Certain Canadian securities regulators recently issued guidance[1] on disclosure expectations for reporting issuers in the cannabis industry. Aimed at protecting investors in this emerging growth industry, the securities regulators stressed that there have been a number of instances of inadequate transparency relating to cross-ownership between parties (and their directors and officers) to corporate transactions, such as mergers and acquisitions. In their view, conflicts of interest have not always been adequately disclosed, thereby hindering investors from making informed decisions.

Gowling WLG focus

To ensure the continued growth of this emerging market and other growth industries, it is critical that reporting issuers abide by disclosure requirements and consult with their advisors to ensure that all material facts are disclosed at the right time and in the right manner. Ensuring that financial interests are disclosed adequately is crucial for successfully closing corporate transactions, and board members must be careful and alive to all factors that may impact their independence.

Corporate governance in the cannabis industry

The securities regulators observed a "higher than usual cross-ownership of financial interests" amongst cannabis issuers and their directors and officers. This situation stems in part from early financing funded by high-worth individuals or friends and family of the founders, followed by further financing by these same individuals of other cannabis issuers as the market expanded.

Accordingly, the securities regulators have offered the following guidance:

  1. Detailed disclosure of cross-ownership of financial interests is material information for investors and should be disclosed in disclosure documents (even if the amount of the financial interest does not trigger disclosure thresholds under securities law).
  2. Parties to a proposed corporate transaction should provide each of their securityholders sufficient disclosure to address concerns about possible conflicts of interest.
  3. Independent directors must not have a direct or indirect relationship with the issuer that could, in the view of the board, be reasonably expected to interfere with the exercise of a director's independent judgement.
  4. The CEO should not be the chair of the board; the board must be able to operate independently.
  5. Issuers should adopt a written code of business conduct and ethics that includes direction on when and how conflicts of interest should be disclosed to the board and the public.