On November 12, the Canadian Securities Administrators (the “CSA”) issued multilateral staff notice 51-359 (the “Staff Notice”) highlighting a number of transparency and disclosure issues with respect to reporting issuers in the cannabis industry.
The Staff Notice focused on two main issues:
- failure to disclose cross-ownership of financial interests by reporting issuers (or their respective directors or officers) in the context of merger and acquisition transactions (“M&A Transactions”); and
- deficiencies with respect to corporate governance disclosures relating to director independence.
The major theme in the Staff Notice is that a qualitative assessment of materiality and independence be considered in addition to the quantitative requirements of applicable securities legislation. While the Staff Notice was directed towards cannabis issuers, the CSA notes that its content is equally relevant to all issuers, particularly those operating in emerging growth industries.
Disclosure of Financial Interests in M&A Transactions
In the Staff Notice, the CSA notes that the cannabis industry has been marked by an above-average level of cross-ownership as a result of early rounds of cannabis financing being funded by a network of high-net worth individuals, some of whom were founders and/or directors or officers of other cannabis issuers. As a consequence, there have been a number of M&A Transactions in the sector where cannabis issuers (or their officers or directors) have had financial interests in the counterparty to the transaction, which the CSA notes were not properly disclosed in certain instances.
The Staff Notice states that in the context of M&A Transactions, the CSA expects “detailed disclosure” of the cross-ownership of financial interests between a purchaser and a vendor if it is material (despite any quantitative thresholds that are imposed by Multilateral Instrument 61-101 or elsewhere with respect to related-party transactions). The CSA notes this information will be considered ‘material’ based on the significance of the information to investors in light of all the circumstances, and that it needs be to disclosed to investors in the appropriate disclosure document.
The CSA adds that cross-ownership of financial interests in M&A Transactions results in conflicts of interest that may lead investors to re-consider the merits of the underlying transaction, or re-examine prices, timing or other transaction variables. In that regard, the CSA also notes that each security-holder should be provided sufficient disclosure to address concerns about potential conflicts of interest to make better informed decisions.
Independence of Board Members
The Staff Notice also notes that the CSA has observed several instances where cannabis issuers have identified board members as being independent without properly considering key factors which may compromise a board member’s independence, including whether the director has personal or business relationships with other directors or officers of the issuer that may compromise a director’s independence. The Staff Notice reminds issuers that independent directors cannot have a direct or indirect ‘material relationship’ with an issuer (a relationship which could reasonably be expected to interfere with the exercise of the director’s independent judgement). CSA Staff recommends reviewing the impact of these relationships and whether disclosure is warranted in the circumstances.
Lastly, the CSA points out that a common governance shortcoming has been the chair of the board and the chief executive officer of a cannabis issuer being the same individual, although National Policy 58-201 Corporate Governance Guidelines outlines that the chair of the board should be an independent director in order to give investors assurance that the board operates independently.
Cannabis issuers are encouraged to review their current corporate governance policies and procedures, and to consider adopting the CSA’s recommendations to implement a written code to assist with director and executive officer disclosure to ensure potential conflicts of interest and director independence are properly disclosed.