The Canadian Securities Administrators (“CSA”) have published additional guidance relating to the disclosure of financial interests in the context of M&A transactions for reporting issuers in the cannabis and other emerging growth industries.

On November 12, 2019, the CSA published Multilateral Staff Notice 51-539 - Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry (“SN 51-539”), providing clarification on specific issues observed by the CSA. The two highlighted issues relate to (i) the deficient disclosure of financial interests in M&A transaction documents, and (ii) the determination of the “independence” of board members. The CSA stated that while SN 51-539 is directed towards cannabis industry reporting issuers, its content is also relevant to other issuers, including those in emerging growth industries.

Disclosure of financial interests in M&A transaction documents

The CSA observed mergers, acquisitions or other significant corporate transactions where either the acquirer or acquiree (or a director or officer of either) had a financial interest in the other entity that was not disclosed. Cross-ownership of financial interests can result in a conflict of interest that may influence investors’ investment decisions. The CSA believes that detailed disclosure of the cross-ownership of financial interests should be disclosed in applicable disclosure documents, as it is material information for investors. This disclosure must be sufficient to address concerns about possible conflicts of interest.

Independence of board members

The CSA observed instances where board members of cannabis issuers have been incorrectly described as being independent directors, without considering potential conflicts of interest or other factors that could jeopardize director independence. The CSA provided the example of personal or business relationships with other directors or officers that have not been properly contemplated when determining a director’s independence, and noted that independent directors must not have a direct or indirect “material relationship” with the issuer. The CSA also reminded issuers that NP 58-201 - Corporate Governance Guidelines states that the chair of the board of directors should be an independent director, or, where this is not appropriate, an independent director should be appointed to act as “lead director”.

The CSA indicated that it will continue to monitor compliance with public disclosure requirements, and will take regulatory action when the CSA feels such action is warranted.