Consolidation in the space has raised concerns over possible crossover of financial interests
Pot firms may still have a few true believers, particularly those holding out hope that Cannabis 2.0 fulfills its potential as a significant market-opening opportunity. But at the moment, the Canadian weed space is in a state of flux, which includes significant growth coupled with merger and acquisition transactions.
As executive- and board-level interactions between cannabis firms heightens the potential for a tangled map of financial stakes and interests, securities regulatory authorities in Ontario, British Columbia, Quebec, New Brunswick, Saskatchewan, Manitoba and Nova Scotia have published guidance to help cannabis issuers strengthen their governance disclosures.
“Investors need to understand the conflicts of interest that could arise when issuers have crossover of financial interests, because those conflicts could have implications for the possible M&A transaction,” said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers. “Strengthening governance disclosure is important to providing investors with information to make an informed decision.”
In Multilateral Staff Notice 51-359 Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry, the Canadian Securities Administrators (CSA) offered guidance on what relationships and interests should be disclosed in certain instances.
With respect to mergers and acquisitions (M&A), the notice highlighted how many cannabis issuers and their directors and issuers have participated in the financing of other issuers, resulting in a “higher than usual cross-ownership of financial interests” including overlapping debt and equity interests, as well as other business relationships.
“Staff are of the view that, in the context of M&A Transactions, detailed disclosure of the cross-ownership of financial interests (held either by the acquirer, the acquiree, or either of their directors or executive officers) is material information for investors and their investment/voting decisions, and should be disclosed in the applicable disclosure document,” the notice said.
Focusing on board composition, the notice referred to NI 58-101 and NP 58-201, which set out items for mandatory disclosure as well as recommended practices for reporting issuers to apply in their own corporate governance practices.
“We have observed instances where cannabis issuers have identified board members as being independent, without giving adequate consideration to potential conflicts of interest or other factors that may compromise their independence,” the CSA said, citing personal or business relationships with other directors or executive officers as an example.
The impact of relationships or any other factors that may compromise independence should be weighed, the CSA stressed, as well as whether such factors should be disclosed considering the circumstances.
“We have also observed instances where the chair of the board and the chief executive officer of the cannabis issuer are the same individual,” the CSA added, emphasizing that an independent director should be appointed as chair of the board in line with NP 58-201.
“Reporting issuers are encouraged to adopt a written code of business conduct and ethics, which includes standards for ethical decision making and compliance, and which addresses potentially challenging situations that may arise during the normal course of business,” the notice said.
