On November 12, 2019, staff of the securities regulatory authorities (Staff) in Ontario, British Columbia, Québec, New Brunswick, Saskatchewan, Manitoba and Nova Scotia issued CSA Multilateral Staff Notice 51-359 - Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry (the Notice) to provide supplementary guidance related to the disclosure of financial interests in the context of mergers, acquisitions or other significant corporate transactions (M+A Transactions) in the cannabis industry. Staff also note that they have observed recent examples where corporate governance disclosures were deficient.
References to a ‘financial interest’ in the Notice include situations in which one party to an M+A Transaction (or any of its directors or executive officers) may have a conflict of interest as a result of ownership, control or direction of equity, debt or other investments, or business relationships, related to the transaction counterparty.
While the Notice is directed towards cannabis reporting issuers, its content is also relevant to other issuers, including those operating in emerging growth industries.
Disclosure of Financial Interests in M+A Transaction Documents
According to the Notice, there is a higher than usual cross-ownership of financial interests amongst cannabis issuers and their directors and executive officers.
Staff note that they have observed M+A Transactions where either the acquirer or the acquiree (or a director/executive officer of either entity) had an undisclosed financial interest in the other entity. 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.
Staff further note that cross-ownership of financial interests results in conflicts of interest that may lead investors to re-examine other variables such as purchase price, transaction timing or contingent payments. These variables may not otherwise be considered in the same manner if the conflict of interest is not disclosed. Non-disclosure of the cross-ownership of financial interests may also cause investors to question whether the M+A Transaction occurred on its own merits.
According to the Notice, Staff are of the view that it is critical for parties to a proposed M+A Transaction to provide each of their securityholders with sufficient disclosure to address concerns about potential conflicts of interest.
Regardless of the form of document required to be filed in connection with the M+A Transaction, Staff remind issuers to disclose the cross-ownership of financial interests based on the broader materiality requirements of the applicable disclosure document.
Corporate Governance Disclosure
Staff note that they 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. Independent directors must not have a direct or indirect ‘material relationship’ with the issuer. A material relationship is defined as a relationship which could, in the view of the board, be reasonably expected to interfere with the exercise of a director’s independent judgement.
Reporting issuers are reminded to consider the impact of relationships or any other factors that may compromise independence, including whether disclosure of these factors is warranted in the circumstances.
According to the Review, Staff have also observed instances where the chair of the board and the chief executive officer of the cannabis issuer are the same individual. Where it is not appropriate for the chair of the board to be an independent director, an independent director should be appointed to act as a lead director.
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.
DISCLAIMER: This post is intended to convey general information about legal issues and developments as of the date above. It does not constitute legal advice and must not be treated or relied on as such.