Securities regulators issue guidance on disclosure expectations in the cannabis industry

On November 12, Canadian securities regulators in Ontario, British Columbia, Québec, New Brunswick, Saskatchewan, Manitoba and Nova Scotia published Multilateral Staff Notice 51‑359 – Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry. This guidance was issued to help cannabis issuers strengthen their governance disclosures, including disclosure of financial interests in significant corporate transactions.

What you need to know

• Regulators have observed instances of inadequate transparency and deficient disclosure relating to potential conflicts of interests by cannabis companies involved in significant corporate transactions.
• In the view of the regulators, detailed disclosure of the cross-ownership of financial interests—including overlapping debt or equity interests, or other business relationships—held either by the acquiror, the target or their respective directors and executive officers, is material information in the context of significant corporate transactions that should be disclosed to investors.
• Regulators have also observed cannabis issuers identifying directors as being independent without adequately considering potential conflicts of interest or other factors that may compromise their independence.
• Although the guidance is intended for cannabis issuers, the disclosure expectations articulated in the staff notice are equally applicable to issuers in other industries, particularly those operating in emerging growth industries.

Disclosure of financial interests in M&A transactions

Regulators note that the manner in which cannabis companies have been financed has resulted in higher than usual cross-ownership of financial interests amongst cannabis issuers and their directors and executive officers—including overlapping debt and equity interests or other business relationships. As the industry is developing, many of these issuers are engaging in consolidation or other acquisition transactions with one another.

In the context of such transactions, regulators view cross-ownership of financial interests among the acquiror, target or their respective directors and executive officers as material information required to be disclosed in the applicable transaction document. Regulators note that such cross-ownership disclosure may lead investors to re-examine other variables such as purchase price, transaction timing or contingent payments—variables which may not otherwise be considered in the same manner absent the conflict of interest disclosure. Regulators expect that this information is disclosed to shareholders in connection with significant corporate transactions even if the financial interest is not otherwise disclosable under insider reporting or early warning requirements.

Independence of board members

Similarly, regulators commented that in some instances cannabis issuers have identified board members as independent without adequately considering potential conflicts of interest or other factors that may compromise independence. Under Canadian securities laws, issuers are required to annually disclose their corporate governance practices, including identifying the directors who are independent. Independent directors do not have a direct or indirect “material relationship” with the issuer. A material relationship is a relationship which could, in the view of the board of directors, reasonably be expected to interfere with the exercise of a director’s independent judgment. Beyond this broad concept, certain relationships are expressly deemed to be material relationships.

Regulators encourage issuers in the cannabis industry to take the time to stress test their judgments of director independence and review their disclosure of potential conflicts of interest. In addition, regulators encourage issuers to ensure adequate structures are in place to permit a board to operate independently (e.g., by having an independent chair or lead independent director) and to adopt a written code of business conduct and ethics which includes provisions on when and how potential conflicts of interest are disclosed to the board and the investing public.