Canada’s cannabis companies are being told to grow up—when it comes to corporate governance.
With merger and acquisition transactions on the rise across North America’s cannabis industry, Canadian securities regulators have noticed that some cannabis companies are not as transparent as they should be regarding “overlapping” financial interests. As a result, these regulators on Monday released guidance outlining their “corporate governance disclosure expectations” for cannabis companies.
Specifically, regulators note, “As the market has expanded, many cannabis issuers and their directors and executive officers have participated in the financing of other cannabis issuers, resulting in higher than usual crossover of financial interests.”
(Separately, in the United States, no major M&A deal has been approved under the Hart–Scott–Rodino Antitrust Improvements Act, which requires both Department of Justice and Federal Trade Commission clearance. Several companies in the process of acquisitions worth hundreds of millions of dollars, like Cresco Labs, Harvest Health & Recreation, and Curaleaf, are engaging with these entities, and federal prohibition, which isn’t an issue in Canada, has yet to pose an extra hurdle.)
The chair of the Canadian Securities Administrators (CSA), a group of securities regulators from different provinces, Louis Morisset, emphasized the importance of transparency for investors’ decision making.
“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 Morisset, who is also the president and CEO of the Autorité des marchés financiers.
The guidelines do not mince words, immediately casting a spotlight on “inadequate” transparency and “deficient” disclosures.
From there, they focus on two areas: “disclosure of financial interests in M&A Transaction documents” and the “independence of board members.”
Regarding the first area, both acquiring companies, and those being acquired, have recently failed to disclose, for example: equity control, investments, and relationships that would be pertinent to investors when it comes to considering “purchase price, transaction timing or contingent payments.” This could, regulators warn, “cause investors to question whether the M&A Transaction occurred on its own merits.”
And regarding the second focus area, cannabis companies have said certain board members are “independent,” when in fact there are “factors that may compromise their independence.” For example, “personal or business relationships with other directors and executive officers.” Also, for some companies, the same person serves as board chair and as CEO, but regulators note that in order for the board to remain independent, its chair “should be an independent director” and, “where this is not appropriate, an independent director should be appointed to act as a lead director.”
Cannabis companies are encouraged to “adopt a written code of business conduct and ethics,” that addresses decision making and disclosures. And, the guidance concludes, “staff will continue to monitor these areas and will take appropriate regulatory action when warranted.”