Trust and transparency: New guidance from CSA regarding enhanced disclosure of conflicts of interest in cannabis M&A

Trust and transparency have been challenging in the cannabis industry: whether related to product trust and transparency or to public disclosure of conflicts of interest. And the need for trust and transparency has not gone unnoticed by securities regulators. In reviewing disclosure relating to M&A and other significant corporate transactions by cannabis issuers, the Canadian Securities Administrators (CSA) suggested that there was inadequate transparency and disclosure of financial and other interests.

In connection with its review, the CSA issued guidelines this week to publicly traded cannabis companies regarding enhanced transaction disclosure and some timely reminders about existing disclosure requirements, specifically:

• Disclosure of financial interests in corporate transactions;
• Determining director independence; and 
• Adopting a written code of ethics.

See CSA Staff Notice 51-359 – Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry. 

While directed to cannabis issuers, the CSA states that its guidance is applicable to all issuers, including those in emerging growth industries. 

Background

The Staff Notice described instances of inadequate transparency and disclosure related to the cross-ownership of entities involved in M&A or other significant corporate transactions (including where one party to a transaction or any of its directors or officers may have a conflict of interest as a result of ownership, control or direction of equity, debt, other investments, or business relationships related to the transaction counterparty (each, a “financial interest”)). 

The new guidance aims to ensure that investors are provided with sufficient information required to make informed investment or voting decisions in the context of corporate transactions. 

Key takeaways of the guidance

Corporate Transactions

• In M&A transactions, securities regulators expect to see detailed disclosure of the cross-ownership of “financial interests” of the buyer, seller or their respective directors or officers.
• The disclosure should be clearly set out in the applicable disclosure document (depending on the deal, this could be in the material change report, prospectus, takeover bid circular, stock exchange listing statement or information circular). 
• “Financial interests” should be disclosed even if the quantum of the interest may not trigger the usual 10% reporting threshold but is otherwise material information to investors in light of all of the circumstances.  

Director Independence

• In assessing whether a director is independent, personal or business relationships among directors or officers of the issuer must be considered in ensuring that independent directors do not have relationships that could reasonably be expected to interfere with the exercise of their independent judgement.¹ Staff also confirm the existing expectation that a lead independent director should be appointed where the chair of the board and the CEO are the same person.² See the existing guidance set out in National Instrument 58-101 Disclosure of Corporate Governance Practices as it relates to director independence.

Written Code of Business Conduct and Ethics

• The securities regulators encourage cannabis issuers to adopt a written code of business conduct and ethics that should include specific provisions for when and how conflicts should be disclosed to other directors and to the public. 
• The code may extend to addressing cross directorships and officer positions in the context of M&A transactions, particularly given the significant overlap among some cannabis industry players.