Corporate law for cannabis companies: Part 1 – preparing for liftoff

Entrepreneurs don’t start businesses for the thrill of good record keeping, developing and maintaining a comprehensive capitalization table and keeping up to speed on corporate governance best practices. However, with a startup or early-stage business it is necessary to attend to these matters in real time, especially in the extremely fast-paced cannabis industry.

But, as the saying goes, an ounce of prevention is worth a pound of cure. With that in mind, here are the top three corporate matters cannabis issuers should attend to sooner rather than later to ensure they do not get bogged down late and lose momentum when it’s time to grow the business and close a deal:

• Books and records: Corporations in Canada are generally required to maintain official records that contain documents such as the corporation’s articles, by-laws, minutes of board meetings, shareholder resolutions, and securityholder registers. These records are compiled and kept in a minutebook, which is often held in your lawyer’s office. Organizational documentation will need to be completed upon incorporation of the issuer and its records may need to be updated whenever the issuer issues securities, enters into transactional, commercial or other agreements, or there is a change in management or in the ownership of securities. Retroactively cleaning up your minutebook is possible, but it can be costly and pull resources away from your business.
• Capitalization table: A capitalization table (commonly referred to as a “cap table”) is a breakdown of the equity ownership and value of your company. A cap table includes two key pieces of information: 1) ownership of equity (including convertible securities such as warrants and options); and 2) value of equity. These key pieces of information are then used to calculate ownership percentages and track your company’s valuation from time to time. Similar to updating corporate records, updating your cap table after the fact can be a frustrating and time-consuming exercise.
• Shareholders agreements: A shareholders agreement can be used by a private company to provide for rights, obligations and restrictions on stakeholders and management and outline resolution mechanisms for disputes among investors and the corporation. While it isn’t a legal requirement to have a shareholders agreement, implementation while the shareholders all have a positive relationship with each other and the corporation is critical to help ensure the business continues to operate if there is a falling out or other unforeseen circumstance in the future. Again, this work is best done as early as possible as it will become more complicated as the business grows and additional rounds of financing are completed.

The earlier you attend to these matters, the easier your life will be when it comes time to close a deal. Our lawyers at Norton Rose Fulbright can help you get back on track before it’s too late.

The author wishes to thank articling student Daniel Weiss for his help in preparing this legal update.