Canadian cannabis firms rapped over ‘deficient’ corporate governance disclosures

Image of Toronto Stock Exchange building

The Toronto Stock Exchange building in downtown Toronto. (Photo by Matt Lamers)

Canada’s securities watchdog is warning the nation’s cannabis businesses of “deficient” corporate governance disclosures and urging them to address concerns related to potential conflicts of interest.

The Canadian Securities Administrators (CSA) issued a notice providing guidance related to the disclosure of financial interests in the context of mergers and acquisitions, as well as the independence of directors.

Corporate governance has become a growing concern in the emerging cannabis industry.

One year ago, the CSA warned publicly traded marijuana companies against “problematic promotional activities” that could artificially increase share prices.

Around the same time, the CSA also warned cannabis firms to improve their disclosure practices – including any risks tied to their executives and employees crossing into the United States – or face additional regulatory action.

The CSA’s notice Tuesday highlights significant growth of M&A transactions in the cannabis industry, which the CSA said often involves directors and executives participating in the financing of other cannabis businesses.

That has resulted in unusually high cross-ownership among publicly traded marijuana companies and raised the specter of potential conflicts.

“The 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,” the notice points out.

“Staff are of the view that it is critical for parties to a proposed M&A Transaction to provide each of their security holders with sufficient disclosure to address concerns about potential conflicts of interest. This disclosure will allow security holders to make a better informed determination about the merits of the M&A Transaction.”

Instances have occurred involving cannabis companies identifying board members as being independent, though adequate disclosure was not provided in relation to potential conflicts of interest, the CSA noted.

The agency said independent directors must not have a “material relationship” with the company whose board they represent.

The CSA also took issue with a common practice in the cannabis industry where one person shares the dual role of board chair and CEO.

The chair position should be held by an independent director, the CSA said.

The CSA “will continue to monitor these areas and will take appropriate regulatory action when warranted,” according to the notice.

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