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Hartley Nathan and Sasha Toten post "Due Diligence before Becoming a Director of a Cannabis Company" on Canada Cannabis Legal

Aug 08, 2018

Minden Gross LLP lawyers Hartley Nathan and Sasha Toten discuss what should be considered prior to becoming a director of a cannabis company.

Due Diligence before Becoming a Director of a Cannabis Company

Originally published on Canada Cannabis Legal by Hartley Nathan and Sasha Toten on August 7, 2018.​​

The cannabis industry is still relatively new, with many unknowns yet to be resolved. When becoming a board member of a cannabis-related company, both experienced and inexperienced board members should pause to consider what it is they are getting themselves into.

As equity financing is still the primary source of funding for cannabis companies, many of them have gone public or are considering doing so. This has heightened regulatory oversight and public scrutiny of decisions made by boards of directors. Potential directors of private companies should be similarly prepared before agreeing to be a candidate for election as a director.

Outlined below are some steps an individual should take when considering to accept the position of a director for a cannabis company. These should be revisited each term.

  1. Request a written job description detailing the responsibilities expected of a director, what committees you may be requested to sit on, and find out how much time will be expected of you while holding each position.
  2. Speak to other directors to get their perspectives on the company and what areas of concern they have identified for the company.
  3. Find out what materials are usually circulated to directors before meetings and if they are sent on a timely basis. It is important to be prepared for meetings and to have sufficient information.
  4. Find out if the company pays for independent outside advisers such as lawyers and accountants, where it is deemed necessary. It is important to ensure that boards have the information and guidance they need to make informed decisions.
  5. Request and take the opportunity to review board and committee minutes for the past two or three years and to review the company’s financial statements to determine whether the company is financially strong.
  6. Find out if there is an orientation program for new directors and continuing education opportunities on corporate governance and industry-related matters. This is useful for directors with all levels of experience.
  7. Ask whether the company has guidelines and procedures to manage conflicts on the board.
  8. Request from the company’s solicitors details of any outstanding and pending litigation or regulatory proceedings against the company and/or its officers and directors.
  9. Determine if there are formal policies for compliance with regulatory requirements.
  10. Make sure the Act that governs the company allows the indemnification of directors.
  11. Find out whether directors’ and officers’ insurance coverage is available to the directors. It is important to know its limits and exclusions, particularly as they relate to cannabis-related matters. Consider requesting an additional indemnity agreement.
  12. Ensure that investments made by the company comply with relevant legislation.

Due Diligence while Serving as a Director

You should continue to diligently review documents and actions taken by the board and the company once being elected as a director. Outlined below are some of the steps a director should take during their term.

  1. Attend as many meetings of the board and committees you are a member of as possible.
  2. Read the material sent to directors before a meeting.
  3. Take accurate notes at board meetings and review minutes to ensure accuracy.
  4. Make sure your concerns, if any, are set out in the minutes of the meeting.
  5. Consult independent experts when necessary.
  6. Maintain familiarity with the financial status and operations of the company.

What can the Company do to Protect Directors?

The company should be mindful of how to best protect the company and its directors. Outlined below are some of the steps the company should consider.

  1. Appoint a staff person as the point of contact to answer board members’ questions and to provide consistency.
  2. Consider whether a skills matrix may be useful to ensure there is an appropriate amount of experience among the directors to address matters to be considered by the board.
  3. Ensure that directors are adequately prepared for meetings.
  4. The Chair should make sure that there is ample time for discussion of each issue at a board or committee meeting.
  5. The company should provide appropriate directors and officers insurance.
  6. Establish a Code of Conduct for directors and ensure that the directors abide by the established rules.

As a potential or current director, you should look for red flags in a company’s diligence. If you have concerns, investigate further, and if your concerns are not resolved and will not be resolved, either decline the opportunity or resign from the position, as applicable. If further guidance is needed on the foregoing, Minden Gross LLP is readily available to provide advice on such matters.

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