By Andrew Elbaz, Partner​, and Alexander Katznelson, Associate ​- Securities and Capital Markets

On November 12, 2019, the Ontario Securities Commission, British Columbia Securities Commission, the Autorité des marchés financiers, the Financial and Consumer Services Commission (New Brunswick), the Financial and Consumer Affairs Authority of Saskatchewan, the Manitoba Securities Commission and the Nova Scotia Securities Commission (collectively, the “Securities Regulators”) published CSA Multilateral Staff Notice 51-359 – Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry (Staff Notice 51-359), which provides guidance to cannabis issuers on disclosure practices related to potential conflicts of interest for mergers and acquisitions (M&A) transactions.

Staff Notice 51-359 focuses on three key areas:

1. disclosing the financial interest of directors, officers and key shareholders in applicable disclosure documents for M&A transactions;
   
   
2. ensuring the independence of board members by evaluating relationships and other factors that may compromise independence; and
   
   
3. adopting appropriate written codes of conduct and ethics that address, among other things, disclosure practices in relation to conflicts of interests.

Staff of the Securities Regulators (“Staff”) have noticed that a number of cannabis issuers were funded in early rounds of financings by family and friends of the founders and high net worth individuals. As the cannabis industry grew, many of these investors and directors and officers of existing cannabis issuers went on to fund other cannabis related businesses. As a result, cross-ownership among cannabis issuers is “higher than usual.” Accordingly, Staff reminded issuers to provide detailed disclosure of the financial interests of related parties in M&A transactions in the appropriate disclosure documents. Moreover, Staff note that disclosure may be required where the information would be material to investors, despite financial interests in a transaction not triggering disclosure thresholds under applicable securities laws.

Staff Notice 51-359 goes on to remind cannabis issuers to consider all factors which may impact the independence of directors, prior to deeming a director to be independent. Section 1.4(1) of National Instrument 52-110 – Audit Committees (NI 52-110) provides that a director is “independent if he or she has no direct or indirect material relationship with the issuer.” NI 52-110 defines “material relationship” as “a relationship which could, in the view of the issuer’s board of directors, be reasonably expected to interfere with the exercise of a member’s independent judgement.” It is important to note that a review of director’s independence should be conducted every time there is a change to the relationship between the director and the issuer.

The following is a non-exhaustive list of individuals considered to have a material relationship with an issuer:

1. a current officer or employee of the issuer;
   
   
2. an individual whose immediate family member is an officer of the issuer;
   
   
3. an individual who is, or whose immediate family member is, an officer of an entity which any of the issuer’s current officers serves on the entity’s compensation committee;
   
   
4. An individual who received, or whose immediate family received, direct compensation from the issuer of $75,000 or more over the course of any 12-month period over the last three years;
   
   
5. a partner of the issuer’s auditor, an employee of the auditor or was within the last three years a partner or employee of the auditor and worked on the issuer’s audit within that time;
   
   
6. an individual whose spouse, minor child or stepchild, or child or stepchild who shares a home with the individual is (A) a partner at the issuer’s auditor, or (B) is an employee of the auditor and participates in its audit and assurance or tax compliance practices or (C) within the last three years was a partner or employee of the auditor and worked on the issuer’s audit within that time; and
   
   
7. an individual who, in the last three years, satisfied (i) to (iii).[1]

In addition to the foregoing, a number of relationships may be considered material and each case should be considered in light of the factors at hand to determine whether such relationship is material. Further, in considering the impact of a director’s relationship with an issuer, cannabis issuers must also determine whether such factors require disclosure.

Staff encourage reporting issuers to adopt written policies addressing codes of conduct and ethics, including, among other things, disclosure of cross-ownership, officer positions and directorships and how and when conflicts of interest should be disclosed.

Although Staff reviewed disclosure practices of cannabis issuers, the foregoing guidance applies to all reporting issuers. For more details on the above, please contact the Securities and Capital Markets Group at Minden Gross LLP at www.mindengross.com.

[1] Section 1.4(3) of National Instrument 52-110 Audit Committees