The Canadian Securities Administrators (CSA) issued a multilateral staff notice on Nov. 12 that says regulators in multiple jurisdictions have observed instances of inadequate transparency related to the cross ownership of companies in the cannabis industry.
Regulatory staff in Ontario, British Columbia, Quebec, New Brunswick, Saskatchewan, Manitoba and Nova Scotia also say they have observed recent examples where corporate governance related disclosures were deficient.
In response, the CSA issued Notice 51-359, supplementary guidance related to the disclosure of financial interests when it comes to mergers, acquisitions or other significant corporate transactions. “Strengthening governance related disclosures that address concerns about potential conflicts of interest will provide investors with the information they require to make informed decisions,” the CSA says.
Of note, the regulators say they have observed higher than usual cross ownership of financial interests among cannabis issuers, their directors and executive officers – financial interests that have in the past gone unreported in cases.
Conflicts of interest
“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,” say the document’s authors. “These variables may not otherwise be considered in the same manner if the conflict of interest is not disclosed.” They add that non-disclosure can also cause investors to question whether the transaction occurred on its own merits.
Regulators also say they have observed instances where companies identify certain board members as being independent without giving adequate consideration to conflicts of interest, business relationships and other factors that may compromise their independence.
“Reporting issuers, including cannabis issuers and issuers in other emerging growth industries should ensure that governance related disclosures address concerns about conflicts of interest,” the CSA concludes. “This will allow security holders to make a better determination of whether cannabis issuers have adequately addressed governance issues.”
