Regulators Ready to Crack Down on Conflicts of Interest in Cannabis Sector

Article by Barbara Shecter, Financial Post

Regulators ready to crack down on conflicts of interest in cannabis sector Crypto-currency and blockchain could be next Canadian securities regulators are preparing to enforce stricter guidelines for the cannabis industry. Getty Images Barbara Shecter

Canadian securities regulators are preparing to enforce stricter guidelines for the cannabis industry after finding a series of inadequacies in the way companies disclose conflicts of interest, particularly when it comes to cross-ownership in mergers and acquisitions.

In some cases, regulators discovered that the buyer or seller in an M&A transaction — or an executive or director — had an undisclosed financial interest in the other company.

“We have observed instances of inadequate transparency related to the cross-ownership of financial interests,” including undisclosed business relationships, regulators from seven provinces including Ontario, British Columbia and Quebec said in a notice Tuesday morning.

The new guidance requires cannabis companies to disclose such material information to investors in a variety of documents — from prospectuses to takeover bid circulars, listing statements, and material change reports. Guidance from securities regulators lays the groundwork for enforcement action if companies do not adhere to the expectations that have been spelled out.

There were about 80 publicly traded cannabis companies headquartered in Ontario at last count, said Sonny Randhawa, director of corporate finance at the Ontario Securities Commission. He added that there has been a lot of merger and acquisition activity in the sector, which exploded with the legalization of recreational cannabis a little over a year ago, and more consolidation is expected.

Cross-ownership between cannabis companies in M&A deals “results in conflicts of interest that may lead investors to re-examine… variables such as the purchase price, transaction timing or contingent payments,” the regulators said in Tuesday’s notice from the Canadian Securities Administrators, an umbrella group for the country’s provincial and territorial securities watchdogs.

“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 regulators said in the document. 

The OSC’s Randhawa declined to reveal the number of cases where a lack of transparency was found, or identify specific cases flagged by staff at the regulator.

A second concern regulators found in the cannabis sector is how companies characterize the independence of their boards of directors.

“We have observed instances where cannabis issuers have identified board members as being independent, without giving adequate consideration to potential conflicts of interest or other factors that may compromise their independence,” market watchdogs said in the CSA notice.  

“This may include, for example, personal or business relationships with other directors and executive officers of the issuer that have not been properly considered in the determination of a director’s independence.”

Securities regulations stipulate that to be considered an independent director, one must not have any “material” relationship with the company, whether direct or indirect. Examples include paid consulting, and some stipulations on independence extend to the activities of immediate family members.

The CSA notice urged cannabis companies to separate the roles of chief executive and chair, and to ensure that the chair or lead director is independent. These governance models gained traction in other sectors several years ago.

Read the full article here.

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