CSA Staff Notice 51-359: Corporate Governance Compliance by Public Cannabis Co.’s
Published:
January 22, 2020
Author(s):
All issuers must comply with both periodic and ongoing securities law corporate governance (and other) disclosure requirements. This can, however, be challenging for issuers engaged in industries that are new or expanding, often characterized by a high number of corporate transactions, particularly mergers and acquisitions, that often spark those disclosure obligations – just like the Canadian cannabis industry. On November 12, 2019, the Canadian Securities Administrators (CSA) published Multilateral Staff Notice 51-359 offering reporting issuers specific guidance on corporate governance compliance. Staff Notice 51-359 applies to all issuers, but building on the CSA’s October 2018 Staff Notice 51-357 that set out the CSA’s initial review of cannabis industry reporting issuers’ compliance with securities law disclosure requirements, it’s specifically directed to deficiencies in the corporate governance-related compliance of reporting issuers in the cannabis industry (and other emerging growth industries):
- Financial interest disclosure. Insufficient public disclosure of “financial interests” (defined as any situation where one party, or any of its directors or executive officers, to a merger and acquisition or other significant transaction might have a conflict of interest as a result of ownership, control or direction of equity, debt or other investments, or a business relationship related to the other party(ies)) in mergers, acquisitions and significant corporate transactions of cannabis issuers, their directors and executive officers (as the case may be). The Staff Notice reminds issuers to consider what information is “material” for investors and their decisions, and that material information should be disclosed – even if it doesn’t necessarily trigger securities law disclosure thresholds (for example, where the financial interest represents securities less than 10% of the issuer’s voting rights).
- Board independence. Inadequate consideration of potential conflicts of interest or other factors that could compromise a board member’s independence, and appointment of the same person as both board chair and CEO (contrary to the guidance outlined in National Policy 58-201 Corporate Governance Guidelines).
In Staff Notice 51-359, the CSA expressly recognizes the growth in M&A transactions in the cannabis industry, and reflects the close compliance eye securities regulators are keeping on public cannabis industry players. Every corporation, small and large, private and public, can benefit from implementing right-sized corporate governance best practices. Some, however, must comply with specific legal corporate governance requirements; for example, corporations incorporated under the Canada Business Corporations Act (CBCA) must comply with the CBCA’s corporate governance requirements, such as (effective January 1, 2020) diversity reporting to shareholders. And public companies must also comply with securities law corporate governance requirements. These three tips will help cannabis issuers improve securities law corporate governance compliance pursuant to Staff Notice 51-359:
Ethics Education. Foster internal awareness & compliance by establishing written a Code of Conduct and Business Ethics policy(ies) that (among other things) explain how directors and executive officers can identify a potential conflict of interest and outlines what procedures to follow if they identify one. Implement clear mechanisms for the Board of Directors or appropriate governance committee to assess the materiality of such conflicts and to address how they are managed and disclosed to the public.
Keep Current. Annually review and document whether each director is or is not independent and the basis for that determination. Require all directors and executive officers to provide, annually, a completed acknowledgment form certifying they have reviewed the Code of Conduct (including conflict of interest provisions), and identifying:
- Any and all directorship, officer and respective principal occupations held during the five years prior to the acknowledgement certification date (as per Form 51-102F2 Annual Information Form (disclosure requirements)).
- All financial interests, whether as a result of ownership, control or direction of equity, debt or other investments, or a business relationship held, bearing in mind that in the context of M&A transactions, for example, they will need to disclose material cross-financial interests in the appropriate disclosure document.
Confirm Consistency. Require the corporate governance committee (or those responsible for disclosure) to review the completed directors’ and officers’ certification information before filing any disclosure documents with the relevant regulator, and at least annually. Include in the review a comparison of the proposed public disclosure information with other sources, including these, to ensure they’re consistent and to identify – and correct – any discrepancies:
- The information in the certification.
- Online sources, such as: the System for Electronic Document Disclosure by Insiders (SEDI) for ownership interests; LinkedIn profiles for current and past employment or directorship positions; and Google Searches of the directors and executive officers.
Please contact your McInnes Cooper lawyer or any member of The Corporate Finance & Securities Law Team @ McInnes Cooper or The Cannabis Law Team @ McInnes Cooper to discuss this topic or any other legal issue.
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