Canadian regulators warn cannabis companies to improve conflict-of-interest disclosures

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Canada’s association of securities regulators has called out publicly traded cannabis companies for not disclosing when their executives and directors have had financial interests in companies they have bought and sold.

The Canadian Securities Administrators, the umbrella organization of the 13 provincial and territorial securities regulators, issued a notice of guidance on Tuesday directly to cannabis companies, urging them to strengthen their disclosures and “address concerns about potential conflicts of interest” so that investors have “the information they need to make informed decisions.”

The notice comes more than a year after one of Canada’s largest licensed cannabis growers, Aphria Inc., came under fire for several related-party deals that benefited company insiders. In March, 2018, the company purchased Nuuvera Inc., a much smaller cannabis firm. Four Aphria executives and another three directors personally owned stock in Nuuvera. Their stake in Nuuvera was not disclosed to Aphria investors at the time because, the company said, the size of their investment rendered their ownership immaterial. The group first purchased Nuuvera shares worth a combined $900,000 in August, 2017, and when Aphria purchased Nuuvera for $425-million in March, 2018, their collective investment became worth $4.75-million.

Aphria was also targeted by a short-seller report in late 2018 that made similar allegations. The report alleged that Aphria had overpaid for two South American companies, as well as a Jamaican company, owned by companies with links to financier Andy DeFrancesco, a founding investor of Aphria and close associate of several insiders.

Aphria denied that it overpaid and said the acquisition had been approved by the company’s independent board members. Aphria chief executive Vic Neufeld resigned a little more than a month after the short-seller report was released. A special committee established to review the transaction determined that “certain of the non‐independent directors of the company had conflicting interests in the Acquisition that were not fully disclosed to the board."

In an interview, the Ontario Securities Commission’s director of corporate finance, Sonny Randhawa, declined to comment about specific cases. Speaking generally, he said, “We’re concerned about these situations where there is cross-ownership that is not being disclosed.”

The CSA’s note on Tuesday states that seven of Canada’s 13 securities commissions – Ontario, British Columbia, Quebec, New Brunswick, Saskatchewan, Manitoba and Nova Scotia – have observed “inadequate transparency” around such cross-ownership.

The regulators “are of the view that it is critical for parties to a proposed M&A Transaction to provide each of their security holders with sufficient disclosure to address concerns about potential conflicts of interest. This disclosure will allow security holders to make a better informed determination about the merits of the M&A transaction,” the note states.

The note also states that some cannabis companies have not given enough consideration to board members’ ties to the company before identifying them as “independent.” In addition, there has been more than one instance when the CEO and the chair of the board are the same person, a situation that regulators have discouraged, the note states.

“Investors want to know that structures are in place to permit the board to operate independently.”

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