What’s the definition of “affiliate”? That’s the question echoing across the cannabis industry following the Ontario government’s decision to severely restrict licensed producers’ ability to own retail stores in the province.
Under the new regime, outlined in Bill 36 tabled in the Ontario legislative assembly on Thursday afternoon, LPs will be restricted to owning one retail store “located on or within the site set out in the licence.”
The legislation, goes on to say “The person [licensed to produce cannabis for commercial purposes] and its affiliates, as defined by the regulations, may not between them hold more than one retail store authorization.”
The government has given no guidance to what “affiliate” means, saying only that it will be defined in regulations, hopefully before the licensing process begins in December. But the question is of vital and immediate interest to LPs, many of whom have invested millions of dollars to buy either minority or controlling stakes in would-be retailers.
Would Alcanna Inc., in which Aurora Cannabis Inc. has a 25-per-cent stake, be considered Aurora’s “affiliate” and be banned from opening stores?
This won’t be clear for some time. However, one potential place to look for guidance, according to Trina Fraser, a partner at Ottawa law firm Brazeau Seller Law, is the Ontario Business Corporations Act (OBCA).
In the OBCA:
“one body corporate shall be deemed to be affiliated with another body corporate if, but only if, one of them is the subsidiary of the other or both are subsidiaries of the same body corporate or each of them is controlled by the same person.”
Here the key word is “subsidiary,” which in turn is defined in terms of “control,” meaning holding more than 50 per cent of the voting shares needed to elect people to the board of directors, and the ability to elect a majority of the board if those votes are exercised.
“That’s not to say [the Ontario government] couldn’t in this instance define it differently,” said Ms. Fraser. “But with these kinds of terms – ‘affiliate,' ‘subsidiary,’ ‘control,’ – typically you see a consistent approach taken to what those terms mean throughout the legislation within a particular jurisdiction. Because it can create mass confusion if they start using different definitions for the same term in different acts.”
She pointed to the federal government’s approach to terminology in the Cannabis Act and regulations.
"At a federal level, we have these new concepts of ‘key investors’ … that made reference to ‘control.’ And it says right within the [federal LP] application guide, if you want to know what control is, look to the Canada Business Corporations Act,” she said.
"I expect the definition of affiliates to kind of follow that pattern and follow it to the OBCA."
Andrea Hill, a lawyer at boutique Toronto corporate law firm SkyLaw, likewise pointed to the Canada Business Corporations Act, but warned that “it has no bearing at all on what they may decide to define affiliate as under this act."
“I think what is probably safe to assume is that it's going to cover at least wholly owned subsidiaries,” she said, suggesting that the “affiliate” designation could go both ways, so that a parent company that owns an LP, but isn’t an LP itself, could face restrictions when trying to acquire retail licenses.
With all the uncertainty, one thing seems clear: lawyers are going to have a lot of work on their hands figuring out corporate structures that give LPs exposure to retail without hitting whatever ownership threshold the provincial government sets out to trigger the “affiliate” definition.
In the meantime Matt Maurer, a partner at Torkin Manes and vice-chair of the firm’s cannabis law group, is cautioning clients to “be patient.”
“I would rather be prudent, figure out what the rules are going to be and then work around the rules. If you’ve got the cash to tie up a property, and you can get burned on it ... or you’re not able to get a [retail] license, go for it. But for the average person wanting to get into retail, take your time, there’s no cap on licenses that are going to be given out,” said Mr. Maurer.