Since the introduction of Bill C-45 to legalize the production, distribution and sale of cannabis for recreational use, the cannabis sector (the Sector) has been thriving. Despite many unknowns and uncertainties surrounding the Sector, investors appear unfazed as share prices continue to surge.
Some key features of the Sector
Even though Bill C-45 has not yet passed and has been the subject of some controversy, investor reticence appears to be at a minimum. However, mirroring the volatility of the cannabis market itself, the nature of these investors has changed. Whereas in the nascent stages of the Sector investors could generally be categorized as retail, advisory firm Kingsdale Advisors (Kingsdale) observes that investors of larger cannabis companies are becoming increasingly institutional. Kingsdale attributes this shift to forthcoming legislation, companies’ need for capital and their increased market cap and indexing. As investors increasingly change from retail to institutional, they may place greater scrutiny on the companies for their governance practices and proxy advisory firms like Institutional Shareholder Services and Glass Lewis may begin to influence the operations and trajectories of these affected companies. Kingsdale also notes that the pool of potential acquirers of cannabis companies is ever-expanding.
Significance and relevance of corporate governance
Kingsdale advises that as the nature of the Sector changes, as described above, the significance of sound corporate governance practices rises. In particular, Kingsdale warns directors of cannabis companies to be on alert for hostile bidders and activist shareholders who may launch campaigns that could detrimentally transform the companies. Similarly recognizing the significance of corporate governance, Ernst & Young, in its report entitled “How do you define your future in an undefined market? Insights and perspectives from Canada’s cannabis industry leaders”, suggests that Canadian licensed cannabis producers “will need to quickly organize talent and apply the formality, rigour and a lens for governance that established organizations do”.
As the passing of Bill C-45 looms near, it may prove to be imperative for cannabis companies to monitor how the market value of the Sector reacts, how the nature of the investors changes, as well as any other consequences of the legislation in order to ensure their companies’ success.
The author would like to thank Samantha Sarkozi, articling student, for her assistance in preparing this legal update.