CHAPTER 09 Governance in a Nascent Industry: Lessons from Canada’s “Green Rush”
Disclosure Practices: Lack of Transparency Undermines Investor Confidence THE APHRIA SHORT-SELLER REPORT In December 2018, Hindenburg Research and Quintessential Capital Management released a report 204 alleging that then TSX- and NYSE-listed Aphria Inc. had entered into a number of non-arm’s length transactions allegedly designed to funnel funds into companies controlled by Aphria insiders and advisers. The report claimed that Aphria had acquired assets in Latin America and Jamaica from related companies at significantly inflated valuations and failed to disclose conflicts of interest. The allegations sent shockwaves through the industry, and Aphria’s share price fell by over 50% within four days of the release of the report. Although Aphria’s trading price did (temporarily) recover, the event brought into focus the perceived deficient disclosure practices of issuers in the cannabis industry generally. Although Aphria defended its valuation of the acquired assets, shortly after the allegations were made, Aphria’s CEO and board chair, Vic Neufeld, resigned from his position as CEO, and the corporation became the subject of an unsolicited (ultimately unsuccessful) takeover bid. CSA STAFF TAKE NOTICE OF DISCLOSURE DEFICIENCIES As discussed above, nearly one year after the Aphria report was released, CSA Staff issued CSA Notice 51-359. CSA Staff had identified “instances of inadequate transparency relating to the cross-ownership of financial interests” by cannabis issuers or their directors and executive officers in corporate transactions – transactions in which either the acquirer or the target, or a director or executive officer of either entity, had an undisclosed financial interest in the other entity. A “financial interest” may include business relationships or ownership, control or direction of equity, debt or other investments related to the transaction counterparty.
Although Aphria’s trading price did (temporarily) recover, the event brought into focus the perceived deficient disclosure practices of issuers in the cannabis industry generally.
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