Understanding Directors' Fiduciary Duties at CannTrust Roundtable

Governance Professionals of Canada
21st Annual Corporate Governance Conference
Fairmont Le Château Frontenac| Quebec City, QC| August 18-21, 2019
Roundtable A
Understanding the
Fiduciary Duties of
Directors
KEVIN WEST & PRIYA RATTI

Speaker Profile
 Kevin is a senior corporate and securities lawyer with 20
years of experience
 After clerking for Justice Binnie at the Supreme Court of
Canada in 1998, Kevin practiced with Sullivan & Cromwell
in New York and Australia and was a partner at Davies
Ward Phillips & Vineberg in Toronto
 Kevin founded SkyLaw in 2010, an innovative boutique
law firm focused on corporate transactions
 SkyLaw’s recent work includes leading cross-border M&A
transactions, representing fast-growing licensed
producers of cannabis and advising on over $550 million
of investments in Canada by a U.S. private equity fund

OBJECTIVES
 Gain an understanding of the legal framework governing
boards of directors
 Identify fiduciary duty considerations in recent case studies
 Share your experiences managing board responsibilities
 Discuss key takeaways for assisting directors in the discharge
of their duties

 What are
Fiduciary Duties?
Directors must
act honestly
and in good
faith with a
view to the
best interests
of the
corporation

 What is the Duty
of Care?
Directors must
exercise the
care, diligence
and skill that a
reasonably
prudent person
would exercise
in comparable
circumstances

Legal Framework
 Corporate Statutes
 Director duties
 Conflict of interest rules
 Oppression remedy & the reasonable expectations of stakeholders
 CBCA Proposed Amendments
 Directors and officers, in satisfying their duty to act in the best interests
of the corporation, may consider, but are not limited to considering, the
interests of shareholders, employees, retirees and pensioners, creditors,
consumers, government, the environment and the long-term interests
of the corporation

Legal Framework
 Business Judgement Rule
Courts give directors latitude to exercise business judgment
 Securities Laws
Independent directors
Minority shareholder protection

Case Studies
 BCE & HBC
 Board duties in M&A transactions
 SNC-Lavalin and CannTrust
 Boards grappling with regulatory malfeasance
 Aimia and Hudbay
 Boards vs. disgruntled shareholders
 Private Companies, Not-For-Profits and Government
Agencies

Considerations for Directors
 The importance of process
 Record-keeping
 Expert advice
 Indemnification agreements
 D&O insurance

Discussion Questions
 Who on earth would want to be a director?
 How has the role of the board changed in recent years in
your organization?
 What steps does your board take to demonstrate that it has
discharged its duty of care?
 Has anyone had to deal with current hot topics such as
cybersecurity or #metoo issues?
 What are the key takeaways for assisting directors in the
discharge of their duties?

Questions?

Kevin West & Priya Ratti
SkyLaw Professional Corporation
E-mail: kevin.west@skylaw.ca and priya.ratti@skylaw.ca
Tel.: 416-759-5299
www.skylaw.ca
Thank you!

Note: These blog posts are not legal or financial advice. They are blogs which are made available by SkyLaw
for informational purposes and should not be used as a substitute for professional advice from a lawyer.
These blogs are subject to copyright and may not be reproduced without our permission. If you have any
questions or would like further information, please contact us at 416-759-5299 or online at SkyLaw.ca.
© Copyright SkyLaw 2019. All rights reserved. SkyLaw is a registered trademark of SkyLaw Professional Corporation.
Learn More:
Recent Blogs
BY MEMBERS OF THE SKYLAW TEAM

A Lesson in Corporate Governance:
the CannTrust Saga
CannTrust Holdings Inc. is a public company listed on the
TSX and NYSE. It is a licensed producer of cannabis in
Canada. Recently CannTrust has been on the front page
of the papers after Health Canada discovered the growing
of cannabis in five unlicensed rooms. What happened?
 How do rooms get licensed to grow cannabis?
Rooms in a licensed producer’s site are authorized for
specific activities such cultivation, processing, storage,
and destruction.
After discovery of non-compliance, the board of CannTrust takes action

When a licensed producer such as CannTrust wants to expand to new rooms within its facility to grow
cannabis, it must first prepare the rooms in accordance with Health Canada’s standards. The licensed
producer then applies through Health Canada’s online portal to add the authorized activity of cultivation to
those specific rooms and provides supporting documentation. If the changes are approved, Health Canada
issues an amended license or a letter notifying the licensed producer.
The change in use cannot be implemented (and the new activity, such as cultivation, cannot be carried out
in those rooms) before the change is formally approved by Health Canada. The time between application
and approval can be significant.
 What happened to CannTrust?
On July 8, 2019, CannTrust issued a press release accepting Health Canada’s finding of non-compliance at its
greenhouse facility in Pelham, Ontario because those rooms had been used for growing without a license.
the CannTrust Saga (Continued)

CannTrust identified in that press release corrective actions it was taking, including employee training and
the retention of external advisors for an independent review. The non-compliance related to cultivating
plants in unlicensed rooms between October, 2018 and March, 2019, and providing false and misleading
information to Health Canada inspectors. It appears CannTrust had applied for approval to cultivate plants
in the rooms in question in the autumn of 2018, but approval and licensing of those rooms had not actually
occurred until April, 2019. CannTrust had not had approval to grow plants in those rooms during the
interim period, and provided inaccurate information to Health Canada about having done so.
 What did the CannTrust board do in response?
Shortly after receiving the Health Canada notice of non-compliance, CannTrust put on hold all medical sales
as a precaution and announced that a special committee of its board of directors had been established
comprised of independent board members to investigate the matter.

On July 25, 2019, CannTrust announced senior management changes and other interim actions based on
the ongoing investigation by the special committee of its board of directors. CannTrust stated in its press
release that the investigation into the company’s non-compliance with Health Canada regulations and
ancillary matters uncovered new information that had resulted in a determination by the board to
terminate its CEO with cause. One of the members of the special committee was appointed as interim CEO
and he stepped down from the special committee.
The special committee also retained a financial advisor to review strategic alternatives.
On August 1, 2019, CannTrust announced that the filing of its Q2 financial reports would be delayed. As a
result, a cease trade order was put in place preventing trading in securities by directors, officers and
insiders of CannTrust.

 What are likely ramifications?
Health Canada placed a hold on CannTrust inventory from unlicensed rooms in the company’s Pelham
facility and CannTrust instituted a voluntary hold at its second production facility in Vaughan. The company
estimates that the value of the impacted inventory and biological assets is approximately $51 million as at
June 30, 2019. The company is preparing a remediation plan for submission to Health Canada which is
being prepared under the direction of the special committee.
Health Canada has the ability to issue fines against a licensed producer and its directors and officers.
Defences are limited: it is not a defence that the person exercised due diligence to prevent the violation, or
that they reasonably and honestly believed in the existence of facts that, if true, would exonerate the
person. Health Canada can also order the destruction of cannabis produced in the unlicensed rooms, or
amend, suspend, or revoke CannTrust’s license.

The Ontario Securities Commission has advised
CannTrust that an investigation has been opened into
matters and parties related to CannTrust and the
investigation has been assigned to the Joint Serious
Offences Team of the Enforcement Branch of the OSC.
On August 9, 2019, KPMG announced it was
withdrawing its audit report for CannTrust’s financial
statements because CannTrust cautioned against
reliance on the company’s financial statements as well
as newly uncovered information from the special
committee’s investigation.

 Why is corporate governance important?
There are two aspects to this matter that are interesting from a corporate governance perspective. The first
is what happened before the announcement in July and how the non-compliance occurred. This will be the
subject of further investigation by the special committee, Health Canada and the OSC. The US Securities
and Exchange Commission may be involved as well because of the listing of CannTrust shares on the NYSE.
Class actions have also been announced.
The second aspect is what the board did once the non-compliance was brought to its attention. It created a
special committee of independent directors to investigate and prepare a report. The special committee will
direct the creation of the remediation plan for Health Canada. The special committee also hired legal and
financial advisors who will report directly to the special committee.

 The Fiduciary: A Position of Trust
As directors are trusted with a corporation’s finances,
property and key information, they are in a special
relationship with the corporation and owe a “fiduciary duty”
or “duty of loyalty” to the corporation. This duty entails that
the director shall act honestly and in good faith with a view
to the best interests of the corporation.
Amendments to the CBCA received Royal Assent on June 21, 2019, codifying what
directors can consider when exercising fiduciary duties.
CBCA Amended to Codify Fiduciary
Duties of Directors

 Duty of Care
The duty of care requires a director to exercise the care, diligence and skill of a reasonably prudent person
in comparable circumstances and is used as a remedy for stakeholders in civil actions for breach against
directors.
 Director Duties
The key question is to whom the director owes the fiduciary duty. Is it to the shareholders, who have
invested their hard-earned income in the company for which the directors are making key growth
decisions? Is it to the lenders, who expect their loan to be returned as soon as possible without having to
take steps to seize the corporation’s assets to collect? Or is it to employees of the corporation, who expect
the company to operate in the most sustainable manner to ensure they have a job next week?
Duties of Directors (Continued)

 Key Case: BCE
The answer was clarified in 2008 by Canada’s highest court in BCE Inc. v 1976 Debentureholders (“BCE”).
BCE was subject to a proposed leveraged buyout which would result in $30 billion of new debt for BCE. This
decreased the value of the company’s existing debentures by 20% and prompted debentureholders to
launch a claim against the company under the oppression remedy, alleging that the arrangement was not
fair and reasonable.
 The Decision: Consider them All!
The Supreme Court of Canada rejected the arguments of the debentureholders and stated that the only
reasonable expectation of the debentureholders was that the BCE directors would consider their position
when making a decision in accepting offers for the buyout. The directors honoured the contractual
commitments of the debentures and thus fulfilled their duties as directors.

 The Decision: Consider them All! (Continued)
The court further confirmed that the directors of a corporation owe a fiduciary duty to the corporation and
in considering the best interest of the corporation, the directors may look to the interests of shareholders,
employees, creditors, consumers, governments and the environment to inform their decisions.
So long as a director makes a business decision that lies within a range of reasonable alternatives the courts
will defer to the director’s judgment. This means that there is no “one-size-fits-all” answer to how a director
can act in the best interests of the corporation as it will vary based on the corporation, the industry, the
reasonable alternatives and the circumstances faced by the directors. However, at a minimum, the duty
requires the directors to ensure the corporation meets its statutory obligations.

 The Change: Federal Legislation
The amendments by Bill C-97 to the Canada Business Corporations Act (“CBCA”) confirm that when acting
with a view to the best interests of the corporation, directors and officers of the corporation may consider
(but are not limited to) considering the interests of the following stakeholders (that were included in BCE):
 shareholders;
 employees;
 creditors;
 consumers; and
 governments;

 The Change: Federal Legislation (Continued)
and adds the following stakeholders to consider:
 retirees and pensioners;
 the environment; and,
 the long-term interests of the corporation.
The new rules apply to all federal companies incorporated under the CBCA, whether public or private.
These changes codify not only the key principals of BCE, but they go a step further by adding retirees and
pensioners to the list of stakeholders that directors must consider. As these principles are now embedded in
statute, there may now be less flexibility in interpreting them than is afforded by common law.

 A Hot Topic
In recent years, gender diversity and the under-representation of
women in leadership roles has been a hot topic. As this continues
to be an issue in Canada, the Federal government has introduced
legislative and regulatory amendments to the Canada Business
Corporations Act (“CBCA”) under Bill C-25. These amendments will
require distributing corporations (i.e. publicly traded corporations)
to disclose to shareholders certain diversity information about
their board of directors and senior management.
Amendments to the CBCA come into force on January 1, 2020. Canada becomes the
first country in the world to require diversity disclosure.
Diversity Disclosure: Canada’s
New Approach

 A Hot Topic (Continued)
The stated purpose of the amendments by the Federal government is twofold:
 to improve transparency and information available to investors on corporate diversity; and
 through the information provided to shareholders, incite distributing corporations to take steps to
increase such diversity and recognize the benefits of a more diverse makeup of board members and
management.
The Federal government is fast-tracking the implementation of these amendments such that they come
into force on January 1, 2020, ahead of the other regulatory amendments in Bill C-25.
New Approach (Continued)

 The Current Framework: Diversity Disclosure Expectations Under Securities Law
In 2014, the majority of provincial securities regulators implemented amendments to National Instrument
58-101 – Disclosure of Corporate Governance Practices (“NI 58-101”) to require distributing corporations
(other than venture issuers) to report on their diversity policies and practices with respect to the
representation of women among the members of their boards and in senior management.
However, as the Canadian Coalition for Good Governance notes in its brief on the Standing Senate
Committee on Banking, Trade and Commerce: Bill C-25, despite these amendments, little progress has been
made and further steps should be taken to encourage issuers to adopt measures to improve diversity
among boards and executive officers.

 The Current Framework: Diversity Under the Amended CBCA
The amendments under the CBCA encapsulate a broader range of individuals than the required disclosure
under NI 58-101 by incorporating the definition of “designated groups” as defined under the federal
Employment Equity Act which includes not only women, but also includes Aboriginal peoples, persons with
disabilities and members of visible minorities.
As a result, Canada will be the first jurisdiction in the world to require diversity disclosure beyond gender.
Under the amendments, disclosure must be made not only for members of the board but also with regard
to prescribed members of senior management as defined in National Instrument 51-102 – Continuous
Disclosure Obligations, including:

 The Current Framework: Diversity Under the Amended CBCA (Continued)
 the chair and vice-chair of the board of directors;
 the president and the vice-president in charge of a principal business unit, division or function,
including sales, finance or production;
 the chief executive officer and the chief financial officer; and
 an individual who performs a policy-making function in respect of the corporation.
Furthermore, the amendments under Bill C-25 will also extend to venture corporations who are currently
not subject to diversity disclosure under provincial securities laws.

 Information to be Disclosed
The amendments under Bill C-25 will require distributing corporations to include in their proxy materials
disclosure relating to the diversity among the members of the board and senior management to be sent to
shareholders at the same time as the notice announcing the annual general meeting. Distributing
corporations will also be required to concurrently send such disclosure information to the Director of
Corporations Canada.
Such diversity disclosure will include the following:
 whether or not the distributing corporation has adopted term limits for the directors on its board or
other mechanisms of board renewal along with a description of these;

 Information to be Disclosed (Continued)
 whether the distributing corporation has developed a written policy relating to the identification and
nomination of members of designated groups for directors and if so, to provide a short summary of:
 the policy’s objectives and key provision;
 the measures taken to ensure that these are effectively implemented;
 the annual and cumulative progress by the distributing corporation in achieving the objectives of
the policy; and
 whether or not the board of directors measures the effectiveness of the policy and if so, a
description of how it is measured;

 Information to be Disclosed (Continued)
 whether the distributing corporation considers the level of representation of designated groups on
the board and when appointing members; and
 whether or not the distributing corporation considers the level of representation of designated
groups when appointing members of senior management.
These amendments also incorporate a “comply or explain” approach. As such, if a distributing corporation
chooses not to comply with the disclosure on diversity and chooses not to formulate a policy on diversity,
such distributing corporation will be obligated to provide reasons explaining the lack of a disclosure.

Understanding Directors' Fiduciary Duties at CannTrust Roundtable

Recommended

Recommended

More Related Content

Similar to Understanding Directors' Fiduciary Duties at CannTrust Roundtable

Similar to Understanding Directors' Fiduciary Duties at CannTrust Roundtable (19)

More from SkyLaw Professional Corporation

More from SkyLaw Professional Corporation (20)

Recently uploaded

Recently uploaded (20)

Understanding Directors' Fiduciary Duties at CannTrust Roundtable