Canada: Race To "Get A Foot In The Door" Of The Recreational Cannabis Industry Raises Potentially Legal Issues

Last Updated: December 4 2017
Article by Lisa Borsook and Robert Eisenberg

Canadian cannabis producers are in a race to increase their size and gain capital ahead of Canada's planned recreational cannabis legalization in July 2018. The recent duelling takeover bids involving three domestic cannabis companies is proof of the jockeying that is currently going on in the industry.

As of November 30, 2017, Health Canada's website lists 76 authorized licensed producers ("LPs") of cannabis for medical purposes, providing plenty of appealing takeover targets for existing players and new entrants to target.1 For example, Alberta-based Aurora Cannabis Inc. announced its intention to launch a takeover bid for CanniMed Therapeutics Inc., a medical cannabis producer based in Saskatchewan. The all-stock hostile takeover attempt came just one week after Aurora proposed a friendly offer to CanniMed's board. In response, Cannimed has adopted a shareholder's right plan to defend itself.

There is a lot at stake for the early players in the industry. According to Deloitte's Recreational Marijuana Insights and Opportunities, 20162, with tax and licensing revenue totalling over USD $52 million in Colorado for the last fiscal year (and Colorado's population being one-seventh the size of Canada's), it is obvious the opportunities in the Canadian recreational cannabis market are substantial.

Given the recent M&A activity and national press coverage, it is evident that the associated risk is not stopping the investors, underwriters and lenders who previously avoided the cannabis industry. In addition, established players who recognize the substantial opportunity that the recreational cannabis industry offers are likely to draw on experience from established industries such as tobacco, pharmaceuticals and alcohol, in order to leverage their existing assets.3 The rush to "get a foot in the door" of the market raises some potentially serious legal issues.

WeirFoulds LLP is prepared to help your business address these complex issues. As the cannabis industry continues to grow and mature, the wide range of complex issues will continue to evolve and require producers and their service providers to pay close attention to the changing landscape in which they operate.

Investment and Financing

As previously mentioned, the competition for capital prior to July 2018 is fierce, as access to financing is crucial for cannabis producers. Those in the industry have relied on alternative financing models such as private placements or small public offerings, without the support of the banks/global investment banks. Nevertheless, as we move forward into a system of recreational legalization, all potential avenues for investment and financing should be considered.

Protection of Intellectual Property, IT & Cyber Security

Intellectual property remains one of a producer's most valuable assets and can make an enormous difference to their bottom line. Patenting a plant is not generally permissible in Canada. However, it may be possible to protect newly-developed strains of cannabis under the Plant Breeders' Rights Act. Other issues may include information technology and cyber security, as the loss or unauthorized disclosure of this proprietary information could be catastrophic.

Product, Class Action and Director and Officer Liability

Insurance in the cannabis industry has had an interesting past. Coverage was a challenge as insurance companies did not fully understand the industry and its risks. As the industry matures, so does the need for insurance to cover labelling, product defects, including the use of pesticides and/or possible  contamination. These can all lead to recalls that might lead to product liability class action lawsuits. Even prior to recreational legalization, there have been two publicized class action lawsuits which related to product recalls.

The board of directors for cannabis companies are motivated to get D&O insurance for the same reasons as the board of directors of any other company – for corporate and personal protection in case of litigation. The federal Cannabis Act will deem corporate directors, officers and agents to be parties to any non-criminal violations of the Cannabis Act that they authorized or to which they acquiesced, regardless of active involvement. 

Provincial Regulation

The current regulatory regime governing the production and sale of cannabis in Canada is fragmented. First, there is a significant difference in the way that medical cannabis is regulated (under the federal Access to Cannabis for Medical Purposes Regulations) compared to the way recreational cannabis is intended to be regulated (the federal Cannabis Act). Second, post-recreational legalization, the federal government intends to largely let the individual provinces and territories create their own sets of rules governing the sale and consumption of recreational cannabis, with retail options so far ranging from privatized sales (Alberta) to government-run monopolies (Ontario). This fragmentation is expected to raise compliance costs.

Advertising and Branding

Currently, under the Access to Cannabis for Medical Purposes Regulations, branding and advertising of products is severely restricted. The intention under the federal Cannabis Act is that companies will be able to brand their products, but must avoid anything that could be construed as trying to appeal directly to youth (i.e. using animated characters, animals, or celebrity endorsements) in their advertisements. Companies may use factual information on their packaging, such as THC levels, that would assist consumers in their purchasing decisions. It is worth noting that the federal Cannabis Act has not yet been passed into law and there remain several opportunities (committees, and notably approval by the Senate) for significant revisions to the Bill before it becomes law. As the legislative requirements become more settled, their impact on business (both from a federal perspective and the need not to run afoul of any individual province's own laws on sale, as they may be more stringent than the federal law) should be a constant consideration. In addition, regarding production and distribution, only LPs licensed by Health Canada can grow and sell cannabis under the current medical regime; as we move into a recreational world, it becomes murkier as to who can produce and sell, and may vary somewhat by province.

Market Growth and Limitations

Several Canadian LPs have already expanded into Germany and Australia where the use of cannabis for medical purposes is permitted and regulated. International opportunities will continue to emerge as legalization spreads. However, exporting cannabis from Canada is currently restricted to medical or scientific purposes. Moreover, the most likely source of expansion for Canadian exports would be to the United States, although cannabis remains a Schedule 1 narcotic under the American Controlled Substances Act. Thus, due diligence by Canadian companies wishing to access markets in the 29 states that have legalized cannabis use in some form will have to be extensive.4

Tax Considerations

There are a wide range of tax considerations that need to be addressed by existing players and potential entrants to the cannabis industry. British Columbia Premier John Horgan has stated that his provincial government should not "gouge" cannabis businesses with licensing fees if the province wants to eliminate the sizable black market.5

Federally speaking, on November 10, 2017, the Department of Finance released its proposed excise duty and GST/HST framework for cannabis products, which includes the application of excise duties and the imposition of licensing, stamping and reporting requirements. GST/HST will also generally apply in addition to the excise duties. The public is invited to submit feedback on the proposals by December 7, 2017. Under the proposals, excise duties (that are currently levied on spirits, wine and tobacco) will be levied on cannabis (both medical and recreational) at a maximum rate of the greater of $1 per gram or 10 per cent of the sale price. 

Further, cannabis producers will be required to obtain a license from the Canada Revenue Agency (CRA), in addition to a license issued by Health Canada. Obtaining a license will require the submission of a detailed application with supporting documentation (including a business plan) and the posting of security of $5,000 to $5,000,000, depending on the expected amount of duty payable. Cannabis licenses will be issued for a maximum of two years and will not be automatically renewed. A cannabis licensee will have to re-apply at least 30 days prior to the expiry of their license. All cannabis products will generally be required to be packaged in a container with an excise stamp, which stamp will be issued by the CRA.

All cannabis licensees will also be required to submit to the CRA a monthly duty and information return. 

The cannabis excise duty framework is proposed to generally apply on the date that legal cannabis for non-medical purposes becomes accessible for retail sale.

In the Result

As July 2018 inches closer, each province and territory in Canada will continue to develop and implement its own regulatory framework, to be layered with the federal cannabis legislation. In this rapidly-developing marketplace, WeirFoulds LLP is eager to help you navigate the evolving commercial, regulatory, and legal landscapes and ensure that your business meets its legal obligations under federal and provincial laws.

Footnotes

1 Geoff Zochodne (November 20, 2017) "Consolidation fever intensifies in Canada's cannabis sector" Financial Post, http://business.financialpost.com/investing/consolidation-fever-intensifies-in-canadas-cannabis-sector

2 Deloitte, "Recreational Marijuana Insights and Opportunities" (2016).

3 David Hodges, (November 20, 2017) "87 per cent of Canadian pot producers say industry consolidation is inevitable: survey" The Canadian Press/ CTV  News, http://www.ctvnews.ca/business/87-per-cent-of-canadian-pot-producers-say-industry-consolidation-is-inevitable-survey-1.3686160

4 Deloitte, "Recreational Marijuana Insights and Opportunities" (2016).

5 Mike Hager (November 22, 2017) "Horgan warns against overtaxing burgeoning cannabis industry", The Globe and Mail, https://www.theglobeandmail.com/news/british-columbia/horgan-warns-against-overtaxing-burgeoning-cannabis-industry/article37058020/

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Lisa Borsook
Robert Eisenberg
Events from this Firm
7 Dec 2017, Webinar, Toronto, Canada

FEX Members Jeff Noble, BDO, and Caroline Abela, WeirFoulds LLP, invite you to a complimentary webinar series titled: All About Shareholders.

15 Dec 2017, Seminar, Toronto, Canada

WeirFoulds Partner Caroline Abela will instruct The Advocates' Society program, "Leading Your Case: Opening Statements and Examination-in-Chief".

30 Jan 2018, Seminar, Toronto, Canada

WeirFoulds Partner Marie-Andrée Vermette will instruct The Advocates' Society program, "Cross-Examination: Strategies for Success".

 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions