Paving the Path to Success: Creating a Customized Governance Framework for New Entities and Emerging Companies

Kevin West
Corporate Lawyer
Founder of SkyLaw Professional Corporation
Deborah Rosati, FCPA, FCA, ICD.D
Corporate Director
Founder & CEO of Women Get On Board
August 21, 2018
Governance Professionals of Canada
20th Annual Corporate Governance Conference
The Victoria Conference Centre | Victoria, BC | August 19-22, 2018
Paving the Path to Success:
Creating a Customized Governance Framework
for New Entities and Emerging Companies
Session Sponsored By:

• Kevin is a senior corporate and securities lawyer with
20 years of experience.
• After clerking for Justice Binnie at the Supreme Court
of Canada, Kevin practiced with Sullivan & Cromwell
in New York and Australia and was a partner at
Davies in Toronto for over 5 years.
• Kevin founded SkyLaw in 2010, an innovative
boutique law firm.
• At SkyLaw, Kevin and his team represent clients
ranging from start-up companies to public
companies involved in special situations, including
M&A transactions and financings.
Speaker Profile
Kevin West
2

• Deborah Rosati is an accomplished
corporate director, entrepreneur, Fellow
Chartered Professional Accountant (FCPA)
and certified Corporate Director (ICD.D)
with experience in technology, consumer
and retail, and private equity and venture
capital.
• Deborah has served on 17 boards over the
last 17 years (public, private & non-for-
profit).
• Deborah co-founded Women Get on Board
Inc. in 2015.
Speaker Profile
Deborah Rosati
3

➢Learn how to customize the nuts and bolts of a governance
framework for your organization
➢Hear case studies from experts working with new and fast-
growing cannabis and FinTech companies
➢Discuss governance issues when companies engage in
transformative transactions (such as a spin-out, new entity
or an initial public offering)
➢Building a culture of good governance, from the ground up
This session will provide key insights into the best governance
techniques and practices for those involved in creating and
managing new entities or newly listed organizations.
4

• Why is corporate governance like a game of
Rolly-Polly?
Let’s get the ball rolling
5

• What are your objectives?
• Who are the players?
• What are the rules?
The pre-game huddle
6

• Be clear on your objectives
• Get input from your whole team
• Challenge conventions – ask why
• What is working? What is not?
Objectives - Set your sights
7

• What do your stakeholders want?
– Financial outcomes
– Social good
– Growth
– Fulfilment of mandates
• Vision, mission and values statement
Objectives - Go for the gold!
8

• Shareholders and other stakeholders
• Directors
• Officers and managers
• Corporate Secretary
• Outside advisors
The players - Who is on your team?
9

• Why do your stakeholders have stakes?
• How involved are your stakeholders?
• More than just your shareholders:
– Customers and clients
– Employees and unions
– Environment
The players - Who do you work for?
10

• Get the Right People in the Right Boardroom
to govern the Right Issues
• Consider role of independent directors
• Pros and cons of shareholder nominees
• What needs approval of the board?
• How quickly can the board respond?
The players - What is the board’s role?
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• The board sets the direction for the officers and
managers to get it all done
• What authority does each of your officers and
managers have?
• What are the incentives – equity, quality of life,
• Benevolent dictatorship vs. democratic
The players - Getting it done
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• Governance professionals play a critical role
• Keep the trains running on time
• Gatekeeper
• Record keeper
• Institutional knowledge
The players – the Governance Pro
13

• Engage expertise where needed
• Calculate the internal costs if work done in-house
• Obtain independent views
• Don’t abdicate to advisors – witness Enron, one of
the greatest corporate governance failures
The players – Outside advisors
14

• Fiduciary duties of directors and officers
• Securities laws
• Corporate laws
• Stock exchanges
• Regulators
The rules – Know your limit, play within it
15

• Directors are subject to two duties:
– Directors must act honestly and in good faith with a view to the best
interests of the corporation (the “fiduciary duty”); and
– Directors must exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances (the “duty
of care”).
• Directors owe their fiduciary duty to the corporation and not to
shareholders or any other stakeholder.
• The fiduciary duty is not confined to short-term profit or share value.
The rules – Fiduciary duties
16

• The Supreme Court of Canada confirmed in the BCE case that in
considering what is in the best interests of the corporation, directors
may look to the interests of, among others:
– shareholders;
– employees;
– creditors;
– consumers;
– governments; and
– the environment.
17

• Under the business judgment rule, deference is accorded by the courts to
the business decisions of directors acting in good faith and so long as it lies
within the range of reasonable alternatives.
• Any security holder, creditor, director or officer may bring a claim for
“oppression” if the directors have exercised their powers in a manner that
is oppressive or unfairly prejudicial to or unfairly disregards their interests
18

• NI 52-110 – Audit Committees
– Every member must be independent
– For venture issuers, a majority must not be
executive officers, employees or control persons
• NI 58-101 – Disclosure of Corporate Governance
Practices
• NI 58-201 – Corporate Governance Guidelines
The rules – Securities laws
19

• Corporate statutes generally require that conflicted directors abstain from
participating in meetings or voting on resolutions in which they have a
material interest.
The rules – Corporate laws
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• Enhanced corporate governance and
oversight, e.g. approval of option plans
• Majority voting for directors
• Listing standards
• Directors and officers must file Personal
Information Forms
The rules – Stock exchanges
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• For licensed producers under the ACMPR, every
director and officer must have security clearance.
• Once the Cannabis Act is in force on October 17,
2018, security clearance will be required for each
director and officer of a licensed producer, along
with each director and officer of any corporation
that exercises “direct control” over the licensed
producer (such as a parent company).
The rules – Regulators
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• Customized corporate governance does NOT
mean no rules
• Write down the rules
• Communicate effectively
• By-laws
• Mandates and charters
The rules – Write the playbook
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• Drive for goals, not
process
• Remove red tape
• Balance risk with
efficiency
The rules – Too many hoops?
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• Shareholder agreements can range from
simple start-ups between two friends to a
major mining joint venture project and
everything in between
The Shareholder Agreement Example
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• Shareholder agreements set out the playbook
– How decisions get made
– How money comes in
– How money goes out
– How to exit
The Shareholder Agreement Example
26

Case Study 1: MedReleaf
27

• MedReleaf and Aurora are publicly-traded
Canadian cannabis companies
• Aurora acquired all of the shares of MedReleaf
by way of a plan of arrangement in an all-share
transaction on July 25, 2018
MedReleaf Acquisition by Aurora
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• February 28, 2013 MedReleaf was Incorporated
• June 7, 2017 Company completed their IPO
• April 23, 2018 Committee was formed to review the fairness of the
arrangement with Aurora
• May 14, 2018 Aurora Cannabis Inc. and MedReleaf Corp. entered into
a definitive arrangement agreement. Aurora acquires all issued and
outstanding common shares of MedReleaf valued at Approximately
C$3.2 billion on a fully diluted basis
• July 18, 2018 Shareholders of MedReleaf voted in favour of the
proposed transaction. Arrangement required approval by 662/3% of
shareholders present and it obtained 96.17% and court approval.
Key Dates
29

• Four independent board members appointed to the
board and one non-independent board member, the CEO
remained on the board
• Three committees formed:
➢Audit Committee
➢Corporate Governance & Compensation Committee
➢Health, Safety and Quality Control Committee
• Special Committee formed on April 23, 2018
Governance Framework
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• Lean-In
• Challenge assumptions/recommendations
from management and advisors
• Build trust with your board colleagues,
advisors and management
• Create timelines and regular calls
Key Take-aways
31

Case Study 2: NexJ System Inc.
32

• NexJ Systems Inc (NXJ -TSE): a publicly-traded
FinTech Canadian company
• NexJ Health Holdings: a reporting issuer but not
publicly-traded Healthcare-AI for patient care
• NexJ Health was spun-out by way of a plan of
arrangement on January 25, 2016 by giving each
NexJ Systems shareholder a share of NexJ Health
Spin-out NexJ Health business unit
33

• Timing-know when & why to spin-out
• Ensure you have
systems/processes/leadership in place to
support the spin-out
• Create value earlier than later
• Surround yourself with the right advisors
Key Take-aways
34

Case Study 3: Cronos Group Inc.
35

• Cronos Group Inc. became the first cannabis
company to list on a U.S. stock exchange
• Listing in the U.S. requires compliance with
U.S. stock exchange and securities laws with
enhanced corporate governance
Cronos Listing on NASDAQ
36

• "This up listing to NASDAQ is a major corporate
milestone and reflects the significant progress we
have made in strengthening our corporate
governance and expanding our global footprint,"
said Mike Gorenstein, CEO of Cronos Group. "We
believe this will increase long term shareholder
value by improving awareness, liquidity, and
appeal to institutional investors."
Cronos press release February 26, 2018
37

• U.S. securities laws
• NASDAQ rules
• Sarbanes-Oxley Act
• Dodd-Frank
• Board mandate
• Committee charters
• Director independence determinations
Corporate governance steps
38

• Set up your corporate governance for success
• Look to sophisticated companies for good
corporate governance examples
Key Take-aways
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Case Study 4: Borrowell Inc.
40

• Borrowell was launched as a peer-to-peer
lender and has evolved into a marketplace
lender
• Borrowell has established a distinctive brand
and has a growing customer base
• Borrowell was the first in Canada to team up
with Equifax to provide free credit reports
Canadian FinTech Start-Up
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• Embrace innovation
• Be nimble and creative
• Identify and retain great people
Key Take-aways
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Questions For Discussion
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Questions? Please contact us:
Deborah Rosati, Founder & CEO
Women Get On Board
E-mail: deborah.rosati@womengetonboard.ca
Tel.: 416-312-6437
www.womengetonboard.ca
Kevin West, Corporate Lawyer & Founder
SkyLaw Professional Corporation
E-mail: kevin.west@skylaw.ca
Tel.: 416-759-5299
www.skylaw.ca
44

Thank you for attending!
Paving the Path to Success: Creating a Customized
Governance Framework for New Entities and Emerging
Companies
45

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