Aphria Inc (TSE:APHA) Affair Shines Limelight on Corporate Governance Practices

Benjamin A. Smith
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Under rather unfortunate circumstances, Aphria Inc (TSE:APHA) (NYSE:APHA) (FRA:10E) Hindenburg affair thrust an important sector hot button issue into the limelight: corporate governance. While this piece is not a judgement—one way or another—on yesterday’s antagonizing events, it undeniably moves the conversation forward regarding ancillary issues. We give our big picture take, and remedies to strengthen corporate governance along the curve.

Of course, this article must reference the antagonizing event which has displaced investor perspectives. Obviously, this comes via an article purveyed by Hindenburg Research, a bearish-focused outfit which has churned-out similar such pieces before. We leave it to others to debate the authenticity and voracity of the claims; Aphria has responded with a more thorough rebuttal this morning. Either way, Hindenburg’s article has shone a limelight on industry corporate governance practices which, as expected, continue to evolve.

Unfortunately, the situation is projecting negative connotations towards other industry actors—especially those purchasing assets outside of North America. This is neither fair or warranted, as each company deploys their own valuation methodology and third-party assessors to consult on individual asset purchases. I do not believe that just because company ‘X’ is accused of something, company ‘A,B,C’ should suffer guilt by association. Each circumstance is different, although the investor mindset driving such thinking is understandable.

Thus, reviewing the gory details over the past 24 hours, we have some preliminary thoughts on actions Canadian LPs can take to avoid wanton controversy in the future. Only by solidifying corporate governance practices across the board, can the cannabis sector reach its true potential.

Fairness Opinions

Generally, before any significant asset acquisition is entertained, a fairness opinion is sought to certify that the company is paying fair market value for the asset. Essentially, it evaluates the facts of a purchase and provides an opinion as to whether or not the proposed sticker price is fair to the target company and acquirer shareholders. In Aphria’s case, both Haywood Securities Inc. and Clarus Securities Inc. provided clarity on the matter.

While it’s unclear whether the valuation signatories actually visited Aphria’s international acquisition locations, such thoroughness is advisable. After all, how can third-party assessors fairly value assets they have never seen firsthand?

Again, this may or may not have transpired in Aphria’s case. But going forward, we believe it would be helpful for third-party assessors to certify that an actual on-site due diligence has taken place. If assessors rely solely on information given to them without boots-on-the-ground inquiry, we fail to see how this satisfies proper stewardship of shareholder capital.

Promotional Language

This is something many Canadian LPs have been guilty of from time-to-time. Certainly, it’s not endemic to the cannabis space—although the incidence of such is hardly uncommon.

In Aphria’s case, perhaps at-issue is the term “world class assets”, which were the words used to describe its Caribbean/LATAM properties. While attempting to remain impartial, it appears that term was used rather liberally in this instance.

Of course, what denotes “world class” assets in entirely in the eye of the beholder. But we feel the use of promotional language, in general, has been overly-aggressive on several occasions to describe assets purchases by LPs vying for investor attention. We hope press release language can remain more tempered going forward, as poor optics generated from ‘research’ or fly-by-night investigative reporting represents a material blow-back risk to LPs promoting aggressive claims.

Corporate Governance Officers

While most major LPs employ personnel to oversee regulatory affairs (compliance) and financial controlling oversight, we don’t see many employing personnel explicitly focused on internal corporate governance. The role would be akin to an organizational ombudsman, or impartial dispute resolution practitioner whose major function is to provide independent, impartial, confidential and informal assistance to managers and employees. The role could also be employed to vet and/or authorize material company/director relationships, third-party assessors, employee ethics, whistleblower claims and much more.

Endowing the position with sweeping powers and Board of Director access would go along way towards keeping dubious decision making and associations in-check.

Final Thoughts

The above suggestions provide three ways corporate governance can be enhanced within the cannabis sector. Certainly, there are many more potential ideas—we have only scratched the surface.

Either way, the post-legalization era is here and investors expect best practices to advance along with the times. Without greater transparency along the curve, investors will keep wondering what they’re buying into.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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