One of the benefits of incorporating a business is the corporation becomes an entity unto itself, meaning the officers and directors are generally shielded from personal liability should something go wrong. However, this isn’t always the case, depending on the specific issue. As demonstrated by the ongoing trials and tribulations faced by an Ontario-based cannabis company, incorporation is not necessarily enough to protect individual actors from liability. Further, ongoing civil claims from shareholders and investors have yet to be settled, leaving the financial status of the company in limbo pending a final resolution.
What is “the Corporate Veil”?
The corporate veil is a protection created by incorporation, however, it cannot erase personal liability in all cases. For example, individual officers and directors may be found liable in their personal capacity under the following circumstances:
- Oppression claims where the director is the sole directing mind of the corporation and benefits personally from the conduct
- Conduct in the director’s own interest rather than the company’s interests
- Employment and tax claims, such as unpaid wages, paritcularly in situaitons where a company becomes insolvent
“Piercing the corporate veil” is a common phrase to describe the concept of reaching beyond the corporate veil to make a finding of personal liability against specific individuals responsible for the actions of a corporation.
Company Kept Portion of Operation Hidden from Inspectors
A cannabis production company based in Ontario has found itself facing numerous issues since 2019, when inspectors from Health Canada discovered a large number of plants had been grown without the requisite licence. In addition, individuals at the company had provided inaccurate and misleading information to inspectors. The finding initially resulted in Health Canada seizing over 4,000 kgs of product from the facility, putting another 5,000 kgs on hold, and temporarily suspending the company’s license to produce and sell cannabis. The company voluntarily placed another 7,000 kgs on hold at a different facility, while an internal investigation was completed. All told, the incident put between $28 million and $69 million worth of future sales at risk.
In 2020, a group of investors in the company initiated a class action lawsuit seeking damages and losses stemming from the incident. Within a month, shares in the company had dipped in value by over 20%. Those impacted by the drop formed a class and brought an action against the company for oppression, misrepresentation, negligence, and conspiracy. The class consists of those who acquired shares in the company on the Toronto Stock Exchange between October 2018, and September 2019, as well as investors who acquired shares during the company’s prospectus offering in May 2019.
Quasi-Criminal Charges Against Corporate Officers
In addition to the civil class action claim, two directors and one officer are facing quasi-criminal charges stemming from the Health Canada inspection. As part of an Ontario Security Commission (OSC) investigation, three individuals were found to have committed fraud by providing false information to the OSC, and permitting or acquiescing in the commission of an offence.
Following an investigation, it was found that the three individuals were directly involved with efforts to conceal the unlicensed rooms at the grow facility described above. Further, the OSC determined they had committed securities fraud by falsely claiming to investors that the company was fully compliant with all of the relevant regulatory requirements, via communications including:
- press releases,
- corporate disclosures,
- analyst calls, and
Further, two of the individuals allegedly made trades of company shares with knowledge of the unlicensed inventory, which was tantamount to insider trading. The trial for the regulatory offences starts today (July 26) in Toronto. If found guilty, each person faces up to five years in jail. In addition to laying charges against the individuals, the OSC also instituted a cease-trade order against company shares in April 2020.
Restructuring and Settlement
The three executives facing charges are no longer with the company. One was terminated, and the other two stepped down voluntarily. Since then, the company has begun efforts to rebuild and find a way forward in light of past events. The company entered creditor protection and has yet to resolve the civil action initiated by investors. However, it has taken the step of having a restructuring plan approved under the Companies’ Creditors Arrangement Act and plans to seek a revocation of the cease trade order.
Earlier this year, the company also set aside $50 million in a trust in order to resolve the remaining civil claims outstanding against it. Health Canada also reinstated the company’s licences in September 2020, allowing it to resume production and begin selling product in the retail and medical cannabis markets.
Contact Milosevic Fiske LLP For Skillful Legal Representation in Matters Involving Directors or Officers Liability
If you are an officer or director of a corporation and a claim has been filed against you, or your business is facing class action litigation, contact the highly knowledgeable Toronto corporate lawyers at Milosevic Fiske LLP as soon as possible. Our goal is to immediately protect you, your reputation, and the health of the corporation. Call us at 416-916-1387 or contact us online.