Global M&A trends and risks
Powerful new forces shaping in the M&A landscape
You can withdraw your consent by clicking “manage cookies” and following the instructions shown.
Global | Publication | February 2020
Edibles, extracts, and topicals are now part of Canada’s legal cannabis offerings. With the business opportunities presented by these new categories of cannabis products come regulatory challenges, especially in relation to edibles. While the Cannabis Act (the Act) and the Cannabis Regulations (the Regulations) have always contained rules regarding recalls, edibles give rise to additional food safety risk factors which increase the chance that a recall might be necessary.
Given the increased food safety concerns regarding edibles as compared with dried cannabis products, it is even more important that producers faithfully adhere to the recall provisions. Failure to do so exposes directors and officers to significant penalties, including steep fines and imprisonment, or both.
Food safety concerns regarding edibles include biological hazards, chemical hazards, and physical hazards.
Biological hazards include pathogenic bacteria, mold, and viruses. An example of a biological hazard for edible cannabis products is Clostridium botulimum (Botulism), a powerful toxin which can cause severe illness or death and which can survive the cooking and pasteurization temperatures associated with the extraction process. Edible cannabis products that are at risk of Botulism contamination include extractions or infusions for oral consumption and infusions made from extractions, such as oils, butters, and honey.
Chemical hazards include pesticides, detergents, and disinfectants. The use of unapproved pesticides, in particular, is a frequent cause of cannabis recalls in Canada. Physical hazards include any physical object that can be inadvertently added to food products, for example pieces of plastic packaging material, metal fragments from equipment, or personal objects. Physical hazards present in food products are often the subject of recalls.
Edible cannabis products contaminated with biological, chemical, and physical hazards may pose a risk to human health necessitating a recall.
A recall includes any action taken by a license holder to correct or remove a cannabis product from sale and distribution, and to notify all affected supply chain customers and the public of a problem, or potential problem. A recall may be ordered by Health Canada or initiated voluntarily by a license holder.
Companies may initiate a recall themselves, and provide notice to Health Canada, when they become aware of a product presenting (or possibly presenting) a risk to health and safety, or otherwise not meeting a requirement of the Act or Regulations. To date, the vast majority of recalls of cannabis products have involved packaging and labeling issues. The next largest category involves contamination by mold and undeclared substances such as unapproved pesticides.1 Edible cannabis products are more at risk for food safety contamination issues such as those experienced by traditional food producers, highlighting the importance of adhering to the regulatory requirements respecting recalls as set out in the Regulations (the Recall Requirements).2
The Regulations set out the framework of the Recall Requirements and Health Canada’s Cannabis Voluntary Recall Guide provides specificity and guidance with respect to the implementation of the Recall Requirements.3 The following are the key Recall Requirements.
The Regulations require license holders to establish and maintain a system of control that permits the rapid and complete recall of every lot or batch of cannabis that has been sold or distributed (the Recall System).4 This means that, well before a recall is ever necessary, license holders must have implemented an internal recall program with well-documented processes and an effective document retention system.5 This includes processes regarding sale and distribution records and recall reporting.6
To be able to conduct a timely and effective recall, license holders must create and maintain records for:
The information listed in the records must be sufficient to allow a license holder to trace and account for all of the affected cannabis products being recalled.
To test and ensure that the Recall System a license holder has implemented works and people are properly trained, a license holder must conduct a recall simulation based on its Recall System at least once every 12 months. Following each recall simulation, the license holder is required to prepare a report documenting the details of the simulation and the results ( a Recall Simulation Report).11
When it is determined that a recall is necessary, a license holder must define the scope of the recall and develop a recall strategy. Health Canada expects a recall strategy to include certain specific components, including as follows:
Conducting a risk evaluation which identifies the level of risk posed. Health Canada provides for three types of risk levels ranging from low risk (Type III) to high risk (Type I).
Defining the scope of the recall within the supply chain. This involves determining the extent to which the affected cannabis product has been distributed within the supply chain, as well as the number of supply chain customers who are involved.
Identifying applicable timelines for contacting customers. Timelines are determined based on the risk level classification. For instance, Health Canada requires license holders to make first contact with supply chain customers within one business day of commencing a recall in the case of a Type I recall.
Developing a communications plan which defines the method of and content for all communications associated with the recall. Communications are intended to ensure supply chain customers immediately stop the sale and distribution of the affected cannabis product and quarantine any stock.
Before initiating a recall, a license holder must make an initial report to Health Canada containing information specified by the Regulations.12
Within 72 hours of making that initial report, a license holder must submit a risk evaluation document setting out the risk associated with the problem or potential problem.13 As the recall progresses, progress reports must also be provided.
Finally, within 30 days after the recall is completed, a license holder must submit a report setting out the results of the recall and the measures taken to prevent a recurrence of the problem.14
The documents referred to above, including the Recall System Document,15 the Recall Simulation Reports,16 all documents provided to Health Canada in connection with a recall, and all records required by the Regulations to be retained, must be kept by license holders for two years.17
Health Canada may request copies of the Recall System Document or the Recall Simulation Report at any time or verify compliance during an inspection.
Understanding and fully implementing the Recall Requirements is imperative, as contraventions can lead to significant liability, including personal liability to directors and officers where that individual “directed, authorized, assented to, acquiesced in, or participated in the commission” of the contravention. The person who actually committed the contravention need not be prosecuted for the offence for the director or officer to be pursued.
The stakes are high – including a monetary penalty of up to $1 million with no due diligence defense for violations and a fine of up to $5 million, jail or both for offenses.18
With the introduction of edible cannabis products on the market, contamination of edibles with biological, chemical, and physical hazards are risk factors potentially giving rise to risk to consumer health and safety requiring a recall of edible products. This elevates the importance of adhering to the Recall Requirements, failing which penalties imposed are significant and directors and officers of a company are exposed to personal liability for contraventions.
With a special thank you to Miranda Sharpe, an articling student in Calgary, who helped to write this article.
Nina Varumo is a freelance portrait and documentary photographer based in Stockholm. A recent project of hers Kvinnor till sjöss (‘Women at sea’) is on ongoing photo series highlighting the working life of female seafarers in order to change the stereotypical image of what and who is a seafarer.
Companies have been publicly reporting on their financial performance for over a hundred years. However, they are increasingly having to make public non-financial disclosures relating to sustainability and environmental, social and governance (ESG) matters as a result of rules, laws and regulations issued by stock exchanges, governments and regulators worldwide.
© Norton Rose Fulbright LLP 2023