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Intellectual Property and Tech Strat-Ups: Protecting Software in Canada
By Saranjit Dhindsa Introduction For tech start-ups, protecting your software is an important step in ensuring that your company can retain the source of its value. There are many forms of IP protection available to protect software, but it is difficult for start-ups to determine which form will strategically protect their valuables, while also being the most cost-effective. Below is an overview of the different forms of IP offered by the Canadian Intellectual Property Office (CIPO), and how they can protect your software. Copyrights (per the Copyright Act) Canadian copyright law gives the author (creator) the sole right to produce and reproduce your work in any form. It provides protection to literary, artistic, musical, or dramatic works – in this case, software falls into the “literary” category. Per copyright laws, copyright subsists in both the source code and assembly code of computer software. But it is important to note that copyright only protects expressions of ideas, not the idea itself.[1] This is important to note, as copyright will only prevent others from copying your specific code but will not help if a competitor independently develops the same software or copies the functionality of the code.[2] It's also important to note that, unlike other forms of IP, copyright does not need to be registered with CIPO. Per section once a copyrightable work is created and fixed in a material form, it is protected by law.[3] But when you register, you are provided with a certificate of registration that can be used in court as evidence of ownership – this can be very beneficial in case of litigation. Copyright generally lasts for the life of the author of the work, plus 50 years.[4] Patents (per the Patent Act) Patents are the most common form of IP, but it is difficult to obtain a patent for software. While you cannot use a patent to protect the lines of code, the functional aspects of software can be patentable. This is what makes a valuable, as it would prevent competitors from reproducing the functional aspects of your software.[5] As such, software patents provide broader protection. To patent software, your software must be:
Essentially, if your software simply automatizes a human task or provides simple/generic components it may not be patentable, as they do not provide any novel function. Furthermore, if the software is considered to be directed to an “abstract idea” it may not be patent-eligible. CIPO guidelines make software eligible if the claims are drafted in a way that essentializes tangible elements (i.e., a computer, phone, circuit board) to the software.[6] In Canada, a patent lasts for 20 years from the date it is filed with CIPO.[7] Trade Secrets/Confidential Information Canada has no legislation governing trade secrets, but rather is enforced through torts such as breach of confidence or breach of fiduciary duties. Additionally, trade secrets can be enforced on a breach of contract claim (i.e., when someone breaks an NDA). The protection of a trade secret requires the following, at a minimum:
When a trade secret has been revealed, you can seek damages (money) in courts. Additionally, trade secrets can potentially last forever – as long as the information remains secret, trade secret protection applies. Integrated Circuit Topography (per the Integrated Circuit Topography Act) Software that has been or can be embedded on a semi-conductor chip can be eligible for protection under Canada’s Integrated Circuit Topography Act. This specific Act provides protection for certain original integrated circuit topographies, whether the design has been embodied in an integrated circuit product or not.[9] The Act protects only the registered topography – this means the idea, concept, process, system or any information embodied is not protected.[10] Like patents, protection for integrated circuit topographies is not automatic – a registration of the topography in Canada must be obtained. The Act protects registered topographies for a period of up to 10 years, beginning from the filing date of the application.[11] Conclusion There are many ways to protect your software using Canadian IP laws – these are just some of the most common. It’s also good to note that you can use a mixture of IP protection to ensure that your software is as protected as possible. Contact the Business Venture Clinic to provide you with legal information on each form outlined above, and some next steps to take in your mission to protect your start-up from IP infringement. Footnotes: [1] https://patentable.com/software-copyright-in-canada/ [2] https://www.mondaq.com/canada/patent/1135896/you-can39t-patent-software-right-or-can-you [3] https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr03915.html [4] https://canlii.ca/t/7vdz#sec6 [5] https://www.mondaq.com/canada/patent/1135896/you-can39t-patent-software-right-or-can-you [6] https://www.dentons.com/en/insights/alerts/2020/june/22/software-patentability-in-canada-and-beyond [7] https://canlii.ca/t/7vkn#sec44 [8] https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr03987.html [9] https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/h_wr02282.html#part1.6 [10] https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/h_wr02282.html#part1.6 [11] https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/h_wr02282.html#part1.10
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What Personal Health Information Can Businesses Collect?
Written by Carolee Changfoot As COVID starts to plateau in Canada and restrictions lift, I reflect on the last two years and the role health innovation has played in our lives. We have had several medical innovations such as mRNA vaccinations, new COVID treatment medications, and the rise of telehealth.[1] Health and Fitness Apps saw a 47% increase in adoption as COVID spread globally in 2020.[2] Additionally, funding for digital health start-ups hit a record breaking $57.2 billion last year, a 79% increase from 2020.[3] COVID highlighted just how important our health is. Many businesses seem to recognize this as the global mobile health app market is expected to grow 11.8% from 2022 to 2030.[4] With more businesses expecting to work with health data, it is important for businesses to understand their expectations around collecting and protecting personal information. This blog post is not legal advice but describes some of the requirements private businesses face when collecting personal information. National Requirements The Personal Information Protection and Electronic Documents Act (PIPEDA) establishes national limits on the collection of personal information.[5] PIPEDA applies to every organization that collects, uses or discloses personal information in the course of commercial activities.[6] PIPEDA defines “personal information” as information about an identifiable individual.[7] Medical records are considered sensitive information.[8] Organizations must identify the purpose for which the information is to be used at or before the time the information is collected.[9] The purpose must be specified at or before the time of collection to the individual whose information is being collected.[10] Organizations must make a reasonable effort to ensure that the individual understands the purpose for which their information is to be used.[11] The knowledge and consent of the individual whose personal information is collected is required for the collection, use or disclosure of personal information.[12] Consent in regards to sensitive information, like medical information, must be expressly given.[13] If the business changes how they plan to use the personal information, that business must communicate the new purpose to the individuals whose personal information has been collected and must obtain their express consent before their information can be used for the new purpose.[14] Further, an individual may withdraw consent at any time, subject to legal or contractual restrictions and reasonable notice.[15] The organization shall inform the individual of the implications of such withdrawal.[16] Provincial Requirements In addition to PIPEDA, the provinces have established additional requirements through provincial legislation. The collection, use, and disclosure of private information in Alberta is governed by Alberta’s Personal Information Protection Act (AB PIPA) and Alberta’s Health Information Act (HIA).[17] AB PIPA defines “personal information” as identifiable information.[18] The collection, use, and disclosure of personal information requires the consent of the individual whose information is being collected, used and disclosed.[19] Personal information can only be collected for purposes that are reasonable.[20] The purpose must be communicated to the individual whose information is collected at or before the time the information is collected.[21] It is relevant to note that only organizations classified as “custodians” under the Health Information Act and the regulations made under it are authorized to collect an individual’s personal health number.[22] The definition of custodian does not include a private business or organization.[23] Footnotes: [1] COVID Drugs; COVID Vaccines; Rise of Telehealth [2] Fitness App Growth Q2 2020 [3] 2020 Fitness Health Funding [4] mHealth App Market Growth Expectations [5] Privacy Commissioner of Canada, PIPEDA in Brief [6] S. 4 Personal Information Protection and Electronic Documents Act [7] S. 2 Personal Information Protection and Electronic Documents Act [8] Schedule 1 - S. 4.2.3, Personal Information Protection and Electronic Documents Act [9] Schedule 1 - S. 4.2, Personal Information Protection and Electronic Documents Act [10] Schedule 1 - S. 4.2.3, Personal Information Protection and Electronic Documents Act [11] Schedule 1 - S. 4.3.2, Personal Information Protection and Electronic Documents Act [12] Schedule 1 - S. 4.3, Personal Information Protection and Electronic Documents Act [13] Schedule 1 - S. 4.3.6, Personal Information Protection and Electronic Documents Act [14] Schedule 1 - S. 4.2.4, Personal Information Protection and Electronic Documents Act [15] Schedule 1 - S. 4.3.8, Personal Information Protection and Electronic Documents Act [16] Schedule 1 - S. 4.3.8, Personal Information Protection and Electronic Documents Act [17] S. 2, Health Information Act [18] S.1, Alberta Privacy Information Protection Act [19] S.7(1), Alberta Privacy Information Protection Act [20] S.11, Alberta Privacy Information Protection Act [21] S.13, Alberta Privacy Information Protection Act [22] S.21(1), Health Information Act [23] S. 1(1)(f), Health Information Act We’ve Heard About SAFEs, But What About RBFs?
Written by: Saranjit Dhindsa Start-ups need financing – that much is clear. There are many ways early-stage financing can take shape, but it will either take the form of debt (i.e., a bank loan) or equity (i.e., selling shares to investors to raise capital). One of the most popular forms of early stage outside financing for start-ups comes in the form of a SAFE – a “Simple Agreement for Future Equity.” Developed in 2013 by YCombinator, SAFEs have been viewed as a quick and easy way to secure financing in seed rounds. For more information on them, check out this blog post.[1] However, there is a new kid on the block – and it goes by the name of Revenue-Based Financing (or RBFs; the “r” is sometimes referred to as “royalty”). What is RBF? Revenue-based financing, also known as royalty-based financing, is another method of raising capital from investors. Investors inject growth capital into the business, in exchange for a percentage of future monthly revenues. The investor receives their share of the business’s income, until a predetermined amount has been paid. This amount is often a multiple of the initial investment amount. For example, if an investor initially invests $1 million, the predetermined amount could be a multiple of 3, or 5 times that initial investment (i.e., $3 million or $5 million). On its face, RBF sounds a bit like debt financing, but unlike debt, you do not pay interest on the outstanding investment, nor are there any fixed payments. Instead, payments have a directly proportional relationship to the business, as the payment calculations are based on the business’s income. So, if a business sees a high number of sales, the royalty payment will be higher, and if the sales slump for a month, the royalty payment will be lower. RBF is also different from equity financing, as the investor does not have direct ownership of the business. As such, RBF occupies a weird, hybrid space between debt and equity financing. What Kind of Start-Ups Can Benefit from RBF? Businesses that are experiencing moderate and hyper-growth can benefit well under RBF. As such, RBF can be a good way for growth companies to secure growth capital. In addition, businesses that are approaching profitability or have become profitable can benefit from RBF. RBF can be used where a company is pre, post or anti-venture capital. It can also be used to extend cash runaway or eliminate the need for a final funding round. Currently, RBF is most successful with Software-as-a-Service (SaaS) companies. This is because SaaS companies usually have high gross margins and subscription-based revenue models. So, what are the pros and cons to RBF?[2] Pros:
Cons:
[1] http://www.businessventureclinic.ca/blog/safes-what-are-they-and-when-are-they-used [2] https://flowcap.com/founders-guide-to-revenue-based-financing/ Understanding International Patent Law and Implications for Your Start-Up
Written by Karlee Squires So you have come up with a great invention and are excited to build a business around it. Until you discover that someone has created a similar invention in another country. What can you do? Do you still have a viable business? Do you still have a patentable invention? To answer this question, you need to understand how patents are awarded in Canada and internationally. Understanding Patents in Canada The patent process in Canada is governed by the Patent Act.[1] A patent provides a time-limited, legally protected, exclusive right to make, use and sell an invention.[2] Once approved, a patent lasts for 20 years from the file date.[3] For an invention to be patentable in Canada, it must meet 4 criteria. (1) It must be a matter that can be patented.[4] (2) It must be novel or new.[5] (3) It must be useful.[6] (4) It must be inventive and non-obvious, [7] meaning the invention would not have been obvious to a person skilled in the art or science to which it pertains. What Does a Canadian Patent mean for Other Countries? Patent laws and requirements are different in each country. Receiving a patent in Canada does not guarantee the same invention will be patentable in another country. To exercise an enforceable patent in another country, you will need to apply for the patent right in each country separately. In the same way, the existence of a patent in another country does not automatically mean that patent is granted in Canada. Similarity of a Patent in Another Country However, if a patent or similar patented invention exists in another country, while not enforceable in Canada, it’s existence may affect the ability to obtain a Canadian patent. A similar invention outside of Canada raises issues around the novelty requirement for an invention to be patentable in Canada. How do you get around this issue? When applying for a patent it is important to be clear how your invention differentiates from something similar in other jurisdictions. When submitting your patent application in Canada, you should disclose any patent in another jurisdiction you believe is similar to your own invention. If possible, provide the name of the inventor, the number of the patent, the country and the date of issue of the similar patent. The most important thing you will need to include is a list of the similarities and differences between your product/invention and the previously patented invention.[8] Footnotes: [1] Patent Act, RSC 1985, c P-4 [Patent Act]. [2] Patent Act, supra note 1 at s 42. [3] Canadian Intellectual Property Office, “What is a Patent” (28 February 2022), online: http://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr03716.html [4] Government of Canada, “Manual of Patent Office Practice (MOPOP)” (28 February 2022), online: https://s3.ca-central-1.amazonaws.com/manuels-manuals-opic-cipo/MOPOP_English.html#_Toc95464691 at Chapter 17. [5] Supra note 3 [6] Supra note 3 [7] Supra note 3. [8] Supra note 2, s 67(2). So... You’ve started your own business and want to issue shares?
Written by: Carolee Changfoot How are Shares Issued? Shares represent equity in a corporation. Shares are issued by a corporation from certain classes with certain rights attached to them. Shares must be issued for valid consideration for the issuance to represent a binding contract. Consideration is a quid pro quo, where one party accrues a right, interest, or benefit and another party undertakes a responsibility, loss, or detriment.[1] Additionally, private company shares must be issued in compliance with the Prospectus Exemption under NI 45-106.[2] There are tax implications on the issuance of shares and dividends, either on the corporation or on the shareholder. It is recommended that a company work with a strong corporate tax account for tax planning and advice when issuing shares What are a Shareholder’s Rights? A company’s Articles of Incorporation will establish the classes of shares that a corporation is authorized to issue and what rights are affiliated with shares from those classes.[3] Some common rights are:
Shareholders in the same class must be treated equally.[4] For example, if one shareholder is issued dividends, all shareholders of that class are entitled to dividends. Shareholder Dividend Rights. Profits can distributed to shareholders in the form of dividends. However, the right to dividends is not a legally enforceable right.[5] Dividends can be paid periodically, pursuant to a contract, or as a onetime event.[6] To pay dividends, the issuing company must be “solvent” under the Alberta Business Corporations Act and the company’s Board of Directors must have voted to declare dividends.[7] The right to dividends are either cumulative or noncumulative. In a cumulative dividend, the dividend amount accumulates to the next time the corporation pays the dividend.[8] Shares with cumulative dividend rights must be paid dividends before lower ranking shares are paid dividends. [9] Noncumulative dividends do not accumulate and a shareholder does not have a right to any unpaid dividends. [10] Shareholder voting rights Shares that specifically provide for a vote at shareholder meetings can attend shareholder meetings and vote on general shareholder resolutions. These shares give the shareholder a say in the general operation of the corporation. Non-voting shareholders do not have the right to attend or vote at a shareholder however can vote on matters that affect its share class.[11] Section 176(1) of the Alberta Business Corporations Act provide that a shareholder can vote on:
Additionally, all shareholders have a right to vote on certain special resolutions that affect that class.[12] A special resolution must receive a majority vote of not less than ⅔ of the votes cast in order to be passed.[13] The following are examples of special resolutions that require the vote of all shareholders:
Amending the Articles of Incorporation: Changing a corporation’s Articles of Incorporation requires a special resolution.[18] A corporation’s Articles of Incorporation are required to be amended in the following circusmtances:
Amalgamation or Merger: An amalgamation or merger occurs when two or more corporations combine and continue as one corporation. To complete an amalgamation or merger a corporation’s shareholders must approve of the transaction by special resolution.[19] Extraordinary Sale, Lease or Exchange: A sale, lease or exchange of all or substantially all of a corporation’s property, other than in the ordinary court of business, requires the approval of the corporation’s shareholders by special resolution.[20] Voluntary Liquidation and Dissolution: A director or voting shareholder may propose for the corporation’s voluntary liquidation or dissolution.[21] The proposal must be voted on by special resolution by all the shareholders.[22] Founder Share Considerations Dividing shares among founders is a way to reflect the experience and resources each founder brings to the corporation. Factors that are often considered in the distribution of founder shares are: relative contributions, entrepreneurial experience, and capital consideration.[23] Investor Share Considerations A company might distinguish a share class in its Articles of Incorporation as a “preferred share” class. Investors are typically offered preferred shares because they typically offer greater rights than the corporation’s common shares. [24] For example, the right to a cumulative dividend or a right of redemption. A right of redemption provides the investor with the right to require the corporation to re-purchase their shares. This gives the investor an exit from the company.[25] An investor will likely consider the rights founders shares, the rights of other shareholders (specifically if there are shareholders with greater rights than they are being offered),and how much debt the corporation has before investing.[26] It is recommended not to provide early investors with too many rights as this may deter future investors or the corporation may need to offer future shareholders greater rights than previous investors. [1] Terrafund Financial Inc v 569244 BC Ltd (2000), 2000 Carswell BC2739. [2] NI 45-106, Prospectus Exemptions [3] ABCA, s 6(1)(b). [4] ABCA, s.26(5) [5] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013) at 74. [6] Glossary: Dividends, Practical Law [7] ABCA, ss. 43. 118(3)(c), Practical Law - Board Resolutions: Declaring Cash Dividends [8] Glossary: Cumulative Dividend, Practical Law [9] Glossary: Cumulative Dividend, Practical Law [10] Glossary: Cumulative Dividend, Practical Law [11] ABCA, s,176 [12] ABCA, s 1(1)(ii); 176(1). [13] ABCA, s 1(1)(ii). [14] ABCA, s 173(1). [15] ABCA, s 183(5). [16] ABCA, s 190(6). [17] ABCA, s.212(3), [18] ABCA, s 1(1)(ii); 176(1). [19] ABCA, s.183 [20] ABCA, s.190(6) [21] ABCA, s.212(1) [22] ABCA, s.212(3) [23] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013) [24] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013) at 92 [25] I Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013) at 93. [26] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013). What are the criteria for a corporation to qualify as a Canadian-controlled Private Corporation to receive the special incentives of this status?
February 2022 | Dani Dufresne Canadian-controlled Private Corporation (“CCPC”): A Canadian-controlled private corporation is defined in section 125(7) of the Income Tax Act[1] as a private corporation resident in Canada other than a corporation that is:
“125 (7) Canadian-controlled private corporation means a private corporation that is a Canadian corporation other than (a) a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation), by one or more corporations described in paragraph (c), or by any combination of them, (b) a corporation that would, if each share of the capital stock of a corporation that is owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation described in paragraph (c) were owned by a particular person, be controlled by the particular person, (c) a corporation a class of the shares of the capital stock of which is listed on a designated stock exchange, or (d) in applying subsection (1), paragraphs 87(2)(vv) and (ww) (including, for greater certainty, in applying those paragraphs as provided under paragraph 88(1)(e.2)), the definitions excessive eligible dividend designation, general rate income pool and low rate income pool in subsection 89(1) and subsections 89(4) to (6), (8) to (10) and 249(3.1), a corporation that has made an election under subsection 89(11) and that has not revoked the election under subsection 89(12); … “ CCPC Status Prerequisite for Incentives under Income Tax Act (Federal Laws): CCPC status is a prerequisite for the special incentive provisions in the Act, including: 1. The small business deduction (“SBD”), which provides a preferential rate on the first $500k of a CCPC’s annual active business income earned in Canada.[3]
2. Refundable investment tax credits (including an enhanced ITC rate and the ability to get a refund under the SR&ED program).[9]
3. The deferred recognition of employee stock option (“ESO”) benefits.
4. If the CCPC qualifies as a small business corporation, the capital gains exemption (“CGE”).
5. A shorter time-period during which the CRA is permitted to reassess a taxation year.
6. A longer time-period to pay the balance of tax payable.
*An additional refundable tax is imposed on the investment income of a CCPC.
Similar CCPC Status Incentives under Alberta Corporate Tax Act (Provincial Laws) The Alberta Corporate Tax Act provides similar incentives consistent with the federal rules. The Tax and Revenue Administration (TRA) administers the Act. 1. Alberta Small Business Deduction (“ASBD”).
[1] Income Tax Act, RSC 1985, c 1 (5th Supp), ss 125(7) Definition of “Canadian-controlled private corporation”. [2] Ibid, ss 248(1) Definitions; s 262. [3] Ibid, ss 125(1) Small business deduction; s 125(1.1) Small business deduction rate. [4] Ibid, ss 125(2) Business limit; s 125(5) Special rules for business limit. [5] Ibid, ss 125(7) Definition of income of the corporation for the year from an active business. [6] Ibid ss 157(1)(b) Payment by corporation. [7] Ibid ss 157(1.1) Special case; ss 157(1.2) Small-CCPC; ss 157(1.3) Taxable income – small-CCPC; ss 157(1.3) Taxable capital – small-CCPC; ss 157(1.5) No longer a small-CCPC. [8] Canadian Revenue Agency, “Fiscal period for income tax purposes” (14 April 2021), online: Government of Canada <https://www.canada.ca/en/revenue-agency/services/tax/businesses/small-businesses-self-employed- income/business-income-tax-reporting/fiscal-period-income-tax-purposes.html>. [9] Ibid, ss 129(9). [10] Ibid, ss 127(5) Investment tax credit. [11] Ibid, ss 127(9) Definition of “investment tax credit”. [12] Ibid, ss 127(10.1) Additions to investment tax credit. [13] Ibid, ss 127(10.2) Expenditure limit determined; ss 127(10.21) Expenditure limits – associated CCPCs; ss 127(10.3) Associated corporations; ss 127(10.6) Expenditure limit determination in certain cases. [14] Ibid, ss 127.1 (1) Refundable investment tax credit; ss 127.1 (2) Definition of “refundable investment tax credit”; ss 127.1(2.01) Additions to investment tax credit; ss 149(1) Miscellaneous exemptions. [15] Ibid, s 7; ss 110(1)(d) Employee options; ss 110(1)(d.1) Idem. [16] Ibid, ss 110.6(1) Definitions; ss 110.6(2.1) Capital gains deduction – qualified small business corporation shares. [17] Ibid, ss 110.6(14) Related persons, etc. [18] Ibid, ss 152(3.1) Definition of normal assessment period. [19] Ibid, ss 157(1)(b). [20] Ibid, ss 152(1) Assessment; ss 123.3 Refundable tax on CCPC’s investment income; ss 129(3) Dividend refund to private corporation. [21] Ibid, ss 129 (1) Dividend refund to private corporations. [22] Ibid, ss 186(1) Tax on assessable dividends. [23] Alberta Corporate Tax Act, RSA 2000, c A-15, ss 22(1) Small business deduction; ss 22(2.198). [24] Ibid, ss 36(1.1) Return to be filed; ss 36(1.3). [25] Ibid, ss 43(0.1) Assessment period, reassessment, etc. [26] Ibid, ss 38(1.1) Payment on account. Is the Unanimous Shareholder Agreement (also known as a “USA”) Bad for Your Growth Company? The Answer is … Probably!
Written by: Nikolas Kalantzis Then, why is the USA so commonly used by growth companies and start-ups as the go-to addition to the constating documents? There are some advantages that don’t completely rule it out in certain situations. But, for the vast majority of growth companies out there, stay away – the disadvantages far outweigh the advantages. What is a USA? It is a type of shareholder agreement that aims to regulate the conduct of shareholders with respect to one another and the company.[1] Shareholder agreements are concerned with allocating management control and setting out the terms in which shareholders may sell or buy their shares in the company. In general, some kind of shareholder agreement should be used in raising equity for the company. A USA works to eliminate all or a portion of power from the board of directors and give it to the company’s shareholders.[2] This requires the approval of every current shareholder and will force any future shareholders into the agreement. Shareholder powers will likely include a vast array of rights and privileges that can be highly beneficial or highly obstructive depending on the issues each company faces. A USA is likely beneficial in only in two scenarios: (1) Where a private company is anticipating raising capital from a large but individually small group of investors. Here, a USA can force all of the incoming individual shareholders to sell their shares if the majority shareholder (likely the founders) plan to sell their shares at some in the future. This provision in the USA is called a “Drag-Along Right”.[3] (2) Where a company seeks to be classified as a Canadian controlled private corporation (CCPC) for tax purposes a USA will allow non-Canadian resident investors, as long as Canadian resident investors have the right to elect 50% of the company’s board of directors.[4] Apart from the above, a USA will likely cause more roadblock’s than create solutions. The problems: (1) USAs are roadblocks in efficient management of a growth company. With a few shareholders a USA may not cause many problems, but once a company grows, multiple shareholders with differing personalities, goals, and opinions will make organization and decision-making extremely difficult. (2) USAs automatically include every new shareholder. If the relationship between shareholders deteriorates, this could be catastrophic for a company. For example, commonly used “shotgun” provisions, if triggered, requires one shareholder to offer to purchase the others at a specified price but if refused, the other shareholders must then buy the initial offerors shares at the same price.[5] The result may lead to one single shareholder with all the company’s shares and the less equipped shareholders forced out. (3) USAs are roadblocks to shareholder freedom. Generally, shareholders don’t have a responsibility to anyone’s interests other than their own. Yet, corporate legislation expressly provides that powers exercised by shareholders in a USA are subject to the same kind of fiduciary duties of directors.[6] That likely means shareholders may have duties of disclosure, honesty, loyalty, and candour to the company but no means of resigning those duties like directors. (4) USAs are not that helpful most of the time. Courts will not always enforce certain provisions that compel a company if they are seen as fettering discretion of the directors.[7] Further, directors may not be excused from their fiduciary duties even though they have lost effective control of the company. (5) Lastly, USAs are extremely difficult to modify or terminate. The Alberta Business Corporations Act states that every shareholder is a party to the agreement and any amendment requires the consent of all.[8] In cases where the company has outgrown the uses of a USA, such as an IPO or buyout, there will be limited options – especially if shareholders are passive or difficult to reach.[9] The takeaway: A USA is probably not for your growth company! Nevertheless, there are times where a USA may be appropriate. Every company should pay close attention to the potential roadblocks and benefits before approving a USA. Nikolas Kalantzis is a member of the BLG Business Venture Clinic and is a 2nd year student at the Faculty of Law, University of Calgary. [1] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 3rd ed (LexisNexis Canada, 2018) at ch 5. [Tingle] [2] Ibid. [3] Ibid. [4] Ibid. [5] Tingle, ch 5. [6] Ibid; see Business Corporations Act, RSA 2000, c B-9, s 146(7). [ABCA] [7] Ibid; Atlas Development Co. v. Calof, 1963 MBQB CarswellMan 20. [8] ABCA, s 146(8). [9] Tingle, ch 5. Not-for-Profit Organizations (Registered Charities and NPOs)
Written by: Viviana Heather The not-for-profit sector is a significant growing part of the Canadian economy and has a huge impact on the lives of Canadians. Not-for-profit is an umbrella term used to describe non-profit organizations (“NPO”) and registered charities. Both are creatures of statute (specifically, the Income Tax Act) and are mutually exclusive categories of organizations. This blog post provides a brief overview of the various ways a non-profit organization can be incorporated in Alberta and Canada and registering a charity through the Canada Revenue Agency (“CRA”). For differences between NPOs and charities, please visit the Canada Revenue Agency website. Provincial Incorporation There are two main ways for a NPO to incorporate in Alberta: (1) under the Companies Act, RSA 2000, c C-21, or (2) under the Societies Act, RSA 2000, c S-14.[1] Depending on the purpose of the organization, an applicant may choose one or the other to incorporate a NPO in Alberta. (1) Companies Act A NPO under the Companies Act must have the purpose of promoting art, science, religion, charity, or any other useful objective.[2] Further, a NPO can be involved in business activities by, for instance, charging other organizations to provide services.[3] Therefore, a NPO can operate in various ways as long as it is on a cost-recovery and they cannot distribute profits to its shareholders or members.[4] There are two types of organizations under this Act: private and public.[5] For a private NPO, at least two people are needed to form the organization. There are also the following restrictions: It cannot have more than 50 shareholders or members, it cannot sell shares or memberships to the public, and it restricts share or membership transfers.[6] For a public NPO, at least three people are required to form a public organization. However, there are significant reporting requirements. (2) Societies Act A NPO under the Societies Act can be formed if there are more than five people for purposes such as social activities, recreation, culture, and charity.[7] However, a NPO under the Societies Act cannot be involved in business activities.[8] Societies cannot issue shares, declare dividends for members, or distribute property among the members during the lifetime of the society.[9] (3) Advantages and Disadvantages The Companies Act is more complex in comparison to the Societies Act. An organization under the Companies Act must either be a public or private company and there are specific requirements under each. On the other hand, the Societies Act is simpler and cheaper to incorporate. However, it prevents the organization from engaging in any type of ongoing business operations. Federal Incorporation An organization may incorporate as a federal NPO under the Canada Not-for-Profit Corporations Act, SC 2009, c 23. This is advised if the organization wishes to operate nationally and require name protection across Canada. However, the organization will be required to incorporate as a NPO in Alberta and then register in other provinces if it intends to conduct business in those provinces. Incorporating Federally vs. Provincially The main advantage of incorporating federally, as described above, is it grants name protection across the country. This can be important if a NPO envisions providing services across the country. However, if the services will only be provided locally, it may not be necessary to incorporate federally. Consequently, the main advantage of incorporating a provincial not-for-profit is it is often simpler, quicker, and cheaper. Registering a Charity There are various requirements for a charity to be registered. First, the charity must use its resources for charitable activities and have charitable purposes that fall into one or more of the following categories: relief of poverty, advancement of education, advancement of religion, and other purposes that benefit the community.[10] Second, the organization’s purposes and activities must meet a public benefit test. The organization must be able to show that: (a) its purposes and activities provide a measurable benefit to the public, and (b) the people who are eligible for benefits are either the public as a whole or a significant section of it (the beneficiaries cannot be a restricted group or one where members share a private connection - this includes social clubs and professional associations).[11] Lastly, there are specific governing documents that have to be in place.[12] Once the charitable purpose has been outlined, the organization can meet the public benefit test, and the governing documents are in place, the CRA will designate the charity as either: a charitable organization, public foundation, or private foundation.[13] To learn the criteria that the CRA applies to determine the designation of the registered charity, visit the CRA’s website. Choosing a NPO vs. Charity An organization may choose to be a registered charity if the focus is on gaining donations from individuals and companies to support the community by providing donation receipts for income tax deduction purposes. On the other hand, an organization may choose to be a NPO if its focus is on community and creating an association for individuals. It is important to note that an organization can only be one or the other, but not both! If you want more information regarding the similarities and differences between NPOs and registered charities or need help with registering your charity or incorporating your NPO, contact the BLG Business Venture Clinic. Viviana is a member of the BLG Business Venture Clinic and is a 3rd year student at the University of Calgary Faculty of Law. [1] There are other ways to incorporate a NPO provincially such as through the Agricultural Societies Act, Religious Societies Lands Act, and other private Acts. The Companies Act and Societies Act are the two main ways to incorporate a NPO. [2] Companies Act, s 200(1). [3] Ibid. [4] Ibid. [5] Alberta Government, “Incorporate a non-profit company”, online: <https://www.alberta.ca/Incorporate-non-profit-company.aspx>. [6] Ibid. [7] Alberta Government, “Incorporate a society”, online: <https://www.alberta.ca/incorporate-a-society.aspx>. [8] Ibid. [9] Ibid. [10] Canada Revenue Agency, “What is charitable?” (last updated 25 April 2019), online: <https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/registering-charitable-qualified-donee-status/apply-become-registered-charity/establishing/what-charitable.html>. [11] Ibid. [12] Canada Revenue Agency, “What is a governing document” (last updated 18 December 2019), online: <https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/registering-charitable-qualified-donee-status/apply-become-registered-charity/establishing/what-a-governing-document.html>. [13] Canada Revenue Agency, “Types of registered charities (designations)” (last updated 3 June 2016), online: <https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/registering-charitable-qualified-donee-status/apply-become-registered-charity/establishing/types-registered-charities-designations.html>. Legal Considerations for Employees and Start-up Companies
Written by: Ali Sarhill It is contended that a new company’s success is primarily attributable to future managerial decisions, unlike established companies where most income is derived from existing business.[1] As such, the value of employing superior employees to start-ups is, arguably, substantially higher than for established companies. Thus, an overview of some potential employment issues may encourage start-ups to pay closer attention to employment matters with their counsel. Areas of Potential Employment Issues for Start-ups Employment agreements As changes to responsibilities of employees can frequently occur in a start-up company, employment agreements used should broadly describe job duties. They should also express that job responsibilities may change from time to time due to the corporation’s expected growth.[2] This is crucial as Canadian courts have found that constructive dismissal occurred due to changes in an employee’s work duties.[3] As benefit plans and office policies are likely to change in start-ups over time, they should not be specified in the employment agreement.[4] To assist companies in establishing consideration for various agreements, the employment agreement should explicitly reference these separate agreements that comprise the entire contract of employment: stock option agreement, share subscription agreement, non-disclosure and non-competition agreements, and any assignment of technology.[5] Crucially, the employment agreement should include an integration clause - that the documents in question form the entire employment agreement and that terms and conditions can only be changed by both parties in writing. Such a clause prevents an argument that some oral interactions are terms of the employment agreement.[6] The employment agreement and other contracts should be given to the employee at the time employment is offered to the employee. The employee should, in writing, also be encouraged to seek independent legal advice. Doing so would support a court enforcing the employment agreement. Otherwise, if the employment agreement was signed on the employee’s first day of work, courts will not enforce such an agreement, without additional consideration being provided.[7] Termination of employees and independent contractors When an employee is terminated, the corporation is required to pay the employee a certain amount of money, also known as “notice”, if they were terminated “without cause”. This is often the amount of money they would have made, had they continued to work the “notice” period.[8] The amount of notice that an employee is entitled to is determined by reference to the relevant province’s Employment Standards Code and the common law. Judges often rely on common law cases and determine that an employee is entitled to much more notice than under legislation, based on an estimate of what the employment agreement implicitly provides for. To avoid courts finding that an employee is entitled to more notice than what was given, an explicit provision that sets out the notice period and severance amounts should form part of the employment agreement.[9] A written contract stating that an independent contractor is not entitled to any severance payments should be prepared, as courts are likely to impose a notice period if such a written contract does not exist. This is especially true if the company is asserting control over the contractor, where the contractor worked mostly exclusively for the company, and where the contractor’s and company’s businesses are tightly integrated.[10] Ali Sarhill is a member of the BLG Business Venture Clinic and is a 3rd year student at the University of Calgary Faculty of Law. REFERENCES: [1] Bryce Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, Third Edition, LexisNexis Canada Inc. (2018) at 126 [Tingle]. [2] Ibid at 127. [3] see Ferdinandusz v. Global Driver Services Inc. [1998] O.J. No. 4225, 5 C.C.E.L. (3d) 248 (Ont. Gen. Div.). [4] Tingle at 127. [5] ibid at 127. [6] ibid at 127. [7] ibid at 127-128. [8] ibid at 128. [9] ibid at 128-129. [10] ibid at 130-131. The Next Era of Social Discovery Platforms and Dating Apps: The Metaverse
Written by: Dani Dufresne Last month, Bumble’s Founder and CEO, Whitney Wolfe Herd, broke the news to shareholders on a quarterly earnings call that the friend-finding function, Bumble BFF, is expanding into the Metaverse. What is “the Metaverse”? The anticipated future of the internet: extended reality (XR), a 3D virtual world that is persistent, synchronous, and interoperable. The Metaverse is a never-ending extension and digital parallel of our physical world. It can be comprised of a combination of technologies such as augmented reality (AR), virtual reality (VR), avatars, and a digital economy that uses non-fungible tokens (NFTs). Herd stated, “Bumble BFF gives us a platform for Bumble to become a leader in the Web 3.0 world. […] Longer-term, it becomes a way for members to own their experience on Bumble. This could happen through the communities they build, the virtual goods and experiences they acquire, or through new ways of owning their identity as they navigate the metaverse.” The company’s President, Tariq Shaukat elaborated on Bumble’s ambitions to venture into the Metaverse and predicts that cryptocurrency will be incorporated into future iterations of dating apps. Rival dating app, Tinder, shared similar plans to build a Metaverse. The company is currently testing crypto tokens (tinder coins) in multiple regions. Tinder has initiated beta-testing on a concept called Singletown on select college campuses in Seoul. Through this platform, one’s digital self, in the form of a real-time, audio-powered avatar, can engage in one-on-one or group conversations in virtual spaces. Dating-focused Metaverse: a promising new medium to connect people in a global pandemic and revolutionize the dating landscape OR a platform that will create further isolation and less human interaction? Dani is a member of the BLG Business Venture Clinic and is a 3rd year student at the University of Calgary Faculty of Law. |
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