Written by Sarah Dallyn
JD Candidate 2024 | UCalgary Law
 
There is a lot of paperwork involved in getting a new business off the ground and it can be overwhelming to keep all the different documents straight. One set of documents that are essential to the formation and organization of any new corporation are the constating documents. This blog provides a brief overview of what constating documents are and why these documents are important to your start-up.
 
What are constating documents?
Constating documents, also referred to as organizational documents, are the documents that establish a corporation and set out how the internal affairs of the business are governed.[1] Under the Canada Business Corporations Act (CBCA), a corporation’s constating documents consist of articles of incorporation, bylaws, and unanimous shareholder agreement.[2]
 
Articles of Incorporation:
Every corporation incorporating under the CBCA or the Alberta Business Corporations Act (ABCA) is required to file an articles of incorporation document with the regulator appointed to administer the act.[3] The articles of incorporation are the charter or constitution that set out basic elements of the corporation and provides the framework for its formation.[4] Under the CBCA[5] and the ABCA[6], articles of incorporation must include the following information:

• the name of the corporation
• the classes and any maximum number of shares that the corporation is authorized to issue
• if the right to transfer shares of the corporation is to be restricted, a statement that the right to transfer shares is restricted
• the number of directors or, the minimum and maximum number of directors of the corporation
• any restrictions on the businesses that the corporation may carry on

 
The CBCA also requires the province in Canada where the registered office of the corporations is to be situated.[7] In addition to the required information above, articles of incorporation may also include additional provisions depending on the specific needs of the business. It is important to carefully consider your business and tailor the articles of incorporation to your business’s specific structure to help avoid shareholder disputes or taxation issues in the future.[8]
 
Bylaws:
Bylaws are the specific rules and procedures for the internal governance of the corporation.[9] In other words, the bylaws are like the internal operating manual for your business.[10] The bylaws often cover the procedures for board and shareholder meetings, the composition and election of the board of directors, and corporate record-keeping. These rules must be consistent with the articles of incorporation. [11] However, unlike the articles of incorporation, bylaws are not required by law under the CBCA or the ABCA. If a corporation chooses not to pass its own bylaws, the CBCA or the ABCA will act as the default for certain affairs of the corporation.[12] Although not legally required, bylaws are important to establish the effective governance of the corporation and may be required in the future by third parties such as potential investors or banks lending money to the corporation.[13]
 
Unanimous Shareholder Agreement:
A unanimous shareholder agreement is defined in the CBCA as a written agreement among all the shareholders of a corporation that restricts the powers of the directors to manage, or supervise the management of, the affairs of the corporation.[14] The purpose of a unanimous shareholder agreement is to transfer authority over some or all management decisions from the directors to the shareholders of the corporation.[15] It is important to note that under the ABCA, the removal of power from the directors is not required and instead represents one of several things that may be included in a unanimous shareholder agreement.[16] Furthermore, as is the case with bylaws, a unanimous shareholder agreement is not a legal requirement under the CBCA or the ABCA.[17]
 
In addition to binding current shareholders, all subsequent shareholders are also bound to the terms of the unanimous shareholder agreement. This can be problematic for growth companies as they add new shareholders as it becomes more difficult to efficiently make decisions among all shareholders.[18] Furthermore, the CBCA and ABCA provides no clear-cut procedures for governing shareholder decisions made under a unanimous shareholder agreement. Another issue is that the powers exercised by shareholders under a unanimous shareholder agreement attract the same kind of fiduciary duties that attach to the activities of directors.[19] New shareholders may not want to become bound to the fiduciary duties of the corporation, especially if they already have fiduciary duties to their own shareholders.[20] As these potential issues illustrate, it is very important to think through your business and growth plans to determine whether or not a unanimous shareholder agreement is appropriate for your specific business. If a unanimous shareholder agreement is not entered into, there are other types of shareholder agreements that do not fall within the meaning of CBCA or ABCA’s definition of unanimous shareholder agreement that can be drafted to set forth the various rights and obligations of the corporation’s shareholders.
 
If you have questions regarding the various constating documents discussed above or require assistance with the drafting of your start-up’s constating documents, please reach out to the BLG Business Venture Clinic.
 


[1] Ahlstrom Wright, Definition: Constating Documents (April 18, 2018), online: https://ahlstromwright.ca/definitions-constating-documents/

[2] Practical Law, Glossary: Constating Documents, online: https://ca.practicallaw.thomsonreuters.com/Document/I188aaba9f92311e498db8b09b4f043e0/View/FullText.html?listSource=Foldering&originationContext=MyResearchHistoryRecents&transitionType=MyResearchHistoryItem&contextData=%28oc.Default%29&VR=3.0&RS=WLCA1.0

[3] Practical Law, Glossary: Articles of Incorporation, online: https://ca.practicallaw.thomsonreuters.com/Glossary/CAPracticalLaw?docGuid=I75b15b03f95911e498db8b09b4f043e0&transitionType=DocumentItem&contextData=(oc.Default)&ppcid=66e3e985f4a0458c8fc2c0c02dbb4792

[4] Upcounsel, Bylaws vs. Articles of Incorporation, online: https://www.upcounsel.com/bylaws-vs-articles-of-incorporation

[5] CBCA R.S.C., 1985, c. C-44, s 6(1)

[6] ABCA RSA 2000, c B-9, s 6(1)

[7] CBCA, supra note 5

[8] Kahane Law Office, Understanding The Articles That Form Your Corporation, online: https://kahanelaw.com/articles-of-incorporation-corporate-lawyers-calgary/

[9] Supra note 4

[10] Lena Eisenstein, Articles of Incorporation and Bylaws: Same or Different? (September 29, 2021), online: https://www.boardeffect.com/blog/difference-between-articles-of-incorporation-and-bylaws/

[11] Ahlstrom Wright, What is A Corporate Bylaw And Why Do Corporations Need Them? (April 20, 2018), online: https://ahlstromwright.ca/what-is-a-corporate-bylaw-and-why-do-corporations-need-them/#:~:text=There%20is%20no%20legal%20requirement,although%20it%20is%20not%20recommended.

[12] Ibid

[13] Ibid

[14] Bryce Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, p. 100-101

[15] Ibid at p. 101

[16] Ibid

[17] In 1998, the Supreme Court of Canada recognized unanimous shareholder agreements as being one of the three constating documents for a corporation under the Canada Business Corporations Act in Duha Printers (Western) Ltd. v. R. [1998] 1 S.C.R. 795

[18] Ibid at p. 102

[19] Ibid at p. 104

[20] Ibid at p. 104

Authored by Shazaib Rashid, UCalgary Law, JD Candidate 2024

Patents play an important role in both promotion innovation and economic growth. In Canada, patent law is governed by the Patent Act[1], a complex series of rules and regulations which came into force in 1869. A Patent is a type of intellectual property, that provides the owner the sole and exclusive right to making, using, or selling their innovation. In Canada, the first applicant to file a patent application for an invention will be entitled to obtain patent protection for that invention. This protection lasts up to 20 years starting from the date of filing.[2] Additionally, a patent application must be filed or registered in each country where patent protection is desired.
 
The Patent Act defines an invention as “any new and useful art, process, machine, manufacture or composition of matter or any new and useful improvement in any art, process, machine, manufacture or composition of matter.”[3] Although the definition is broad and would cover a broad variety of different item, there are specific criteria that must be met to receive a patent. To be patentable in Canada an invention must meet three main criteria: new, novel and non-obviousness.[4] First the invention must new, to be considered novel the invention cannot have been disclosed in such a manner as to have become publicly. However, this does not mean that you need to re-invent the wheel you can patent a combination of old inventions as long results in the production of a novel invention. Second the invention must also be useful, to be useful the invention for the purpose which it was designed. An invention has utility if: (a) it gives a benefit to the public; (b) it is useful in achieving a particular purpose; (c) it makes a process better or cheaper; (d) it is advantageous under certain circumstances; and (e) it works.[5] Lastly the innovation must non-obviousness or inventive ingenuity, this requirement was added originally through case law[6] and now by statute.  The invention cannot be obvious to a hypothetical individual, someone who possesses the relevant technical experience and knowledge.
 
The typical process to obtain a patent is as follows: Applicants prepare and file the application; If you are considering a patent the typical process to obtain a patent is as follows: Applicants prepare and file the application; Applicants must then request if the invention is new by searching prior art; The examiner looks for possible defects or issues in the application and may send a report to the applicant if there are any; The applicant files a correction or response to that report. If there are still defects, the examiner can issue another report.[6] If you are considering it is also recommended that one consider hiring a patent agent and/or IP lawyer to help them.
 

[1] Patent Act, RSC 1985, c P-4

[2] Ibid, s. 44

[3] Ibid.

[4] Donald M. Cameron “Canadian Patent Law Primer” (2012) at pg. 7, online (pdf): < patweb00.pdf (jurisdiction.com)>

[5] Ibid at pg. 9

[6] Government of Canada, “Filing a patent application: the devil is in the details” (02 February, 2022). Online: Canadian Intellectual Property Office <https://ised-isde.canada.ca/site/canadian-intellectual-property-office/en/corporate-information/blog/filing-patent-application-devil-details>

Authored by Phil Vandekerkhove, UCalgary Law | JD Candidate 2023

You’re a new business looking to outsource the manufacturing of your product to another business. You have just finished negotiating the basic elements of the agreement. The supplier pulls out a memorandum of understanding (MOU), letter of intent (LOI), or term sheet for you to sign. As with any agreement, you should know what legal obligations are being created before signing.
 
What are MOUs, LOIs, and Term Sheets?
These agreements come in different forms but share the same substance. In this post, they will be referred to as term sheets. Term sheets are a useful and flexible stepping stone in coming to business agreements. They are often executed once key terms of a transaction are agreed upon. Using the above example, a term sheet may set out the price, quantity and timing expectations for a manufacturing agreement. Such a term sheet will usually be signed before drafting the final manufacturing agreement.
 
Are term sheets legally binding?
You may want to know the specifics of an agreement before committing to a price. Many believe that signing a term sheet specifying prices could create a legal obligation to ensure the final agreement integrates those prices. But this is not usually the case.
 
            Non-binding Provision
Standard term sheets contain a non-binding or “subject to definitive agreement” provision.[1] This provision makes clear that the agreement is not intended to create legal obligations.[2] It is unlikely for a court to find a legally binding intention in an agreement with a non-binding provision. Including a non-binding provision carries the lowest risk that the agreement could become legally binding.
 
            Agreements to Agree
Without a non-binding provision, a term sheet is more likely to be enforced by the court. In such a case, the court will turn to the legal principle of agreements to agree. An agreement to agree, or agreements subject to contract is an agreement that leaves out essential terms, expecting the parties to agree on those terms in the future. Using our example, the supplier and buyer may agree on a price and quantity of product and agree to negotiate delivery timelines in the future. If the parties cannot conclude on a delivery timeline, and a dispute arises, the court is unlikely to find this “agreement to agree” enforceable due to uncertainty.[3] Where a contract lacks an essential term, it becomes too uncertain to enforce. Term sheets are often too short to set out all essential elements of an agreement. This legal doctrine adds protection to term sheets, usually making them unenforceable. [4]
 
Why execute a term sheet if they are unenforceable?
There are four main reasons why term sheets are useful business tools:[5]

1. Moral commitment
   Although not legally binding, term sheets can create moral commitments. In our manufacturing example, a manufacturer is less likely to raise the price of their product at the end of negotiations if they have previously signed a term sheet recognizing their original price.
   
   
2. Guidance for Lawyers
   Once key terms have been agreed to, lawyers can use a term sheet as a skeleton around which they can start drafting the final agreement. Early drafting can reduce delays and identify important terms as negotiations continue.
   
   
3. Creating Timetables for Continued Negotiations
   Depending on the transaction, companies may wish to create timelines for due diligence or other inspections. Such inspections often occur before executing the final agreement. With our manufacturing example, the buyer may want to schedule an inspection of product quality during negotiations.
   
   
4. Preliminary binding Legal Clauses
   Although term sheets are generally unenforceable, certain obligations may still be created to benefit ongoing negotiations. If legally binding terms are included, parties should ensure a non-binding provision reflects this intention.[6] Legally binding obligations may include:[7]

• Confidentiality and Non-Disclosure: Parties disclosing confidential information during negotiations will want to bind the other party through a confidentiality provision. In our example, the buyer may be disclosing confidential product ingredients. 

 

• Exclusivity: Exclusivity provisions ensure the parties do not negotiate with a third-party while current negotiations are ongoing. Exclusivity provisions reduce the risk of losing a deal to a third-party offer.

 

• Expenses: Parties often divide expenses incurred during negotiations such as legal, financial and accounting service fees. Parties may each pay their own incurred fees, or devise a fee-splitting arrangement.

 
Conclusion
Be not afraid when a term sheet is put before you. Read the terms to ensure they represent the key provisions agreed on in principle. Ask yourself if it may become binding. A non-binding provision should always be included. Finally, consider the binding terms under the circumstances. For example, if you are receiving other offers, consider whether an exclusivity commitment is the right choice for you.
 
If you would like more information about an MOU, LOI or term sheet, please feel free to reach out to the BLG Business Venture Clinic.


[1] Standard Document: Memorandum of Understanding, Practical Law

[2] Practice Notes: Term Sheets, Practical Law

[3] Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CarsewellOnt 836, [1991] O.J. No. 495 at para 21.

[4] Practice Notes: Term Sheets, Practical Law

[5] Practice Notes: Term Sheets, Practical Law

[6] Standard Document: Memorandum of Understanding, Practical Law

[7] Practice Notes: Term Sheets, Practical Law

Written by Reed Boothby
JD Candidate 2023 | UCalgary Law

 
On May 31, 2022, amendments to the Alberta Business Corporations Act (“ABCA”)[1] came into force. In line with Alberta’s Recovery Plan, the intention underlying the amendments is to attract investment and make Alberta a more appealing jurisdiction for incorporation. Three key benefits as a result of these amendments include: (1) streamlined administrative processes; (2) enhanced director and officer protections; and (3) corporate opportunity waivers.
 

1. Streamlined Administrative Processes:
   
   (a)  Shareholder Approval Requirements for Non-Reporting Issuers:
    
   There are a variety of matters specified in the ABCA that require shareholder approval by way of ordinary or special resolution. Shareholders may approve resolutions by: (1) voting at a shareholder meeting;[2] or (2) signing a written resolution.[3]
    
   Voting during a shareholder meeting was unchanged by the amendments. During a shareholder meeting, ordinary resolutions are still passed by a simple majority vote,[4] and special resolutions passed by a majority vote of not less than two-thirds of the votes cast.[5]
    
   The amendments did change the requirements to pass a written resolution, however. Prior to the amendments, written resolutions required the signature of every shareholder. If a single shareholder was unwilling or unable to sign a written resolution, the corporation was forced to call a shareholder meeting on at least 21 days’ notice (changes to notice periods are discussed below). This led to delays and an increased administrative burden on the corporation.
    
   Pursuant to the amendments, a non-reporting issuer (i.e., a private company)[6] may now pass a written resolution with the signatures of only two-thirds of the shareholders,[7] reducing the ability of any one shareholder to delay business activity.
    
   (b)  Reduced Notice Period for Shareholder Meetings for Non-Reporting Issuers:
    
   The minimum notice a non-reporting issuer is required to provide prior to a shareholder meeting has been reduced from 21 days to 7 days.[8] This change increases flexibility and enables the corporation to more quickly address issues as they arise.
    
   (c)  Electronic Signatures and Delivery by Electronic Means:
   
   A variety of changes were made to the ABCA to facilitate the use of electronic signatures and allow for delivery of documents by electronic means. For instance, security certificates may now be issued in electronic form, rather than paper.[9] Similarly, financial statements may now be signed by directors using electronic signatures, rather than requiring a wet-ink signature.[10] Furthermore, unless the corporation's bylaws or articles of incorporation indicate otherwise, any documents that must be sent to shareholders, directors or other stakeholders of the corporation may be sent by electronic means.[11]
    
   (d)  Revival of a Corporation:
    
   Corporations may be dissolved or wound-up for a variety of reasons. Prior to the amendments, the ABCA permitted the revival of a corporation within five years of its dissolution. Now, a corporation may be revived for up to 10 years after dissolution.[12] This provides interested parties with more flexibility to resume activity under a previously dissolved corporate entity.
   
   
   
2. Enhanced Director and Officer Protections:
   
   (a)  Expanded circumstances of “good faith” defense for Directors:
    
   The ABCA provides a defense wherein a director will not be liable for a breach of their duty of care if the director can demonstrate they relied in good faith on an opinion provided by a list of persons whose profession or expertise lends credibility to a statement made by that person.[13] Prior to the amendments, this list included only lawyers, accountants, engineers and appraisers. The amendments expanded the scope of this list to include employees of the corporation, meaning directors and officers may now benefit from the good faith defense by showing reliance on the opinions of employees who have credibility due to their profession or expertise.
   
   (b)  Enhanced Director and Officer Indemnification:
    
   The ABCA amendments expand the scope of director and officer indemnification. Pursuant to the amendments, directors and officers may now be indemnified with respect to:
    
        (i)    “investigative “ proceedings in addition to civil, criminal, and administrative proceedings;
        (ii)    investigations, actions and proceedings in which the director or officer is not named as a formal party but rather, is
                involved by reason of being (currently or formerly) a director or officer of the corporation.
    
   Prior to the amendments, a corporation was generally limited to indemnifying a director or officer for costs related to civil, criminal, or administrative actions or proceedings to which the director or officer was named as a formal party.
    
   Furthermore, the amendments now provide a corporation with the option to purchase directors’ and officers’ insurance benefiting directors and officers even where they have failed to act honestly and in good faith with a view to the best interest of the corporation.[14] Previously, liability caused by a director or officer failing to act honestly and in good faith with a view to the best interest of the corporation was excluded from insurance coverage.
   
   
   
3. Corporate Opportunity Waivers:
   
   As part of their fiduciary duty, directors and officers are generally prevented from personally exploiting business opportunities offered to the corporation. The amendments to the ABCA now give a corporation the option of including a “corporate opportunity waiver” (the first of its kind in Canada) within its articles of incorporation or unanimous shareholders agreement. Under a corporate opportunity waiver, the corporation waives any “interest or expectancy” of the corporation to participate in a business opportunity that has been offered to it.[15] This enables directors and officers to personally participate in a particular business opportunity they may otherwise have been prevented from participating in by virtue of their fiduciary duty.
   
   The waiver is beneficial for any directors or officers involved with multiple corporations. In particular, institutional investors, such as private equity or venture capital firms, commonly invest in multiple companies and consequently have representatives that sit on multiple boards of directors. The corporate opportunity waiver provides added certainty to these directors and officers that their actions will not violate the fiduciary duties they would otherwise owe to each individual corporation.

 
Conclusion:

The recent amendments to the ABCA make Alberta a more attractive jurisdiction in which to incorporate and operate a business by: (1) streamlining administrative processes; (2) enhancing director and officer protections; and (3) introducing a corporate opportunity waiver.

Note that a corporation's constating documents may require amendments to implement some of the changes outlined in this post. For assistance with amending constating documents, or for further information about the ABCA generally, please contact the BLG Business Venture Clinic.


[1] Business Corporations Act (Alberta), RSA 2000, c B-9. [ABCA]

[2] ABCA, s. 139.

[3] ABCA, s. 141.

[4] ABCA, s. 1(w).

[5] ABCA, s. 1 (ii).

[6] “non-reporting issuer” means a private corporation that is not required to file continuous disclosure documents pursuant to National Instrument 51-102 – Continuous Disclosure Obligations (NI 51-102).

[7] ABCA, s. 141(2.1).

[8] ABCA, s.134(1.1).

[9] ABCA, s. 48(7.1)

[10] ABCA, s. 158(1).

[11] ABCA, s. 255(5).

[12] ABCA, s. 208(1).

[13] ABCA, s. 123(3)(b).

[14] ABCA, s.124.

[15] ABCA, s. 16.1.

By Martika Ince | JD Candidate 2024, UCalgary Law
 
A social enterprise, or a benefit corporation, is one that pursues primarily social or environmental goals through an entrepreneurial structure. As social entrepreneurship gains popularity in Canada, it is crucial for entrepreneurs to be aware of and understand their options in structuring their business. This provides a brief overview of three different legal structures for those who are starting to think about how to organize their social enterprise.  
 
Registered Charity
 
Registered charities are organizations that have a charitable purpose and devote their resources for charitable activities. The Income Tax Act (ITA) provides that organizations can become a registered charity after applying and being approved by the Canada Revenue Agency (CRA).[1] The charitable purpose must fall into one or more of the following categories:
·       The relief of poverty;
·       The advancement of education;
·       The advancement of religion; or
·       Other purposes that benefit the community.[2]
 
Registered charities benefit from a general tax exemption under the ITA.[3] As a charity, you are also able to issue charitable donation tax receipts so that donors can claim tax credits or deductions for charitable gifts.[4]
 
Registered charities can generate revenue in two ways:

1. Charging fees for the charitable service provided, such as a community centre charging for their programming, and
   
2. Carrying on ‘related business’ activities, such as renting out community centre space to third parties.[5]

 
However, carrying on an unrelated business activity is grounds for revocation of charitable registration. This is an important consideration in deciding whether registered charity status is right for your social enterprise, as this rule can severely limit the organization’s activities.[6] Moreover, you may face difficulty in securing private investment as a charity. Venture capitalists and other investors are often less motivated to invest funds to support a social benefit activity that may generate a lower return than pure for-profit entities.   
 
Non-Profit Organization
 
Another structure often used for a social enterprise is a non-profit organization, which has a social benefit purpose and does not operate for profit. You can choose to operate as a non-profit after incorporating into a corporate structure. Non-profits are typically organized as a non-share capital entity to alleviate the concern that owners and shareholders are accumulating wealth.[7] As such, third parties cannot invest in the same way they would with a share capital corporation.
 
Non-profits are exempt from paying income tax, but they must fulfil certain requirements to do so.[8] A non-profit organization can generate revenue if the business is connected to its social mission. The CRA may revoke a non-profit’s tax-exempt status if it is found to carry out trade or business exclusively with a view to profit.[9]
 
The following may indicate that a non-profit is operating for profit:
·       Trade or business operating in a normal commercial manner;
·       Goods or services are not restricted to members and their guests;
·       Operated on a profit rather than cost-recovery basis; or
·       Operated in competition with taxable entities carrying on the same trade or business.[10]
 
In some cases, generating profit to be directed to a social benefit purpose can be considered a for-profit activity by the CRA, rendering the organization ineligible for the tax exemption.[11] As such, non-profit organizations are limited in the ways that they can make money.
 
Business Corporation
 
Corporations are arguably the most flexible vehicle for carrying on social enterprise. A business corporation or for-profit corporation is a legal entity that exists separately from its owners – it is treated as a natural person. Corporations can be incorporated under the Canada Business Corporations Act (CBCA) federally or under the provincial equivalents. In order to indicate your corporation is a social enterprise, you should include your social mission in your articles of incorporation or in a resolution passed by the executive board or shareholders.[12]
 
The benefits of choosing a business corporation for your social enterprise are many. You can conduct any business activities, collaborate with anyone you wish, and use the proceeds with more freedom. Business corporations also have a flexible capital structure, which can attract private investment with no formal limit on returns. If desired, share conditions can be used to establish a set percentage of earnings that will be directed to the social mission, and formal restrictions can be placed on shareholder returns.[13]
 
There are also disadvantages to consider in choosing the appropriate legal structure for your business. As corporations are not a qualified donee under the ITA, they cannot attract funding from the charitable sector. They also do not benefit from a tax-exempt status under the ITA. However, corporations can deduct a percentage of their annual income on account of charitable donations. Another disadvantage is that corporations can be perceived by the public as using the cover of a social purpose to create wealth and benefit themselves.[14] It is important to be transparent about how your social enterprise contributes to a social or environmental goal.
 
Conclusion
 
Many legal structures exist for a business, but registered charities, non-profit organizations, and business corporations are the most commonly used for a social enterprise, each with their respective benefits and disadvantages. If you have questions or require additional information about different legal structures for your social enterprise, please reach out to the BLG Business Venture Clinic.
 

​

[1] Innovation, Science and Economic Development Canada, “Start, build, and grow a social enterprise: Build your social enterprise” (26 November 2021), online: Government of Canada,  <https://ised-isde.canada.ca/site/choosing-business-name/en/start-build-and-grow-social-enterprise-build-your-social-enterprise#s2> [ISED].

[2] Ibid.

[3] Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA] at s 149(1)(f).

[4] Susan Manwaring & Andrew Valentine, “Social Enterprise in Canada”, The 2012 Lexpert (Thomson Reuters Canada Ltd, 2012) [Manwaring].

[5] Ibid.

[6] Ibid.

[7] Manwaring, supra note 4.

[8] ITA, supra note 3 at s 149(1)(l).

[9] ISED, supra note 1.

[10] Ibid.

[11] Manwaring, supra note 4.

[12] ISED, supra note 1.

[13] Manwaring, supra note 4.

[14] Ibid.

Written by Charlotte Kelso
JD Candidate 2024 
UCalgary Law

Ordinary Partnerships

A partnership is a relationship between two or more people (i.e., partners) carrying on a business together with the aim of making a profit, excluding corporations.[1] A firm of any size in any industry can be classified as a partnership if it meets this definition.[2] There are three types of partnerships: ordinary partnerships, limited partnerships, and limited liability partnerships. This article focuses on ordinary partnerships, which I will refer to simply as "partnerships". In Alberta, the Partnership Act governs partnerships, with similar legislation in place across Canada.

The key risk associated with partnerships is that a partner may be personally liable for any debt or obligation that the firm is liable for.[3] For example, if the firm is in default of a bank loan, the bank can recover the debt from the partners' personal funds and assets if needed. Liability is shared amongst partners. This means that an individual partner is financially responsible for the actions and decisions of the other partners during the course of business. Given the liability risks, it is important to know if you are in a partnership.

Identifying a Partnership

To be a partnership, a business relationship between parties must meet the definition of a partnership. There are three “essential ingredients” of a partnership.[4] First, the parties must carry on a business. Carrying on a business includes the early and preparatory stages of a venture.[5] The duration of the business venture does not need to pass any certain threshold.[6] Second, the business must be carried on “in common” by the parties. In other words, they must be carrying out the same business in tandem. Finally, the business must be carried on with the aim of making a profit. Aiming to make a profit does not require that the firm actually make a profit.[7]

Whether the “ingredients” are present is determined by looking at the circumstances and facts of the relationship. Materials like business licences in the partners’ names, correspondence between the parties, and tax returns showing shared profits can point to a partnership. The parties may have an agreement in writing that they have formed a partnership. While this can be indicative of a partnership, it is not necessarily decisive.[8] A lack of evidence that the parties intended to divide profits or carry on a business together suggests that there is no partnership.[9] Where there is no written agreement, words and actions that are consistent with a partnership may establish a partnership.[10] In sum, a partnership is identified based on the circumstances of each business relationship.

Converting the Partnership to a Corporation
​
Partnerships often represent a phase in the legal structure of a business which parties may eventually wish to transition out of, especially given the liability risks of a partnership. The Income Tax Act provides an avenue for a partnership to convert to a corporation in conjunction with the wind-up process. First the partners set up a corporation for the purposes of the transition. Then the partnership transfers property to the corporation in exchange for shares. The shares are transferred from the partnership to the individual partners. Then the partnership wind-ups up. The former partners continue on their business venture under the corporation as shareholders. [11] [12] 
 


[1] Partnership Act, RSA 2000, c P-3, at s. 1(g).

[2] Ibid at s. 1(c).

[3] Ibid at s. 11(2) and 15.

[4] Spire Freezers Ltd v Canada, 2001 SCC 11.

[5] Miah v Khan, [2000] 1 WLR 2163.

[6] Supra note 2.

[7] Supra note 2.

[8] Sproule v McConnell (1925), [1925] 1 DLR 982, 19 Sask LR 319.

[9] Big Bend Construction Ltd v Donald, 1958 CarswellAlta 33, 25 WWR (ns) 281.

[10] Sabbaugh v Rawdah, 1978 CarswellAlta 409, 16 AR 326.

[11] Income Tax Act, RSC 1985, c 1, s. 85(2).

[12] Tingle, B. C.  Start-Up and growth companies in Canada - a guide to legal and business practice (3rd ed.). LexisNexis Canada Inc, p. 36.

Written by Mercer Timmis*

What are Liquidation Preferences?
A liquidation preference is a contractual right that may be negotiated by a venture capital firm while providing financing to a business. A liquidation preference entitles preferred shareholders to receive a certain amount of money on the company's liquidation before anything is paid out to the holder of the other classes of shares.[1] Liquidation preferences may be triggered by events such as bankruptcy, winding up the business, an extraordinary sale of all or substantially all of the company's assets, or a change of control of a company.
Usually, preferred shareholders get an amount equal to their original purchase price plus any accrued and unpaid dividends (the" liquidation price"). However, venture capital investors ask for additional features, such as a multiple liquidation preference. A multiple liquidation preference gives the investor the right to receive between 1 to 3 times the liquidation price.[2]
 
Current Relevance
From 2020 to 2021, venture firms saw a record level of inflowing capital that pushed company valuations higher. This business-friendly market meant that investors settled on a 1 times liquidation preference which ensured they would be paid back their initial investment before founders and employees.[3]
Conversely, 2022 presents a different market where venture capital investment dropped to a six-quarter low amidst increasing interest rates, high levels of inflation, and a declining stock market. This weakened funding environment creates a lower risk appetite for investors where investors ask for more onerous terms. As such, investors are asking for a 2 to 3 times liquidation preference, meaning they would be paid back double or triple their money before other stakeholders.[4] 
 
The Dilemma
Generally, a company's valuation tends to increase for each financing round. However, the current economic climate brings unfavourable company valuations and leads businesses to agree to more onerous terms to prevent a 'down round.' A down round occurs when a company raises money at a lower valuation than its previous round. The consequences of a down round are two-fold. First, raising funds at a lower valuation has a dilutive effect on existing shareholders. Second, it is a red flag that reduces investor confidence and employee morale.[5] As such, liquidation preferences are prevalent in the current market because investors will agree to funding valuations equal to or higher than a company's previous round in return for 2 or 3 times multiple. These terms are attractive because, despite the underlying difficulties of the business, the investor is receiving 2 to 3 times their investment.
 
Options for the Business
If a company faces onerous liquidation preferences, the following compromises are available: First, suggest that the liquidation preferences operate only against management and founders' shareholding rather than against the equity of other investors (i.e., any friends or family). Second, place a cap on the return to the preferred shares so that in the event the company sees modest success, the preferred shareholders will do better by converting to common equity rather than relying on the liquidation preference. 
Finally, when negotiating the terms of liquidation preferences, they should not provide for a "change of control" mechanism that results in the deemed liquidation in the event of an equity investment involving more than 50% of outstanding shares. Instead, the threshold should be much higher.[6]

Footnotes:
[1] Bryce C. Tinge, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practices, 3rd ed (Canada: LexisNexis Canada Inc, 2018). 
[2] Ibid.
[3] The Information, “Startups Avoid Valuation Cuts with ‘Up Rounds in Name Only’ (11, October, 2022) online: The information < https://www.theinformation.com/articles/startups-avoid-valuation-cuts-with-up-rounds-in-nameonly?utm_source=substack&utm_medium=email>.
[4] Bloomberg, “VCs Need the Good Tweets” (13, October, 2022) online: Bloomberg, Matt Levine < https://www.bloomberg.com/opinion/articles/2022-10-13/vcs-need-the-good-tweets>.
[5]Supra, note 1.
[6] Ibid.


*Mercer Timmis
J.D. Candidate 2023
University of Calgary, Faculty of Law

Authored by Sabrina Sandhu*

A Not-For-Profit, or NFP, is an organization where the purpose is not for owners to generate a profit for themselves, nor is there any distribution of income to members, officers, or directors. The goals of an NFP can vary widely from artistic to scientific, and philanthropic to educational. When starting a NFP in Canada, one must make an important initial decision whether to incorporate federally or provincially. Each confers certain advantages and disadvantages. While the individual provinces have harmonized their process for incorporation, differences do exist in the margins. It is therefore important to understand the requirements of each province under consideration before making a decision on jurisdiction. This post will characterize the key distinctions between incorporating federally in Canada to that of the Province of Alberta.

Federal Incorporation
The Canada Not-for-profit Corporations Act, or CNCA, is the governing legislation for incorporating federally in Canada. There are several advantages to the organization when incorporating under the CNCA. First, once federally incorporated, the organization may carry out its objectives in any province or territory they choose. Secondly, the name of the organization will remain unique nationally, in contrast to provincial registration where the name is only protected in that specific province. However, it may be more challenging to find a unique name nationally, than at the provincial level. Third, albeit paradoxical, the extent of financial review is lower when federally incorporated, where it may only be necessary to have an independent accountant review financial statements, rather than having to appoint an auditor which can be costly for an NFP. Fourth, under the CNCA only one individual is required to incorporate the NFP, compared to more than one at provincial levels. Fifth, perhaps the most important advantage is that under the CNCA, a federally incorporated NFP may engage in a business or trade to generate revenue specifically for use by the NFP. This enables the NFP the financial means to pursue broader Not-For-Profit objectives. Finally, the downside is that one is required to pay both the $250 online fee to incorporate federally, plus an additional extra-provincial registration fee to be paid in the provinces and territories that the organization conducts its operations in. In Alberta, the extra-provincial fee would be an additional $250.
​
Incorporation in the Province of Alberta.
If one were to incorporate in Alberta only, the organization would be incorporated under the Alberta Societies Act, or ASA. The key differences from federal incorporation are as follows. First, the fee to incorporate is only $50, which is less costly than federal incorporation. Second, selecting a name for the organization only requires an Alberta search, not a national database search, and therefore it is easier to obtain. However, if the organization subsequently wishes to pursue expansion into other provinces or territories, then the chosen name must undergo a search and clearance in that province as well. Third, instead of only one individual required to incorporate an NFP federally, the Alberta requires 5 or more individuals. Fourth, Alberta NFPs are required to have their annual financial statements audited, which can be costly to the NFP, whereas federally, as mentioned above, an exemption can be obtained that obviates the necessity for an external auditor. Finally, the most important distinction between federal incorporation is that an organization incorporated under the ASA is not permitted to engage in a business or trade to generate revenue for the organization. If the organization is financed primarily through donations, and it is not necessary for the organization to pursue additional revenue generation streams to fulfill its not-for-profit objectives, then this may not be a concern.
If you have questions or require additional information about incorporating an NFP in Canada, please reach out the BVC Clinic to chat with U of C Law Student.

*Sabrina Sandhu, MD FRCPC
JD Candidate 2023 (University of Calgary​)
Anesthesiologist and Pain Medicine Physician
Clinical Assistant Professor
Department of Anesthesiology, Preoperative and Pain Medicine
University of Calgary

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:

1. new;
2. useful; and
3. Non-obvious.

This blog post explains the requirements in more depth.
 
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:

1. that the information has commercial value;
2. that the information is secret; and
3. that the information has been subject to reasonable measures by the business to ensure that it remains secret.[8]

 
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

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
​