Business Venture Blog
This is where we post about business ventures, law, and business venture law.
Anything interesting, really.
Anything interesting, really.
Business Venture Blog
Does your Business Use Music?
Many if not most businesses broadcast music, or otherwise use music in conjunction with their services, marketing, and products. This following blog post will introduce some of the music licensing requirements that a small business may run into.
It’s general knowledge that if a business incorporates music into an advertisement, website, or a product, they require permission from the copyright holder of the song. In these scenarios a synchronization licence would be required. Most often businesses will have to negotiate directly with the copyright holder of the song in order to receive a synchronization license. Often times, this will be a record label, or independent artist. This can prove difficult for small businesses, as they will need to determine who the copyright holder is, and will then have to attempt to contact and negotiate licensing rates with the copyright holder. This may make it nearly impossible for a small business to get a synchronisation licences for a well known song.
There exists music licencing services that act on behalf of groups of artists and rights holders. This can be a good way for small businesses to license music quickly and effectively. A Google search for, “music licensing services” will turn up many results for these sort of licencing services. However, it’s important to ensure that the chosen service is reputable.
For more information: musiccanada.com/resources/licensing/
If the reproduction of music is an essential part of your business, for example you are hoping to be the next record label or music streaming service, there will be other considerations that will not be discussed in this blog post. To learn more on this topic, a good starting point is connectmusic.ca.
For more information: connectmusic.ca
Public Performance and Broadcast
Small business owners often don’t realize that any public use of music in connection with their business requires some form of licensing, as a royalties need to be paid to the rights holders. A recent leger poll surveyed 510 small business in Canada. This poll defined small business as those with 1 to 9 employees. The poll found that 71% of respondents consider music to be an essential part of their service, yet only 11% are licensing music. This suggest that a significant portion of Canadian small businesses are infringing on copyright, and opening themselves up to possible legal action. Simply having purchased a cd, or using a music streaming service does not amount to compliance with the Copyright Act. Section 19 of the Canadian Copyright Act deals with renumeration, it applies to Canadian and non-Canadian sound recordings. It serves the purpose of mandating the proper renumeration of royalties to music rights holders.
For a business to publicly broadcasts music, or use live music to better their clients’ experience, they must ensure that they are paying a royalty to the rights holders.
The following situations provide examples of situations where a business is required to remit a royalty.
SOCAN: SOCAN represents songwriters, composer and music publishers. SOCAN sets tariffs for business, which once paid allow for the issuance of a licence. Tariff rates are set based on the purpose for which the business uses music, as well as based on an estimate of the quantity of people that will hear the music. Some business may need to pay for multiple tariffs to properly comply. For example, a café will need a licence that covers sound recordings that it plays through its stereo, and live music in the café. The licence will be based on the price of two different tariffs.
RE-SOUND: RE:SOUND acts on behalf of performing artists and recording companies. A business will need a licence from both SOCAN and RE:SOUND when broadcasting music. For live music, only a SOCAN License is required. RE-SOUND uses a tariff system similar to SOCAN to price licenses.
Entandem: Entandem is a joint venture between RE:SOUND and SOCAN. It allows Canadian business to get all broadcast and live music licenses from the same place.
Satellite Radio: Some businesses that require background music may be able to use services that pay the royalties on their behalf. Companies including SiriusXM and Stingray have business plans that can be used instead of getting a licence.
Graham Richardson is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
Sources and Further Information
Licensing Music – Who’s Who
SOCAN, Re:Sound and CONNECT – Different rights, different collectives
Copyright Act (R.S.C., 1985, c. C-42)
Copyright in Performers’ Performances, Sound Recordings and Communication Signals and Moral Rights in Performers’ Performances (continued)
Standard Form Agreements – What are they and what is often in them?
Starting a business can be daunting and require a lot of time and energy. One of the last things a start-up may want to waste time on is drafting a standard form agreement, or even an agreement at all.
A standard form agreement (“SFA”) can be either for services or widgets. The agreement is in essence a template agreement that has been drafted once with certain areas left blank, such as the effective date for example, or with alternatives that can be selected depending on the circumstances and the same agreement can be used for several different transactions. Think about how much effort would be consumed drafting a new form for every time your new start-up agreed to provide services to another company? Having an SFA can greatly reduce the amount of time and money spent on drafting.
Often, people will try draft these agreements themselves by taking clauses from templates available on the internet. One may conclude that these clauses are in every contract and they should be in yours. But those templates are not specific to your business and including several clauses from different templates may result in those clauses contradicting one another. Further, the clauses that you have included may not actually reflect your intentions and the start-up may be left vulnerable.
Depending on the nature of the start-up, an SFA can be a good starting point for negotiations. It is not uncommon for two parties wanting to enter into a contract to exchange several drafts with markups, eventually leading to the executable document. Additionally, if the other party provides you with their SFA, you will be able to contrast that against your own to determine where it is different and if it is agreeable.
Below is a discussion about several clauses that are often included in SFAs. Often these clauses can be found on templates on the internet and one may be inclined to include them without really understanding what the clauses are or how they operate.
Terms, Payment, Etc.
SFAs will often include the term of the agreement, price, payment, and penalties. An SFA provides a great starting point for any negotiations regarding the aforementioned. Including term, price, payment, and penalties provides an anchoring point if any of these are negotiated. Further, it establishes a more efficient communication of the expectations of the party providing the SFA, which can have a better result than beginning the negotiation low balling each other.
The term can be renewed automatically, can trigger the parties to negotiate at a certain date, or simply expire on a certain date. The SFA can also spell out the expectations of the parties in regard to payments, late payments, interest, and any other penalties. These provisions must be drafted carefully to ensure none of the provisions contradict one another.
Representations and Warranties
Familiar with representations and warranties? Without sufficient knowledge of what these are, a start-up may be at risk. Representations are statements of a party made before or at the time of entering into a contract that may form part of the contract if so intended, but if the representation is not part of the contract and is inaccurate, it could result in rescission of the contract. Further, depending on the nature of the representation, it could give rise to damages if it was fraudulent or negligent. Warranties can be statements within the contract, or can be implied into contracts, that are collateral to the main purpose of the contract and can give rise to damages if breached.
Templates found online may attempt to limit representations and warranties. However, if they are not specific to the start-up, attempting to limit them may be redundant or not actually place a limit on any representations and warranties. A proper understating of what representations and warranties are and how they operate will better serve the start-up. A lawyer will be able to assist the company in the drafting of these clauses.
Liability and Indemnification
A good SFA will accurately describe any limitations on liability and whether either party will indemnify the other in specific circumstances. These clauses can be difficult to draft, and the advice of a lawyer may more accurately reflect the drafting party’s intentions. Further, a well drafted clause will demonstrate to the other party what the expectations are regarding liability and it will provide a good starting point for any negotiations regarding limitations on liability, if the SFA is not “take it or leave it”. The parties can also choose to limit the penalties in certain circumstances. For example, the parties may agree that to any extent a party is liable for damages, those damages are limited to the amount paid for the services.
Indemnity clauses can also be very difficult to draft depending on the situation. Indemnify means to compensate for harm or loss which is the legal consequence of an act or forbearance on the part of one of the parties or some third person. In essence, the party indemnifying is assuming and guaranteeing to reimburse or compensate the indemnified party for any loss or harm that falls within the circumstances agreed to. The historic use of indemnity clauses has resulted in specific terminology to accurately describe which party is indemnifying the other and in what circumstances. Again, discussing indemnification clauses with a legal professional can help ensure that the clause in your SFA meets your expectations. Taking clauses from the internet could result in accidentally switching the indemnifying and indemnified parties due to the complex language that is often found in these clauses.
Force Majeure Clause
Another common clause is a “force majeure” clause. Force Majeure clauses generally operate to discharge a contracting party when “a supervening, sometimes supernatural, event” beyond the control of either party makes performing the contract impossible. Proper drafting of these clauses can outline the situations which would frustrate the contract and possibly relieve the party who is suffering from the force majeure event of their duties under the contract, or suspend them until the effects of the event are no longer causing issues. Every contract may not need to contain a force majeure clause, so you may want to discuss with a lawyer the particular situation and whether it is necessary.
One of the most devastating things that could happen to a start-up is litigation. It can be a huge drain on capital and time which could be better spent on advancing the start-up. One possible way to reduce the amount of time and money spent is to include a dispute resolution clause in the SFA. The mechanisms can include how disputes are governed, what triggers a dispute, what the process is, who will be the mediator or arbitrator, where the meetings will occur, among others. Hopefully the clause will lead to a faster resolution than the traditional court process and possibly save the business relationship from degrading to a point that is beyond repair.
Another clause that is often included in standard form agreements is a clause describing the governing law if there is a dispute. If you are dealing with parties that are located in other jurisdictions, this may be a clause you want to include in order to ensure the dispute will take place in your home jurisdiction. Further, some jurisdictions costs are assigned to the “loser” of the dispute, which is good news for the start-up if it comes out on the winning side. Additionally, some jurisdictions allow for the parties to agree to waive their rights to a jury trial which is also a benefit as they can be quicker and cheaper.
Confidentiality clauses are frequently found in SFAs. This is especially true when the sharing of sensitive or personal information is required. Several things may be overlooked in drafting these clauses such as how long they should last, what is covered under the clause, what occurs if there is a breach of the clause, etc. Compiling a clause from different templates off the internet can result in a piecemeal clause that may contradict itself, the law, or place the parties in a place with impossible obligations to fulfil.
In relation to confidentiality clauses, a clause can be drafted to place an obligation on a party using your device or software to not reverse engineer your design. Again, consult with a legal professional to ascertain how to accurately incorporate this into your standard form agreement to protect your device or software.
An SFA can be a useful tool for any start-up that needs to either buy or sell services or widgets. Although initially there are some costs associated in having an SFA drafted, there are many advantages to having a well drafted SFA. This is a small investment compared to costs of the issues that can arise from a poorly drafted SFA. The internet can be a wonderful place for information but trying to decide what clauses to copy and paste might not be the best idea when a person is unsure what the clauses mean or how they are intended to be used. The information above may shed some light on how these typical clauses are typically used and in what scenarios. When in doubt, legal advice should be sought to ensure the start-up has what it needs to achieve the desired result.
Sheldon McDonald is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.
 John Yogis et al, Barron’s Canadian Law Dictionary, (Hauppuge, NY: Barron’s Educational Series, 2009) (updated as necessary) sub verbo “representations”.
 Ibid sub verbo “warranties”.
 Axa Pacific Insurance Co. v Premium Insurance Co., 2003 ABQB 426 at para 11.
 Yogis, supra note 1, sub verbo “Indemnity”.
 Atlantic Paper Stock Ltd v St. Anne-Nackawic Pulp & Paper Co.,  1 SCR 580 at 584, 10 NBR (2d) 513 (SCC).
 A trial without a jury can proceed quicker because there is less time used on selecting the jury, informing the jury of their duties, and familiarizing the jury with the law. Additionally, if more time is spent in the court room, the costs will also increase.
Protecting Directors from Civil Liability Through Indemnification
A likely question an entrepreneur may ask themselves early in their venture is “how do I protect the directors of my company?” They may (or perhaps should) think about this because in all likelihood, they will be one of, if not the only director of their business during its early phases following incorporation. Please note: this post assumes that the company in question is incorporated under the Business Corporations Act of Alberta
Indemnification refers to one party’s agreement to secure another against responsibility for their actions, or to give security for the reimbursement of a person in case of an anticipated loss. In this case, it refers to a corporation’s agreement to make a director whole, should they be subject to legal proceedings as a result of their actions in their capacity as a director of the corporation.
Generally speaking, the Business Corporations Act (the Act) allows corporations to indemnify their directors for both legal costs incurred, as well as any monetary damages that arise from a director’s conduct in relation to the business. In order to benefit from such indemnification, a director must have “acted honestly and in good faith with a view to the best interests of the corporation.”
An Alberta corporation is not permitted to indemnify its directors for their actions if they have not acted honestly and in good faith with a view to the best interests of the corporation – that is, if they have breached their fiduciary duty to the corporation. If a director has breached his or her fiduciary duties to the corporation, any indemnity the corporation has offered will be void.
The scope of conduct that may be indemnified under the Act is very broad. Section 124(1) of the Act states:
“…a corporation may indemnify a director or officer of the corporation, a former director or officer of the corporation…against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the director or officer in respect of any civil, criminal, or administrative action or proceeding to which the director or officer is made a party by reason of being or having been a director of that corporation or body corporate…”
When Are Directors Entitled to Indemnification?
In Alberta, a director is only entitled to indemnification by the corporation for all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment in a civil context if they (i) were substantially successful in defending the claim; (ii) acted honestly and in good faith with a view to the best interest of the corporation; and (iii) is fairly and reasonably entitled to indemnity.
A corporation that does not contain indemnity provisions in its by-laws will still be liable for any loss incurred so long as these criteria are met. If indemnification provisions found in either the corporation’s by-laws, or in an agreement between the corporation and a director impose mandatory indemnification, it will of course be liable to do so.
How to Indemnify Directors
Indemnification provisions can be found within a corporation’s by-laws. If a corporation seeks to provide its directors with a wide range of protection, these provisions do not need to be particularly robust. Any attempt to predict the types of conduct or liabilities that the corporation anticipates indemnifying its directors against may simply limit its ability to protect its directors.
If the company’s bylaws do not provide indemnification provisions that are acceptable to a potential director, indemnification provisions may be included within a written agreement between the corporation and the director. This method provides the greatest flexibility as each agreement can be tailored to suit the needs of both the corporation and the individual director.
Some things that indemnification provisions should contemplate include whether the corporation is required, or simply permitted to indemnify its directors (and in which circumstances), the timing of indemnity payments, and out of court settlement. Indemnification provisions that do not require the corporation to indemnify its directors should also consider a mechanism to oblige the corporation to do so such as arbitration.
Corporations that provide the widest range of indemnity to their directors often simply state in its indemnification provisions that the corporation must indemnify the director to the greatest extent authorized under the relevant law. Where it is desirable to minimize the short-term financial impact of litigation on directors, indemnity provisions may require the corporation to advance defence costs as they are incurred. Such provisions should also contemplate whether the corporation is required to indemnify the director for out of court settlements, as opposed to simply court judgments.
What Indemnification Provisions Do Not Cover
Indemnification provisions do not cover directors’ actions when they are not made in good faith with a view to the best interests of the corporation.
In cases where a director is being sued by the corporation or its shareholders, including in derivative actions, a corporation may only indemnify a director for their legal expenses. This leaves directors exposed to liability for corporate or shareholder damages arising from their action (or inaction as the case may be). Why is this? Most derivative actions against directors include a claim for breach of fiduciary duty. If this claim is successful, and a breach has been found, a director will have been found not to have acted in good faith with a view to the best interests of the corporation, and indemnity would not be available in any event.
Hamish Gray is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.
 Black’s Law Journal; 2nd ed; online, <a href="https://thelawdictionary.org/indemnify/" title="INDEMNIFY">INDEMNIFY</a>
 Business Corporations Act, RSA 2000 cB-9 s124 [the Act]
 Act supra note 2 s124(3)
The Class Struggle: Understanding Share Classes for Start-Up Companies
Deciding to incorporate is an important step in the lifecycle of your business. When incorporating, one of your key considerations will be what the share structure of the business should look like. Questions that can arise during this process include:
Who Will I Be Issuing Shares To?
Before you decide what the share structure of your business will be, you need to know who is going to be owning those shares. In a start-up company, there are three primary categories of shareholders:
Founders, employees, and investors are likely to have differing needs and wants when it comes to compensation for their respective contributions to your start-up. For this reason, corporations in Alberta (and throughout Canada) are empowered, through their articles, to establish more than one class of shares. In fact, there is no limit on the number of classes of shares that can be set out in the articles.
There are several rules respecting what rights and restrictions can be placed on shares. Two of the most important rules are:
Without multiple classes of shares, your business will likely be unable to satisfy the unique needs and wants of the founders, employees, and eventually investors.
To authorize new share classes after incorporation, your company would need to amend its articles. Amending articles involves the passage of a special resolution and, depending on the structure of your business, may not be an appealing proposition. For this reason, authorizing multiple classes of shares and setting out general terms during the incorporation process can save a start-up from costly and frustrating article amendments down the road.
What Rights Should Each Class of Shares Include?
Founder’s shares are typically the first to be issued in any new start-up. Due to the fact that Common shares traditionally include voting rights, they are a natural fit for founders who primarily desire control over the direction and decision making of the company. This first round of Common shares may also include the right to dividends as well as the right to receive remaining property of the corporation on dissolution.
Depending on the maturity of the business and relative bargaining power of the founders, the founder’s shares may also include a class of common shares that house special rights such as the right to convert into preferred shares at the same price and with the same conditions as the company’s future investors. Alternatively, founder’s shares may be “super voting” shares – granting the founders more control over the company without the corollary increase in returns.
Employee Share Ownership Plans (“ESOP”) are used to give employees an equity interest in your company. These plans are important as they incent key employees to a) think like a founder, and b) to stay employed with a business exhibiting upside potential. Traditionally, ESOPs take the form of either equity shares or stock options – both fulfilled with Common shares of the business that do not grant any special dividend or super voting rights. ESOPs can typically represent anywhere from 1 to 10% of the total outstanding shares depending on the maturity of the company.
Perhaps the most important consideration for founders establishing an ESOP is a vesting schedule. The vesting schedule determines how long your employees need to work or what performance targets they need to hit for their shares to vest. Different vesting schedules can have significant impacts on both a company’s share structure as well as employee incentives.
Early stage investments are inherently risky. It seems appropriate then, that venture capital and angel investors typically demand rights-heavy Preferred Shares. While there are many different Preferred Share rights, some of the most common include:
There are many different contributors to a start-up company. Accordingly, it makes sense to have several classes of shares that cater to each contributor’s investment needs. Founders, employees, and investors will all demand unique rights when it comes to ownership of the company’s shares.
However, authorizing your company to issue different classes of shares is an exercise best undertaken during incorporation, not after. Otherwise, you may find yourself issuing an unwieldy special resolution to amend your articles each time you bring on a new investor or wish to reward your employees with company shares.
Blair Wentworth is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.
 ABCA 26(4)
 ABCA 26(4)(a)
 ABCA 26(4)(b)
 ABCA 6(1)(b)
 ABCA 173(1)
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.