Business Venture Blog
This is where we post about business, ventures, law, and business venture law.
Anything interesting, really.
Anything interesting, really.
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Start-Ups and E-Commerce
While online shopping has become prevalent due to its ease and convenience, many are still unaware of how they are impacted by laws governing e-Commerce. These laws have implications on both the online buyer and the online seller and are of particular importance to a start-up company that engages in e-commerce and operates largely online. Seller Information When a purchase is made online, the seller and the buyer are entering into a contract. In order to enter into the agreement, the seller must provide the buyer with certain information regarding the business to allow the buyer to make a fully informed decision when purchasing a product or service. The necessary information is as follows:
Finalizing the Internet Sales Contract Before finalizing any agreement, the sellers’ website must be designed to allow the buyer to correct any errors that may arise in the course of making their purchase.[3] An example of such an error is the buyer choosing to purchase two units of a product when it was their intention to purchase one. Before completing the transaction, the buyer should be provided with a summary of the transaction allowing them to recognize their error and make the necessary corrections before completing their order. If a buyer was not provided with the opportunity to review their order for errors prior to the transaction being finalized, this may provide them with cause for the cancellation of the order upon receipt, so long as this is done within a reasonable amount of time. Once the internet sales contract has been finalized and entered into by the buyer, the seller must provide a receipt of the transaction. It is acceptable for this receipt to be provided by e-mail to an e-mail address provided by the buyer. The receipt should contain the buyers name, the date the order was placed and should be provided within 15 days of when the order was placed.[4] Right of Cancellation In addition to the right to cancel where an opportunity to review the order prior to completion was not provided, there are other situations where a buyer may cancel an internet sales contract. A buyer may cancel an internet sales contract any time prior to the commencement of the services or delivery of the goods if:
If the buyer wishes to cancel for any legitimate cause, they must do so by providing notice to the seller.[7] If the buyer fails to communicate cancellation to the seller despite having legitimate cause such as the examples discussed above, the contract will not be cancelled. Methods by which a buyer may cancel an agreement with a seller include mail, e-mail, phone or fax.[8] Keep in mind that the buyer must be able to prove what day they requested the cancellation. The date will be relevant in determining whether the cancellation was justified. Richie Aujla is a member of the BLG Business Venture Clinic, and is a 2nd year student at the Faculty of Law, University of Calgary References [1] Alta Reg 81/2001, s 4(1). [2] Ibid, s 4(2). [3] Ibid. [4] Ibid, s 5. [5] Ibid, s 6(2). [6] Ibid, s 6(3). [7] Ibid, s 8(1). [8] Ibid, s 8(3).
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Blockchain: Decentralized Ledgers & Smart Contracts
Blockchain explained A blockchain is a ledger, similar to a Microsoft Excel spreadsheet. A blockchain is maintained in a decentralized manner. Blockchain ledgers keep track of “transactions”. Transactions occur without external third parties, no escrow needed. These transactions are grouped together in a data structure called a block, where the term block refers to a group of transactions that have been processed at the same time. The transactions are related temporally and are recorded serially. Each block includes a hash (a cryptographicaly generated code) that refers to the last block so any attempt to change a prior block has a cascading effect on each subsequent block. This relationship between blocks gives rise to the term blockchain. Every user on a blockchain sees and maintains the same copy of the ledger through a concept called “reaching consensus”. A reliable consensus procedure is required to ensure the accuracy of the ledger and maintain the security of the system. A blockchain can be public, where anyone can participate, or the blockchain can be permissioned, where only authorized participants can access and add transactions to the ledger. A blockchain is a peer-to-peer system with no central authority managing the data flow. To maintain data integrity a large distributed network of independent users is encouraged. The computers making up the network are in more than one location. The term “node” typically refers to a computer in the network. Blockchains are built to create trust between unknown parties. Blockchains are meant to be honest systems that self correct without the need of a third party to enforce the rules. A consensus algorithm enforces the rules. Consensus develops agreement among a group of commonly mistrusting shareholders. Each blockchain relies on its own algorithm for creating agreement within its network. The main focus areas for decentralized ledger technology are:
Hashgraph as an example of a decentralized ledger Hashgraph is a virtual-voting decentralized ledger technology. Everyone is a node on the network and each can submit data in parallel at the same time on the graph. Hashgraph is not blockchain but boasts that it can provide a comparable or possibly better security level while simultaneously performing transactions faster. Hashgraph patented its algorithm to ensure stability. Hashgraph has a governance system where 39 international, independent blue chip organizations control two thirds of the network’s cryptocurrency. The governance system is based on Dee Hock’s formative book, One From Many: VISA and the Rise of Chaordic Organization, that chronicles the creation of the VISA network among other things where banks associated to benefit all customers. Smart Contracts Smart contracts are contracts formed with blockchain technology. They are not subject to linguistic interpretations and are marketed as a way to prevent ambiguity, ensuring both parties understand exactly what has been agreed to. A smart contract uses computer code to determine the relations and obligations between parties. The resulting interpretation is designed to be more predictable. Smart contracts can remove third-party or escrow agents since performance can automatically be determined by monitoring compliance with a set of conditions. The contract is administered as the conditions are met. This may lead to an “inexorability” problem if a vulnerability within the code is exploited. Szabo predicted that smart contracts would overcome legal barriers that prevent local businesses from entering global markets. “Smart contract” has evolved to encompass more than one meaning. When referring to blockchain application development, smart contract does not refer to a legal contract but rather a snippet of programming code that gets executed on the blockchain, typically in an automated fashion (although some parts may require human input and control). To simplify things, the snippet of programming could be referred to as “smart contract code” and the entire legal contract expressed and implemented in software could be referred to as a “smart legal contract”. Ricardian contracts as an example of smart contracts A Ricardian contract records the “intentions” and “actions” of a particular contract, no matter if it has been executed or not. The same Ricardian contract has to be both readable by people and parsable by computer programs. Each Ricardian contract has its own unique hash that refers uniquely to that document (a cryptographic message digest). That hash ensures the Ricardian contract is immutable (not susceptible to change). While it is possible to implement a Ricardian contract as a smart contract, not every Ricardian contract is a smart contract. The creator, Ian Grigg (a specialist in financial cryptography working at Systemics Inc), defines a Ricardian Contract as a single document that is:
While a Ricardian contract is a design pattern that captures the intent of the agreement of the parties before performance, it can implement the concept of the smart contract by using a hash as a reference that links to external documents of code. Ricardian contracts have not been presented in Canadian court, however, contract law will apply if the agreement has the basic components of a contract, regardless of the form. To prove a meeting of the minds all the essential terms of contract must exist: 1. an offer, 2. an acceptance, 3. certainty of the agreed terms, 4. consideration, and 5. the intention to create legal relations. Shannon Peddlesden is a member of the BLG Business Venture Clinic and a 2nd year student at the Faculty of Law, University of Calgary. References: Shawn S Amuial, Josias N Dewey, Jeffrey R Seul, The Blockchain: A Guide for Legal and Business Professionals, (Danvers, MA: Thomson Reuters®, 2016). Digital Economy Update, “Smart contracts – can code ever be law?” (1 March 2018), online: < www.ashurst.com/en/news-and-insights/legal-updates/smart-contracts---can-code-ever-be-law/>. Hackernoon, “Merkle Trees” (15 December 2017), online: < https://hackernoon.com/merkle-trees-181cb4bc30b4>. Hashing refers to transforming data of any size into short, fixed-length values, this incorporates a technology called Merkle trees. Merkle trees allow for efficient and secure verification of large amounts of data. EliNext, “Smart vs. Ricardian contracts: what’s the difference?” (28 February 2018), online: <https://www.elinext.com/industries/financial/trends/smart-vs-ricardian-contracts/>. Choosing a Business Name
One of the most important steps when starting a new business is choosing the right name. There are, of course, a number of common concerns about the quality of a business name. It must appeal to your target market. It ought to suit your business and industry and work well in marketing. It should be catchy and memorable, helping your business stand out from the competition. It should be able to be used online easily and not already have an existing social media presence. However, there are also a number of legal concerns when it comes to choosing and potentially registering a business name. The first question you should ask yourself is whether or not your business is a corporation. If you are not incorporated then your business name will not constitute its own separate legal entity but will simply be the name you conduct business under, or a “trade name”. You will also not be allowed to use the words incorporated, limited or corporation (or their abbreviations) in your trade name.[1] In Alberta when you run a business as the sole owner under a name other than your personal name you must register this trade name.[2] You may also register your trade name in a partnership, limited partnership, limited liability partnership, or sole proprietorship that uses only the owner’s legal name with no additions - but you aren’t required to do so under the Partnership Act. You are also not required to provide a NUANS (Newly Upgraded Automated Name Search) business name report when registering a business name, but it is generally recommended. While a business name does not have to be unique, you can still be taken to court by an existing business with a similar trade name. If you are incorporated there are additional requirements as you will often carry out business under the name of your corporation. An Alberta corporation name must consist of 3 elements: distinctive, descriptive, and legal.[3] For example, ‘XYZ Consulting Ltd.’. A distinctive element must be the unique word(s) of the business name. The made up title or potentially even the location of the business, in this example ‘XYZ’ is the distinctive element. The descriptive element describes what a business is or does, in this case ‘consulting’. Finally, a corporation name must have a legal element at the end of their name to indicate to the world their status as a corporation and put clients on notice that it is a limited liability business. These legal elements are listed in the Business Corporations Act as Limited, Incorporated, Corporation, Ltd., Inc., or Corp..[4] In this example the legal element is ‘Ltd.’. Corporate names must also be unique.[5] So if you don’t wish to use the assigned ‘number name’ from the Corporate Registry you must get an Alberta NUANS report on your proposed name.[6] This is required for federal incorporation as well.[7] You may also choose to register a business name for your corporation, as a corporation may carry on business under a name other than its corporate name.[8] However, this business name cannot use the legal elements listed above, must still be unique and must still comply with the trade name rules under the Partnership Act. Overall, naming your business remains a crucial decision in any start-up but keeping in mind these simple requirements can help the decision a bit simpler. Kiara Brown is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary. References: [1] Business Corporations Act, RSA 2000, c B-9, s. 10(3). [2] Partnership Act, RSA 2000, c P-3, s. 110(1). [3] Alberta Government, Incorporate an Alberta corporation, https://www.alberta.ca/incorporate-alberta-corporation.aspx [4] Supra note 1 at s. 10(1) [5] Ibid at s. 12(1) [6] NUANS Corporate name search, https://www.nuans.com/eic/site/075.nsf/eng/home [7] Government of Canada, Steps to incorporating, https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06642.html#toc-02 [8] Supra note 1 at s. 10(9) Tailored for Success – Shareholders’ Agreement
What is a Shareholder’ Agreement? A shareholder’ agreement is a legal agreement between the shareholders of a corporation or between a corporation and its shareholders. It regulates the behaviour of shareholders and outlines certain rights and obligations.1 A shareholder’s agreement is “principally concerned with allocating management control and setting out the terms on which shareholders may sell their interests in the business.”2 Unlike the articles of incorporation and bylaws of a company, a shareholder agreement is optional.3 Why might I want one? Shareholder agreements are a way to formally set out the expectations of shareholders. They can be used to protect the rights of minority shareholders or restrain their power in certain situations. A shareholder agreement can be used to address potential conflicts between shareholders and require the use of an arbitrator to resolve issues that arise. They can be used to restrict the transfer of shares to control ownership of a company. They can also mandate a valuation mechanism to determining share price for transfers under the agreement. Far from an exhaustive list, this is a small sample of why shareholders might want to implement a shareholder agreement. Can One-Size-Fit-All? The use of a standard form agreement is not advisable. There are different types of shareholder agreements and their contents can range broadly. Below is an overview of the different types and a sample of common provisions. It should be apparent that the agreement needs to be tailored to the needs of the individuals and the corporation in involved. There are Different Types? Unanimous Shareholder Agreement A Unanimous Shareholder Agreement (USA) must be in writing and include all shareholders of a corporation (or of a certain class of shares).4 This is commonly found in owner managed corporations. The purpose is to transfer some or all the powers of the directors to the shareholders. USAs exists under the Canadian Business Corporations Act5 and similar provincial legislation. They can offer certainty to existing shareholders; because if the corporation’s share certificate references the agreement, all future shareholders automatically become a party to the agreement.6 Unlike other shareholder agreements, USA’s are treated similarly to other incorporation documents such as articles of incorporation and bylaws.7 As such, USAs can amend or supersede these documents. Shareholder Agreement Shareholder agreements that are not unanimous shareholder agreements (USA) are largely explained above, under the heading “What is a Shareholder’ Agreement?”. They are treated as an ordinary contract as opposed to constating documents of a corporation. Unlike USAs, depending on the contents of the document, they do not require unanimous agreement to be amended. New shareholders do not automatically become subject to the agreement by purchasing shares of the company. A provision can be included that requires selling shareholders to ensure purchasers sign the shareholder agreement. This provision does not offer the same certainty as a USA, because if the shares are sold to a good faith purchase who is unaware of the provision, the purchaser will not be bound by the agreement. Unlike USAs the provisions of a shareholders’ agreement cannot amend or supersede other incorporation documents such as articles of incorporation and bylaws. Example of Common Provisions The following is a non-exhaustive list of common provisions found in shareholder agreements. The descriptions are superficial, and the intention is to show the array of combinations that can be found in a shareholders’ agreement. Pre-Emptive Rights Pre-emptive rights provide current shareholders with the right to participate in future financings.8 The shareholders’ participation can often be direct or indirect.9 The purpose of pre-emptive rights is to prevent the dilution of existing shareholder equity. Right of First Refusal “Rights of first refusal require any shareholders intending to sell their shares to first offer them to their fellow shareholders or to the corporation.”10 There are two variations of this provision. One is “hard”, meaning the selling shareholder must acquire an offer from a third party, then provide that offer to the existing shareholders for their consideration. The other is “soft”, meaning the selling shareholder must first offer the shares to the other shareholders, then if not purchased, can offer to third parties. The purpose of a right of first refusal is to allow shareholders to sell their shares while giving the existing shareholders the power to determine who can become owners. Mandatory Share Sales These provision “contemplate that in a variety of circumstances – death, divorce, bankruptcy, breach of the agreement – the affected shareholder will be obliged to sell his or her shares back to the corporation or to the other shareholders.”11 The purpose is to prevent people that are not a party to the corporation from becoming shareholders. Shareholder Remedies and Conflict Resolution Shareholder remedies and conflict resolution provisions “ensur[e] there is a solution to a breakdown in the relationship between the various managers of a business.”12 These provisions are typical of owner managed businesses as opposed to growth companies or publicly held companies. They help provide a mechanism for conflict resolution and help avoid litigation. An example of one of these provisions is a shotgun clause. Non-Compete, Non-Solicit, Non-Disclosure These provisions “contemplate that, in one capacity or another, the shareholders will take on some or all of the duties of the directors.”13 Their purpose is to ensure that shareholders do not abuse their powers in these circumstances.14 Final Thoughts “In general, a well-drafted and considered shareholders’ agreement anticipates reasonably likely future events and provides for methods of dealing with them, which can help avoid or resolve future disputes among shareholders, and ultimately save time, money and the stresses associated with conflict resolution. However, shareholders’ agreements can also result in burdensome conditions, making it more difficult to effect decisions and run a business.”15 The key is to ensure the agreement is well drafted and appropriate for the company and its shareholders. As suggested above, there is a vast array of contents that can be drafted in a shareholders’ agreement. There is no one-size-fits-all and the needs of the parties should be appropriately reflected in the document. Disclaimer Founders of a company should seek independent legal advice when considering a shareholders’ agreement. “Founders are often not sophisticated and Canadian courts have set aside agreements because they did not receive their own legal advice.”16 For more information on how the BLG Business Venture Clinic can help draft a tailored shareholders’ agreement for your company please contact us at http://www.businessventureclinic.ca/contact.html. Neil Thomas is caseworker at the clinic for the 2018/2019 academic year. Neil Thomas is a member of the BLG Business Venture Clinic, and is a 2rd year student at the Faculty of Law, University of Calgary. References
Prospectus Exemptions in Securities Law
Introduction One of the most significant barriers to growing a business corporation is financing. Among other methods, start-up founders may choose whether to secure a line of credit, acquire government subsidies or trade their cash for shares in a corporation. However, these options are restricted to the founders’ capacities of obtaining capital. In order to expand the pool of funds without violating the complex legal rules of expensive prospectus requirements, small business owners may consider offering shares to an exceptional group of friends, family or associates as detailed in the Canadian securities National Instrument 45-106. Overview Under Canadian securities law, a corporation must file a prospectus, which is a comprehensive legal document that discloses the material facts of an investment offering, prior to distributing its securities to the public. The public requires a prospectus in order to make an informed decision about purchasing respective shares. Such a requirement can be an expensive task, involving many professionals including investment bank underwriters, accountants, financial advisors and legal teams, which creates prohibitive obstacles for budding firms. Recognizing this limitation and driven to encourage small firm growth, the government passed the National Instrument 45-106. The National Instrument 45-106 is a set of rules that governs all securities’ jurisdictions in Canada — except for Ontario, which permits exemptions under its own legislation not discussed here. Using the exemptions detailed in the instrument, a small firm may seek capital through distributing shares, without filing a prospectus, in certain transactions or to a limited group of investors. These investors include close family members, close business associates, or accredited investors, rich and sophisticated individuals for whom a significant amount of protections provided through securities legislation would be unnecessary. Below are a few examples of the exemptions available using this instrument. Accredited Investor According to section 2.3 of the National Instrument, the prospectus requirement does not apply if an issuer distributes securities to an accredited investor. An accredited investor includes financial institutions, banks, advisors, dealers, trusts, government organizations, or individuals who, alone or with their spouses, own assets exceeding $1,000,000 or $5,000,000 (the latter do not have to sign risk acknowledgement forms), or have net incomes of at least $200,000 in the past two years (or $300,000 with a spouse). A corporation may also fit into this category provided the fulfillment of certain conditions, such as having net assets of at least $5,000,000; however, the exemption does not apply if a corporation was created solely to hold securities as an “accredited investor”. Family, Friends and Business Associates Under section 2.5, a corporation may distribute securities to founders, employees, directors, officers, control persons or affiliates, their close family members, their close personal friends or business associates, or respective trusts or estates. The court has determined “close” by asking whether it would be acceptable to use a friend’s, family member’s, or business associate’s bathroom without asking. Offering Memorandum The issuer may choose to distribute offering memorandums through the required form of section 2.9 in lieu of a full prospectus. A corporation may issue shares to certain qualifying investors in Alberta without a prospectus, provided that:
While using an Offering Memorandum may widen the group of potential investors, this exemption carries the same level of disclosure and liability as issuing through a prospectus. Private Issuer The private issuer exemption applies to companies that have restrictions from trading securities in the open market without the director’s approval, that don’t have more than 50 shareholders, and that don’t report to any Securities Commission. Under these circumstances, a company may distribute securities to those connected to the firm, such as directors, officers, employees or control persons, their close family members, their close friends or business associates, or accredited investors. Furthermore, unlike the exemptions above, private issuers are not required to publicly report each distribution. In conclusion, the National Instrument 45-106 provides opportunities for small companies to raise funds through share distribution under certain circumstances without the expensive prospectus requirement. If your organization is looking to make use of the opportunity or has questions regarding details of securities law, please do not hesitate to contact a caseworker at the BLG Business Venture Clinic. Nick Konstantinov is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary. Business and Product Liability
Many businesses operate by producing and selling various products. However, as the manufacturer of a product a business may open itself up to certain legal claims if a customer is injured by their product. What follows are some considerations for product manufacturers regarding product liability. What is your Liability for Injuries Resulting from a Product? Start-ups may encounter claims from customers who were injured by faulty or defective products. The burden lies with the customer to prove that but for the product being faulty or defective in some way, they would not have been injured. If this is successfully established by the customer the manufacturer of the product will be held liable for the injury of the customer. While this situation may be avoided through heightened quality control measures and adequate product testing, there are circumstances when an injured customer may bring forward a claim even if the product was functioning properly. Duty to Warn The manufacturer of a product must provide sufficient warnings regarding the risks of using their products. If there were not sufficient warnings provided, a customer may still sue a manufacturer even if the product was functioning properly and the injury resulted from the normal use of the product. The extent of the warning required hinges on two factors:
How Can a Manufacturer Defend Themselves from an Injury Claim? The Injury was not a Result of the Product In the event that a customer has chosen to bring a claim due to being injured by a manufacturers’ product, there are certain defenses available to the manufacturer. For one, the manufacturer may contend that a separate and distinct event was the cause of the injury. For example, if an individual is injured in a car accident because their breaks failed, this would indicate that the manufacturer may be liable for the injury. However, if it is determined that the breaks failed because of an error made by the customer’s mechanic then this may absolve the car manufacturer of liability. This is because the injury was a result of the negligent mechanic, and not any fault on the part of the manufacturer in manufacturing the vehicle. The Customer Assumed the Risk of Injury A manufacturer may also defend themselves by suggesting that the injured customer was aware of issues with the product. This is because the customer was aware that the product was altered or defective in some way, and still chose to operate it despite the heightened risk of injury. An example of this would be a customer choosing to use a knife even after knowing that the blade was faulty. If the blade were to snap and injure the customer the manufacturer may raise the defense that the customer assumed the risk when they chose to use the faulty or defective product. The Customer Used the Product Negligently Another possible defense that a manufacturer may raise is that the customer was injured because they used the product negligently in a manner that it was not meant to be used. For example, if an individual chooses to stand on a laundry hamper in order to change a light bulb and is injured because the hamper topples over, the manufacturer may argue that the injury was a result of the customers’ negligence. This is based on the customer using the hamper in a manner that that it was not meant to be used, and the argument that but for the misuse, the customer would not have been injured. Limitation Period The bringing forward of a claim by an injured customer is subject to a statutory limit. This means that a claim by an injured customer can only be brought forward within a specific period of time once the injury has occurred. This period varies from province to province, but in Alberta it is generally within 2 years of the time the injury occurred. Additional information regarding limitation periods can be found in the Alberta Limitations Act. Richie Aujla is a member of the BLG Business Venture Clinic, and is a 2nd year student at the Faculty of Law, University of Calgary Carrying on a Business in Other Provinces and Territories
Ever wonder how to expand your business beyond its provincial borders? New entrepreneurs may be surprised to learn that they will not generally be able to carry on business in another province without first clearing some basic bureaucratic hurdles. Though the specifics will depend on several factors, including where a business was incorporated, where it will operate, and what kinds of business activities it will be carrying on, a province will most often require that a business register in that province in order to carry on business there. The specific registration requirements and the definition of “carrying on business” will vary from province to province (the same is true of the territories) and may be affected by trade agreements such as the New West Partnership Trade Agreement between British Columbia, Alberta, Saskatchewan, and Manitoba.[1] In Alberta, for example, an extra-provincial corporation (a corporation incorporated outside of Alberta) is carrying on business and must, therefore, register if any of the following conditions apply:
One of the potential advantages of the extra-provincial registration process, especially for start-ups and new entrepreneurs, is that it allows a single business entity to operate across several provinces, rather than requiring the incorporation of a new business in each province. Incorporating in each province would mean managing several businesses and their filing requirements across multiple jurisdictions, whereas extra-provincial registration allows for the management of a single business entity in its home province with the only filing obligations in other provinces being the less onerous registration requirements, as specified by that province. An additional consideration for entrepreneurs looking beyond their provincial boundaries is the use of their business’ name; a business incorporated in Alberta, even if properly registered as an extra-provincial corporation in another province, may not be able to operate under its name if there is already a business operating in that province with the same name or a similar name. If it is important that a business operate country-wide under the same name, federal incorporation may be a good option; though federal incorporation will generally involve more paperwork every year than provincial incorporation, it allows a company to conduct business under the same name across Canada, even if there is already a company operating in a province with that same name.[3] For more information about federal incorporation, provincial incorporation, and extra-provincial registration requirements across the provinces and territories, visit the Government of Canada’s Business and Industry “Registering your business” page: https://canadabusiness.ca/government/registering-your-business/#toc2 Aleksandar Kukolj is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary References [1] https://canadabusiness.ca/government/registering-your-business/#toc2 [2] https://www.servicealberta.ca/713.cfm#jm_versus [3] https://www.thebalancesmb.com/provincial-versus-federal-2948230 Copyrights
Copyright is the sole right to produce or reproduce; publish or perform original literary; dramatic, musical or artistic works.[1] Essentially, it is the right to copy. Copyright applies to all original content, provided the conditions of the Copyright Act are satisfied, regardless of whether the original owner has registered their copyright.[2] Therefore, copyright rights exist the second an author concludes their book, a software engineer finishes a block of code, or a choreographer completes their routine. Certificates of registration of copyright only act as evidence that copyright exists and that the person registered is the owner of the copyright. This can be particularly helpful as an owner may transfer ownership or license their work out to other individuals.[3] One thing to note is that the Canadian Copyright office does not perform “gatekeeping” functions.[4] What this means is that anyone can claim to be the owner of a piece of work. In Andrews v McHale and 1625531 Alberta Ltd. et al, 2016 FC 624,[5] an ex-employee was able to register copyright ownership of some of his ex-employers’ software, turned around and sued the company for copyright infringement.[6] Additionally, the Copyright office does not “police” and therefore, the onus is on the owner of the copyright to ensure that no one is infringing on their right to reproduce. A challenge for many growth companies with regards to copyright is who owns of the software when the author is an employee. As established above, the general rule is that the author is the owner. However, an exception can be found in section 13(3) of the Copyright Act.[7] It states: “Where the author of a work was in the employment of some other person under a contract of service or apprenticeship and the work was made in the course of his employment by that person, the person by whom the author was employed shall, in the absence of any agreement to the contrary, be the first owner of the copyright” What this establishes is that if you own a company and hire a software engineer to write code, the code they wrote in the course of their employment would belong to your company, unless there was an “agreement to the contrary”. It is important to remember that this agreement does not have to be in writing, and in certain circumstances, like in an academic context – where professors are generally owners of their work regardless of their employment, creators ownership can be presumed.[8] Another interesting concern relating to copyright is an author’s moral rights. Moral rights are an author’s right to maintain the integrity of the work and the right to be cited as its author. Even if the work is created under employment or their rights to ownership were waived through contract, their moral rights in their work cannot be assigned and are not automatically waived.[9] In conclusion, this post is to give you a little taste of how copyright works in Canada and how it can apply to growth companies. Tyler Anthony is a member of the BLG Business Venture Clinic, and is a 2rd year student at the Faculty of Law, University of Calgary. References: [1] Canadian Intellectual Property Office, A guide to copyright(Ottawa: Canadian Intellectual Property Office, 2018) <ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr03719.html?Open&wt_src=cipo-cpyrght-main/> accessed October 28, 2018 [2] Copyright Act,RSC 1985, C-42 [Copyright]. [3] Christopher Heer and Daryna Kutsyna, “Copyright FAQ” (13 August 2018), Heer Law (blog), online < https://www.heerlaw.com/copyright-faq/>. [4] Richard Stobbe, “Ownership of Copyright in Software”, (21 September 2016), The Medium (blog), online < https://www.fieldlaw.com/portalresource/lookup/wosid/cp-base-4-7474/overrideFile.name=/Ownership_of_Copyright_in_Software.pdf/>. [Richard]. [5] Andrews v McHale and 1625531 Alberta Ltd, 2016 FC 624. [6] Richard supra note 4. [7] Copyright supra note 2 s.13(3) [8] Jean-Sebastien Dupont and Guillaume Lavoie Ste-Marie, “Do you actually own the IP generated by your Canadian employees” (16 June 2016), Smart & Biggar Fetherstonhaugh (blog), online: <http://www.smart-biggar.ca/en/articles_detail.cfm?news_id=866/>. [9] Ibid. An Intro to Cooperatives
When you’re thinking about starting a business, one of the first legal decisions you have to make is what structure to use. Limited corporation, partnership, limited partnership, and sole proprietorship are the models traditionally considered. This post is about another option that makes sense in some circumstances, the cooperative corporation, or coop. Coops are a business structure option often discounted, and they don’t make sense in every situation. Where you have a group of people facing a common problem though, and your value proposition is deeply based on solving that problem and building the loyalty and participation of that group, a cooperative might be a good fit. Coops are especially good at meeting needs “that neither the market nor the public sector fulfill.”[1] Mountain Equipment Coop, for instance, was built as a consumer cooperative because it was designed to meet a niche retail need, and to serve those consumers. Similarly, the Coop grocery store was built as a response to a lack of good grocery and gas options, and so it made sense to build it as a cooperative to serve member needs. Stocksy United is a platform coop that provides stock photos and whose members are the photographers who take those photos. Those photographers being members rather than employees or contractors gives them an extra incentive to have the overall platform succeed. Coops also have a built in set of principles that they have to operate under as mandated by the legislation that help them fulfill this vision of people coming together to solve a problem or meet their or their community’s needs:
So, what exactly is a coop? At its base, it is a corporation that has members instead of shareholders, and that is democratically controlled by those members. Profits are generally shared amongst the members, often based on use of the coop’s services, rather than strictly by number of shares. However, this is alterable by share structure choices. The basic idea is that members own and control the business. So, who are members? There are four basic options[3]:
Once you’ve decided what kind of coop you are going to make, you should make sure that you are thinking about the cooperative in a way that makes it successful. Coops can be really powerful vehicles to meet the needs of people and communities, and do so in a way that puts those needs, not profits, first. But in order to do that, coops have to have a viable business case - they must be financially feasible. A feasibility study or a business plan aren’t necessary to creating a coop, but thinking about those kinds of things is important before you create a coop. The basic legal steps to create a coop are pretty similar to creating a corporation. You must file an articles of incorporation, a summary of those articles and statutory declaration, a notice of address form, a notice of directors, and an incorporation fee of $100. These documents have to specify what kind of cooperative you are creating. You also have to complete a NUANS search to make search that your name isn’t being used by somebody else already. Full details on this process in Alberta can be found here: https://www.servicealberta.ca/1041.cfm. Once the articles are filed and the coop is incorporated, you must create bylaws for the cooperative. Bylaws for cooperatives are a little bit different from, and a little more complicated than, a set of bylaws for a shareholder corporation. The Albertan government has created a list of Cooperative Act sections that have to be complied with for every section of the bylaws, and that can be found here: https://www.servicealberta.ca/pdf/coop/Bylaw_Requirements.pdf. For more help creating a coop, you can find a list of coop developers and professional service providers for coops here: http://www.coopzone.coop/developers/members/region/Alberta/. Matt Hammer is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary. References: [1] https://canadabusiness.ca/blog/why-start-a-co-operative-1/ [2] https://localinvestingyyc.ca/ [3] https://canadabusiness.ca/blog/why-start-a-co-operative-1/ [4] https://canadabusiness.ca/blog/why-start-a-co-operative-1/ What is an Escrow Agreement?
(1) Introduction Often, the founders of a start-up will be issued stock at the same time notwithstanding one of the founder’s main contribution occurring in the future. However, if the founder has already received the shares, he or she might not be incentivized to satisfy his or her obligations. This blog will describe how an escrow agreement may ameliorate some of the problems resulting from these arrangements. (2) What is an Escrow Agreement An escrow agreement is a legal document defining the arrangement by which one party deposits shares with a third-party, an escrow agent. The Escrow Agent will release the shares to the beneficiary upon the beneficiary satisfying specific terms and conditions outlined in the escrow agreement.1 By depositing the shares with an escrow agent, all the founders can rest assured the beneficiary will not receive the shares unless he or she has satisfied the obligations under the escrow agreement. A founder receiving shares without having contributed to the business raises several issues. Firstly, it may cause resentment amongst the founders. This resentment might impede founder productivity or result in the founders sabotaging the business. Secondly, outside investors are often hesitant to invest in businesses if they perceive a shareholder is not contributing to the company. In this regard, it is important to distinguish growth companies from publicly traded companies which have many inactive shareholders. Thirdly, this may result in a hold-out risk. If the founder possesses enough shares, he or she may impede the other founders from making important decisions on how to grow the company. Examples of Situations Where an Escrow Agreement Would Have Been Useful The following are some examples of where an escrow agreement could be useful. Firstly, changes in business plans may render the founder’s contributions superfluous.2 The risk of a business having to change its business model should not be underestimated. For example, Blockbuster started out with a compelling business model. Its value proposition was clear – enabling consumers to watch hit movies in the comfort of their homes.3 However, ultimately Blockbuster failed because they failed to adequately adopt their business model to compete with Netflix.4 Secondly, the founder may quit the company, or choose to dedicate his or her time to other ventures, upon receiving shares within the growth company. This is not unheard of. For example, Facebook founder Eduardo Saverin opted to commit his time to develop Joboozle rather than Facebook.5 In turn, Mark Zuckerberg chose to dilute his shares, and costly litigation ensued.6 Thirdly, the founder may be ineffective. Although the founder may look impressive on paper, his or her skills may be ineffective in that industry. For example, Apple chose John Sculley to replace Steve Jobs as the CEO of their company. Mr. Sculley had developed an impressive marketing resume during his time with Pepsi Co. However, Mr. Sculley knew little about marketing computers.7 When Steve Jobs returned to Apple, the company was on the brink of failure.8 (3) Conclusion In conclusion, an escrow agreement can be a useful legal tool for those wishing to start a growth company. It is particularly useful if one of the founder’s main contribution to the growth company does not come till after the business is formed. Sunny Uppal is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary. References 1 https://www.investopedia.com/terms/e/escrowagreement.asp 2 Bryce C Tingle, Start-Up and Growth Companies in Canada, LexisNexis Canada Inc. 2018 at p 110. 3 Saul Kaplan, Business Model Innovation: How to Stay Relevant When the World is Changing (John Wiley & Sons, 2012) at p 5. 4 Ibid at p 9. 5 https://www.businessinsider.com/how-mark-zuckerberg-booted-his-co-founder-out-of-thecompany-2012-5 6 https://www.businessinsider.com/how-mark-zuckerberg-booted-his-co-founder-out-of-thecompany-2012-5 7 https://www.cultofmac.com/63323/apples-big-mistake-was-hiring-me-as-ceo-sculleyinterview/ 8 https://www.entrepreneur.com/article/220604 |
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post. Archives
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