Business Venture Blog
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Anything interesting, really.
Business Venture Blog
Rights of First Refusal, Pre-Emptive Rights and Piggyback Rights: Restrictions on the Ability to Transfer Shares and What You Should Consider
Rights of First Refusal, Pre-Emptive Rights and Piggyback Rights: Restrictions on the Ability to Transfer Shares and What You Should Consider
You have started a business and have decided to raise capital by issuing equity. You want to incentivize early investment so you offer to protect potential shareholders’ shares by creating A Shareholders’ Agreement that would ensure their ownership stake is protected. A Right of First Refusal (“ROFR”), Pre-emptive Rights, or Piggyback Rights seem like the perfect forms of protection and incentive. However, if you are not careful, they can create overly restrictive share transfer abilities and discourage future investment. If you want to impose restrictions on the ability to transfer shares, then it is important that you understand the purpose of those restrictions and how you can draft them so they are not overly restrictive.
Rights of First Refusal
A ROFR requires any shareholder intending to sell their shares (“Intending Shareholder”) to first offer them to their fellow shareholders or the company. ROFRs also grant shareholders the ability to control who their fellow shareholders are. It is a reasonable device to prohibit the sale of shares to competitors as long as it is not too onerous or time-consuming.
There are two kinds of ROFRs. The first kind, a Hard ROFR requires the Intending Shareholder to acquire a bona fide offer from a third party to acquire their shares before shares are offered to fellow shareholders. The second kind of ROFR is a soft ROFR, which permits the Intending Shareholder to first offer the shares to the other shareholders, and then, if not taken up, offer them to third parties at the price offered to the other shareholders or higher.
Hard ROFRs can make it difficult for shareholders to sell their shares because a potential third-party investor can easily lose a deal. Soft ROFRs are less restrictive because they must be exercised before any potential third-party purchaser is identified. If a ROFR is going to be included in a Shareholders’ Agreement, a Soft ROFR would provide more flexibility for shareholders to sell their shares. Further, regardless of what sort of ROFR is implemented, the ability for shareholders to sell a certain percentage of their shares before the ROFR is triggered is a reasonable and effective addition to a ROFR.
Pre-emptive Rights provide current shareholders with the right to participate in future financing and are frequently included in early-stage Shareholders’ Agreements. This right to buy future shares can be used to protect early investors’ shares from being diluted when a company decides to issue more shares.
While the use of Pre-emptive Rights can be beneficial to shareholders, it can also serve as an obstacle to a company looking to attract investment from outside investors. The injection of non-professional investors into financing can result in an inability to provide a workable structure that includes Venture Capitalists, and as a result, stunt the growth rate or ability of a company.
If Pre-emptive Rights are to be used, they should be accompanied by either or both a Sunset Provision and a Pay to Play Provision. A Sunset Provision would provide the Pre-emptive Rights only for the period the shares are cheap and early stage capital is being raised. In other words, the Pre-emptive Rights Provision would terminate after a certain period of time (For example: two years after the execution of the Shareholders’ Agreement). A Pay to Play Provision requires existing investors to invest on a pro rata basis in subsequent financing rounds or they will forfeit certain or all preferential rights. This discourages the strategic use of Pre-emptive Rights in future financing rounds.
A Piggyback Right requires that an Intending Shareholder permit other shareholders to sell their shares along with it on a pro rata basis. The rational for this device is to ensure that shareholders with this benefit can exit a company at the same time and rate as the shareholder subject to the right. The issue with a Piggyback Right is that it can delay and drag out potential sales of shares because they require a notice period (to the other shareholders), and a buyer for more than one shareholder’s shares must be found. This can discourage not only potential buyers, but also shareholders, due to the difficult tasks of finding purchaser(s).
Piggyback Rights should be used with caution, and potentially limited to irreplaceable executives and majority shareholders. It shouldn’t matter if an indifferent shareholder decides to sell their shares, however, if an executive shareholder decides to sell all their shares, then other shareholders should have to opportunity to sell their shares as well as this could be an indication that the company’s value is going to decline.
Many forms of restrictions on the ability to transfer shares exist. ROFRs, Pre-emptive Rights and Piggyback Rights are but a few such restrictions that can be used to protect shareholders. However, if these provisions are included in Shareholders’ Agreements without understanding how they may implicate the ability to transfer shares, it can halt a company’s ability to attract investment in the future. If restrictions are to be imposed on the ability to transfer shares, they should be included in a manner that does not make their application absolute and avoids barriers that make the ability to transfer shares too onerous or impossible.
For more information contact the BLG Venture Clinic.
Suleiman Semalulu is member of the BLG Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.
 Bryce Cyril Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, (Canada: LexisNexis, 2018) [Tingle].
 Sara C. Pender, “Canada: Five Beneficial Clauses To Consider When Drafting A Shareholders’ Agreement” (July 19, 2013), online (blog): Mondaq < http://www.mondaq.com/canada/x/252080/Shareholders/Five+Beneficial+Clauses+To+Consider+When+Drafting+A+Shareholders+Agreement>.
 Tingle, supra note 1.
 Joshua Kennon,” Understanding Shareholders Pre-emptive Rights” (February 8, 2019), online (blog): Investing for Beginners < https://www.thebalance.com/what-is-the-preemptive-right-358100>
 Tingle, supra note 1.
 Ibid; Shanlee von Vegasack, “A Brief Introduction to Unanimous Shareholder Agreements” online (blog): BD&P < https://www.bdplaw.com/content/uploads/2016/06/Shareholders-Agreements.pdf>.
 Tingle, supra note 1.
Location is Everything - Choosing Where to Incorporate
So you’ve made the decision that incorporation is right for your business, but there’s another critical incorporation decision ahead – where do you incorporate? In Alberta, incorporation is governed by the Business Corporations Act (the “ABCA”). Federal incorporation is governed by the Canada Business Corporation Act (the “CBCA”). There are a number of factors differentiating provincial and federal incorporation to guide your decision.
The cost of provincial incorporation is $275 plus service fees. The cost of federal incorporation is $200 for online applications or $250 for paper applications.
While incorporating a federal corporation appears less costly in terms of incorporation fees, there is an additional cost consideration for a business seeking to incorporate federally – federal corporations are also required to extra-provincially register in the provinces in which they will carry on business. The definition of “carry on business” triggering the extra-provincial registration requirement includes running a business, having an address, post box or phone number, or offering products and services for a profit. The fee to register an extra-provincial corporation in Alberta is $275 plus service fees.
The ABCA requires a business to have its registered office in Alberta. The requirement to have a registered office in Alberta is not satisfied by merely having a post office box in Alberta. The requirement is a physical address in Alberta accessible during normal business hours. The ABCA requires shareholder meetings to be held in Alberta unless all shareholders entitled to vote at the meeting agree to hold it outside of Alberta.
The CBCA allows a federally incorporated business to have a registered office and hold annual meetings in any province in Canada.
The CBCA entails additional paperwork by requiring a corporation to file annual returns. Current annual federal filing fees are $20 (online) or $40 (paper filing). The filing requirements must be completed annually, whether or not there have been director or address changes for the corporation.
The ABCA has its own annual return requirements. These requirements also apply to registered extra-provincial corporations. A federal corporation registered in Alberta will have to file annual returns under the ABCA to comply with the statute. A corporation operating in Alberta has more onerous filing requirements if it incorporated federally as opposed to provincially.
Federal incorporation allows a business to use its corporate name across Canada. This degree of name protection can only be defeated by a trademark. Federal name searches are therefore more rigorous than provincial name searches.
Provincial incorporation only allows a business to use its corporate name in Alberta, and a corporation will need to conduct a name search in each additional province in which it wishes to carry on business. There is a risk that its corporate name will be rejected in another province, requiring the use of an alternative name.
Corporations Canada maintains a register of the Registered Office Address, Directors, Annual Filings, and Corporate History of federal corporations, publicly available online at no cost. Provincial corporations have relative privacy with respect to the accessibility of their corporate data, as such information from provincial corporations is not publicly available online, and a fee is required for a search.
The ABCA permits the establishment of Unlimited Liability Corporations – this is an unusual incorporation structure that makes the liability of shareholders unlimited in extent and joint and several in nature. This structure is not supported by the CBCA.
Federal incorporation may have the advantage of prestige from global recognition standpoint, as a Canadian corporation is more recognizable than individual provinces.  This is primarily a consideration for businesses intending to operate internationally.
Ultimately, a corporation is not permanently confined to the jurisdiction in which it was originally incorporated. A corporation can choose to change from provincial to federal incorporation, vice versa, or from one province to another, by way of a continuance. Both the ABCA and the CBCA contain provisions allowing corporations from another jurisdiction to effectively re-incorporate under their statute.
For further assistance with incorporating under the ABCA or the CBCA, contact the BLG Business Venture Clinic. We can assist with drafting articles and bylaws to get your corporation set up the right way and avoid costly changes down the road.
Ana Cherniak-Kennedy is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 RSA 2000, c B-9 [ABCA].
 RSC 1985, c C-44 [CBCA].
 Open Alberta, “Registry agent product catalogue” (2019), online: Government of Alberta <https://open.alberta.ca/publications/6041328>.
 Corporations Canada, “Services, fees and turnaround times – Canada Business Corporations Act” (2017), online: Government of Canada <https://corporationscanada.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06650.html>.
 Corporations Canada, “Steps to Incorporating” (2016), online: Government of Canada <https://corporationscanada.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06642.html#toc-06>.
 Service Alberta, “Registry agent product catalogue” (2019), online: Government of Alberta <https://open.alberta.ca/publications/6041328>.
 ABCA, s 20.
 ABCA, s 20(4).
 ABCA, s 20(6).
 ABCA, s 131.
 CBCA, s 19(1).
 CBCA, s 263.
 Corporations Canada, “Policy on filing of annual returns – Canada Business Corporations Act” (2012), online: Government of Canada <https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs02544.html>.
 ABCA, s 268.
 ABCA, s 292.
 Corporations Canada, “Is incorporation right for you?” (2016), online: Government of Canada <https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06641.html>.
 Corporations Canada, “Search for a Federal Corporation” (2019), online: Government of Canada <https://www.ic.gc.ca/app/scr/cc/CorporationsCanada/fdrlCrpSrch.html>.
 ABCA, s 15.2(1).
 Corporations Canada, supra note 20.
 ABCA, s 188; CBCA, s 197.
Jurisdiction to Incorporation
Corporation is a common business form in start-ups. It is adaptable the changing circumstances and it is the only structure that can take advantage of government programs. When incorporating your start-up, the jurisdiction to incorporation must be considered.
Where do the powers come from?
The provincial power is explicit, written under s. 92, para. 11 of the Constitution Act, 1867. The paragraph states that each provincial legislative assembly may individually make laws in relation to the incorporation of companies with provincial Objects. The federal power is implicit, mostly stemming from the general power of the federal government under s. 91 of the Constitution Act, 1867 over peace, order and good government. The power of incorporation is implicit in other enumerated federal powers as well, such as navigation and shipping and the trade and commerce clause.
Although it has been determined both federal and provincial governments may enact laws regarding incorporation of businesses, the precise distinction between the federal and provincial power has not been fully determined. The provincial legislation has often been seen as more limited, since the constitution grants only the power for the incorporation of corporations having “provincial objects.” However, the limitation that flows from it has been narrowly interpreted. A corporation may incorporate under provincial law even if it carries business that is closely related to an area with federal jurisdiction, such as banking. A corporation under federal jurisdiction may also choose to limit its business to an object or purpose that is of provincial nature.
For a start-up business, finances and efficiency should be an important consideration when incorporating. Compared to the federal process, the provincial incorporation process is lower in fees and lawyers would not have to deal with bureaucrats all the way in Ottawa. Many corporate lawyers like to recommend incorporation in the home province of the company and its counsel for these reasons.
Kara Cao is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 John Deere Plow Co. v. Wharton,  A.C. 330
 Referece re Dominion Constitutional Act, s. 110
 Bonanza Creek Gold Mining Co. v. R.,  1 A.C. 566
 Re Bergethaler Waisenamt,  M.J. No. 42, 29 C.B.R. 189
 Colonial Building and Investment Association v. Quebec (Attorney General) (1883)
Employees and Start-up Companies
Finding the best employees is fundamental to start-up companies. Bryce Tingle has noted in his book Start-up and Growth Companies in Canada - A Guide to Business and Legal Practice that "a new company's success is primarily a function of future managerial decisions, unlike more established companies where most income is derived from existing businesses."  Employees in a start-up company will see significant change in the nature and character of their work as the company progresses.  For example, a small food-preparation start-up might begin with two founders. They may have limited tech knowledge and may bring on an individual with coding knowledge. That individual may later be required for more of a business development practice as they become more familiar with the running of the business. A constant movement of various people in the firm as responsibilities change will have an effect on how an employment agreement is written.
Some general considerations of employment with start-up companies:
1. Keeping the description of job duties of an employee in a contract of employment as general as possible can help avoid issues down the road with respect to changes in job duties as hinted above. It can be mentioned that due to the corporation's expected growth, responsibilities of an employee will change from time to time.  Unanticipated changes in employment responsibilities can constitute constructive dismissal, and because changes are reasonably foreseeable in a growth company, a contract clearly providing for an employer's power to change an employee's position from time to time is important. 
2. The goal for a start-up should always be "no surprises".  To avoid issues down the road including an "integration clause" stating that the documents represent the entire agreement regarding the employment relationship, and terms cannot be modified except in writing executed by both parties is important. 
3. As in any contract, consideration is required. Canadian courts have viewed arrangements where an employee signs their formal employment agreement on their first day of work as unenforceable. This can happen where that person was first sent an informal "offer letter", or general job description, and later formally signed at work.  Rather, an employment agreement entered into as a condition of a prospective employee being offered employment is enforceable. The consideration is the employment. 
4. On a general level, Canadian courts are strongly sided towards employees rather than companies. This might be more intuitive in the sense of big multi-national corporations "taking advantage of the little guy". However, for a start-up, being sued by an employee can be heavily detrimental, if not crippling to, a company's survival. It is vital to ensure that employee agreements are well-written and thought out. The BLG Business Venture Clinic can be a useful service for early start-ups considering and contemplating the drafting of employee agreements, and various clauses within such as rights of first refusal, piggyback rights, shotgun provisions and others.
Nielsen Beatty is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 Bryce Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, Third Edition, LexisNexis Canada Inc. (2018) at 126.
 Ibid at 127.
 Ferdinandusz v. Global Driver Services Inc.  O.J. No. 4225, 5 C.C.E.L. (3d) 248 (Ont. Gen. Div.).
 Tingle, Start-up and Growth Companies in Canada at 127.
 Ibid at 128.
 Buaron v. Acuityads Inc.,  O.J. No. 5045 (Ont. S.C.J.).
Is a Unanimous Shareholder Agreement Right for My Business
There is no “one size fits all” solution available when a new venture requires a shareholder agreement. The question of whether a Unanimous Shareholder Agreement (“USA”) should be used over a conventional shareholder agreement is one that entrepreneurs should consider when the time comes to put a shareholder agreement in place. This question is also likely to spark a debate (although, not a particularly exciting one) among lawyers. This blog post sets out to explain the main differences between USAs and conventional shareholder agreements.
What is a USA?
USAs are a creature of statute. It is imperative that entrepreneurs turn their minds to which statute their business is incorporated under, as this will determine whether their agreement amounts to a USA. The corporate statutes in all provinces except British Columbia and Nova Scotia contemplate the existence of USAs. The Canada Business Corporations Act (“CBCA”) defines a USA as being:
An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation....[i]
In contrast, the Alberta Business Corporations Act (“ABCA”) defines a USA as being:
These matters include the rights and liabilities of the parties, election of directors, management of the corporation’s business and affairs, or restriction of director powers.[iii] It is worth noting that it is possible to inadvertently enter into a USA by satisfying one of the statutory definitions above. If, for any of the reasons that follow, an entrepreneur does not want to create a USA, the shareholder agreement should explicitly state that it is not meant to be a USA.
How are USAs Different than Conventional Shareholder Agreements?
USAs are unique in that a person can become a party to the USA without signing it. If a USA is in effect when a person acquires a share of the corporation, that person is deemed to be a party to the agreement and will be bound by it.[iv] This means that those who invest in future equity financings carried out by a corporation will be bound by a USA (if one exists).
Another important distinction is the fact that, when the shareholders are exercising powers that have been transferred from the directors, they are subject to the same fiduciary duty attracted by directors in the ordinary course of their business. A consequence of this is that shareholders making decisions in place of the directors will lose their ability to pursue their own interests.[v] Shareholders acting in place of directors pursuant to a USA must act in the best interests of the corporation.[vi] In contrast, shareholders that are a party to a conventional shareholder agreement are free to act in self-interested ways.
Finally, it is often much more difficult to amend or terminate a USA in comparison to a conventional shareholder agreement. For CBCA corporations, it is uncertain as to whether a court would uphold the termination of a USA executed by any fewer than all the shareholders.[vii] The amendment or termination of a USA in the context of ABCA corporations certainly requires the consent of all shareholders.[viii] Termination provisions in conventional shareholder agreements can have a much more relaxed structure.
When Should a USA be Used?
Generally speaking, start-up growth companies should steer clear of USAs; however, there are certain situations in which a USA may be advantageous.
Firstly, a corporation may anticipate a turn of events that will result in a significant amount of its shares being widely held by individual investors – in this situation, a USA would provide an effective means to bind each one of these new shareholders to the terms of the corporation’s shareholder agreement.[ix]
Another situation in which the creation of a USA may be advisable is when a corporation whose shares are held primarily by non-Canadians wishes to be classified as a Canadian Controlled Private Corporation (“CCPC”) for tax purposes. If Canadian resident shareholders possess the right to appoint a majority of the board of directors by virtue of a USA, the corporation will qualify as a CCPC despite the fact its shares may be owned primarily by non-residents.[x]
Again, USAs are often not advisable for use in start-up growth companies mainly due to the fact that both current and future shareholders are bound by them. Conventional shareholder agreements provide a higher degree of flexibility and allow shareholders to consider only their personal interests.
Thomas Machell is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.
[i] Canada Business Corporations Act, RSC 1985 c C-44 at s 146(1) [CBCA].
[ii] Business Corporations Act, RSA 2000, c B-9 at s 1(jj) [ABCA].
[iii] Ibid at s 146(1).
[iv] CBCA at s 146(3); ABCA at s 146(2) and 146(3); Note that recourse is available for persons who acquire a share of a corporation that is subject to a USA if they did not receive proper notice of the agreement’s existence.
[v] Bryce C Tingle, Start-up and Growth Companies in Canada, 3rd ed (LexisNexis, 2018) at 103 and 104 [Tingle].
[vi] BCE Inc v 1976 Debentureholders, 2008 SCC 69 at para 37.
[vii] Tingle at 106.
[viii] ABCA at s 146(8).
[ix] Tingle at 107.
[x] Canada v Bioartificial Gel Technologies (Bagtech) Inc, 2013 FCA 164 at para 58.
Startup Pitfalls in Employment Law
Hiring your first employees is a major step for a young business, one that comes with a new set of new legal challenges and risks. This blog will discuss some of the major legal pitfalls in hiring. Note that this post doesn’t discuss the contractor/employee distinction (which is also very important) because that was covered in a previous post by Sunny Uppal on April 21, 2019.
Don’t Try This at Home
Employment law did not develop with small startups in mind. It emerged at a time when low-paid industrial workers needed protection from massive industrial employers, and it shows. Employment law generally assumes that employers have the upper hand in bargaining power and fairly deep pockets.
For startups, this means that you should always obtain legal information or advice before proceeding with your first hiring. Attempting to draft your own employment agreements (or not using written agreements at all) is walking blindfolded into a minefield of legal issues. Even lawyers have difficulty drafting some provisions to be enforceable, but they can at least assess risks and steer away from the more dangerous areas.
Get it in Writing from Day One
Handshake deals are common in the business world, and while lawyers are generally wary of unwritten agreements that is doubly true in the employment context. The problem is, absent a written agreement, a contract is “deemed” to arise regardless of the parties’ intentions and the terms of that contract will be decided by statute or by the courts. As an employer, these deemed contracts will rarely be preferable to a written agreement and can create uncertainty and risk.
The other issue with these unwritten agreements is that any later written arrangement is treated not as a new contract, but as a modification of the existing contract that arose when the relationship began. This creates a problem of consideration: the legal concept that if a contract is to be enforced in court, it must be an exchange of meaningful value between parties. The problem in this case is that the later agreement can be treated as a modification of the old contract, so if nothing new is being offered then the court will use to the old contract instead. Consider the following example: Jessica hires her friend Dave to do some bookkeeping for her without a written agreement. As the business grows, Jessica begins to look for financing but investors want to see papered employment agreements, so she asks Dave to formalize their relationship in writing at the same pay, hours, benefits, etc. In this scenario, the second contract is likely void for lack of consideration since Dave is providing a benefit to Jessica (a written contract for her investors) but receiving nothing in return except for the benefits he already receives under the old contract. This means their relationship is still governed by the unwritten contract, including the terms that arise by operation of statute or common law. It is important to get employment agreements in writing from the start, to avoid unwanted terms.
All That is Written is not Gold
While it is important to get employment agreements in writing, doing so doesn’t provide complete assurance that the written terms will be enforced. A major area of concern for startups is the possibility that an employee will start a competing business: startups often have low barriers to competition, so it is important to set up proper protections that will be enforceable.
A common tool to this in is the non-competition clause, or “restrictive covenant”. The idea is to prevent a former employee from becoming a competitor by setting up a competing business or going to work for a rival, using the experience they gained as an employee against the employer. While common, non-competition clauses are a tricky area of law. The Supreme Court has been reluctant to enforce such clauses on the grounds that they make it difficult for employees to find work in their area of expertise, which imposes a burden on their ability to earn a living. This means that non-competition clauses require careful drafting, and even then it is wise not to rely on them entirely.
Another way to protect yourself from competing against a former employee is to include strong intellectual property provisions into the employment contract that prevent the employee from wielding the knowledge they gained during their employment against you. Either way, seeking the proper legal assistance is critical.
Kevin Lee is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 Employment Standards Code, RSA 2000, c E-9; Kent v Bell, (1949) 4 DLR 561.
 Greater Fredericton Airport Authority v NAV Canada, 2008 NBCA 28.
 J.G. Collins Insurance Agencies v Elsley, (1978) 2 SCR 916.
You have an idea. You may even have a plan. The question is how do you do turn this idea into a “real” business? There are several factors you’ll need to consider when starting a business, two of which are absolutely crucial: business structure and finance. One of the first decisions you’ll need to make is what structure your business will take. This decision will have legal and tax implications, so you must select one and operate within that structure’s guidelines. There are three common business structures in Canada:
1. Sole Proprietorship
You are the business and own 100% of it. Choosing to do business as an sole proprietor is your simplest option, and one that many small business owners prefer. The advantages of it are the freedom of full control, minimal costs, tax advantages on your personal income, and undivided earnings. However, as a sole proprietor you are also accountable for all parts of your business (including debts and losses), and creditors can claim your personal assets as well as the business if you fail to pay.
A partnership is a group of two or more who set up a business together. The benefits of starting a partnership are the inexpensiveness to set it up, shared losses and profits. However, since there’s no legal difference between you and your business you’re still liable for all business activities like a sole proprietor. Additionally, you may experience conflict with a partner that could potentially damage the business outlook.
A corporation is a separate legal entity from you and is set up formally with a number of shares divided between yourself and others, indicating ownership in the corporation. The advantage of a corporation is keeping your assets separate from the company, so if the company goes insolvent it is less likely you will be personally liable. Likewise, if you exit from the company, the corporation will live on without you. One unique aspect of the corporation is the ability to sell shares of the company to raise capital it.
Another key consideration is how to finance your business. Even if you have the greatest idea in the world and decided on the right business structure, your opportunities will be limited if you don’t have the capital necessary to get the business off the ground. Until you have a steady stream of revenue, and even after that, you will likely need to finance the business. Key assets are essential to the business, if you don’t have the money to strike when the iron is hot you may lose out on a once in a lifetime opportunity. Entrepreneurs often report that getting financing is the most challenging aspect of starting a business. There are, however, both government and private-sector sources of financing that can help you get your business off the ground. Two common forms of that financing in Canada are:
Any liability or obligation of a corporation is a debt. Debt can be short-term, such as trade credit advanced to the corporation by its employees, or long-term that actually forms part of the company’s capital structure. The benefits of debt to the company (borrower) is the ability to raise capital without selling any shares. The benefit to the creditor is that, in addition to receiving interest payments, if the company goes insolvent there is a degree of certainty over repayment of the debt.
Equity can be described as an ownership interest in an incorporated entity, represented by shares. The benefit of equity for the company selling it is the likelihood of more financing. The benefit of the entity purchasing the equity is, in addition to dividend payments, the ability to sell the shares for a higher price as the company increases in value. One significant aspect of equity vs. debt is that equity is subordinate to debt, meaning greater risk (and reward).
It is essential to understand the options for structuring and financing your business. There are legal and tax implications depending on what form your business takes and the financing it receives. For more information on choosing a business structure or financing options, it’s a good idea to consult with a qualified lawyer or accountant.
For information on how to register a business, visit: https://www.alberta.ca/register-business-name.aspx
Bradley Mills is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.
 Royal Bank of Canada: Choosing a business structure, online at: <https://www.rbcroyalbank.com/business/pdf/Choosing%20Business%20Structure.pdf>
 Government of Canada: Financing your new business, online at: <https://canadabusiness.ca/starting/financing-your-new-business/>
 Bryce Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, Third Edition, LexisNexis Canada Inc. (2018).
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)
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.