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Written by Reed Boothby
JD Candidate 2023 | UCalgary Law On May 31, 2022, amendments to the Alberta Business Corporations Act (“ABCA”)[1] came into force. In line with Alberta’s Recovery Plan, the intention underlying the amendments is to attract investment and make Alberta a more appealing jurisdiction for incorporation. Three key benefits as a result of these amendments include: (1) streamlined administrative processes; (2) enhanced director and officer protections; and (3) corporate opportunity waivers.
Conclusion: The recent amendments to the ABCA make Alberta a more attractive jurisdiction in which to incorporate and operate a business by: (1) streamlining administrative processes; (2) enhancing director and officer protections; and (3) introducing a corporate opportunity waiver. Note that a corporation's constating documents may require amendments to implement some of the changes outlined in this post. For assistance with amending constating documents, or for further information about the ABCA generally, please contact the BLG Business Venture Clinic. [1] Business Corporations Act (Alberta), RSA 2000, c B-9. [ABCA] [2] ABCA, s. 139. [3] ABCA, s. 141. [4] ABCA, s. 1(w). [5] ABCA, s. 1 (ii). [6] “non-reporting issuer” means a private corporation that is not required to file continuous disclosure documents pursuant to National Instrument 51-102 – Continuous Disclosure Obligations (NI 51-102). [7] ABCA, s. 141(2.1). [8] ABCA, s.134(1.1). [9] ABCA, s. 48(7.1) [10] ABCA, s. 158(1). [11] ABCA, s. 255(5). [12] ABCA, s. 208(1). [13] ABCA, s. 123(3)(b). [14] ABCA, s.124. [15] ABCA, s. 16.1.
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By Martika Ince | JD Candidate 2024, UCalgary Law
A social enterprise, or a benefit corporation, is one that pursues primarily social or environmental goals through an entrepreneurial structure. As social entrepreneurship gains popularity in Canada, it is crucial for entrepreneurs to be aware of and understand their options in structuring their business. This provides a brief overview of three different legal structures for those who are starting to think about how to organize their social enterprise. Registered Charity Registered charities are organizations that have a charitable purpose and devote their resources for charitable activities. The Income Tax Act (ITA) provides that organizations can become a registered charity after applying and being approved by the Canada Revenue Agency (CRA).[1] The charitable purpose must fall into one or more of the following categories: · The relief of poverty; · The advancement of education; · The advancement of religion; or · Other purposes that benefit the community.[2] Registered charities benefit from a general tax exemption under the ITA.[3] As a charity, you are also able to issue charitable donation tax receipts so that donors can claim tax credits or deductions for charitable gifts.[4] Registered charities can generate revenue in two ways:
However, carrying on an unrelated business activity is grounds for revocation of charitable registration. This is an important consideration in deciding whether registered charity status is right for your social enterprise, as this rule can severely limit the organization’s activities.[6] Moreover, you may face difficulty in securing private investment as a charity. Venture capitalists and other investors are often less motivated to invest funds to support a social benefit activity that may generate a lower return than pure for-profit entities. Non-Profit Organization Another structure often used for a social enterprise is a non-profit organization, which has a social benefit purpose and does not operate for profit. You can choose to operate as a non-profit after incorporating into a corporate structure. Non-profits are typically organized as a non-share capital entity to alleviate the concern that owners and shareholders are accumulating wealth.[7] As such, third parties cannot invest in the same way they would with a share capital corporation. Non-profits are exempt from paying income tax, but they must fulfil certain requirements to do so.[8] A non-profit organization can generate revenue if the business is connected to its social mission. The CRA may revoke a non-profit’s tax-exempt status if it is found to carry out trade or business exclusively with a view to profit.[9] The following may indicate that a non-profit is operating for profit: · Trade or business operating in a normal commercial manner; · Goods or services are not restricted to members and their guests; · Operated on a profit rather than cost-recovery basis; or · Operated in competition with taxable entities carrying on the same trade or business.[10] In some cases, generating profit to be directed to a social benefit purpose can be considered a for-profit activity by the CRA, rendering the organization ineligible for the tax exemption.[11] As such, non-profit organizations are limited in the ways that they can make money. Business Corporation Corporations are arguably the most flexible vehicle for carrying on social enterprise. A business corporation or for-profit corporation is a legal entity that exists separately from its owners – it is treated as a natural person. Corporations can be incorporated under the Canada Business Corporations Act (CBCA) federally or under the provincial equivalents. In order to indicate your corporation is a social enterprise, you should include your social mission in your articles of incorporation or in a resolution passed by the executive board or shareholders.[12] The benefits of choosing a business corporation for your social enterprise are many. You can conduct any business activities, collaborate with anyone you wish, and use the proceeds with more freedom. Business corporations also have a flexible capital structure, which can attract private investment with no formal limit on returns. If desired, share conditions can be used to establish a set percentage of earnings that will be directed to the social mission, and formal restrictions can be placed on shareholder returns.[13] There are also disadvantages to consider in choosing the appropriate legal structure for your business. As corporations are not a qualified donee under the ITA, they cannot attract funding from the charitable sector. They also do not benefit from a tax-exempt status under the ITA. However, corporations can deduct a percentage of their annual income on account of charitable donations. Another disadvantage is that corporations can be perceived by the public as using the cover of a social purpose to create wealth and benefit themselves.[14] It is important to be transparent about how your social enterprise contributes to a social or environmental goal. Conclusion Many legal structures exist for a business, but registered charities, non-profit organizations, and business corporations are the most commonly used for a social enterprise, each with their respective benefits and disadvantages. If you have questions or require additional information about different legal structures for your social enterprise, please reach out to the BLG Business Venture Clinic. [1] Innovation, Science and Economic Development Canada, “Start, build, and grow a social enterprise: Build your social enterprise” (26 November 2021), online: Government of Canada, <https://ised-isde.canada.ca/site/choosing-business-name/en/start-build-and-grow-social-enterprise-build-your-social-enterprise#s2> [ISED]. [2] Ibid. [3] Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA] at s 149(1)(f). [4] Susan Manwaring & Andrew Valentine, “Social Enterprise in Canada”, The 2012 Lexpert (Thomson Reuters Canada Ltd, 2012) [Manwaring]. [5] Ibid. [6] Ibid. [7] Manwaring, supra note 4. [8] ITA, supra note 3 at s 149(1)(l). [9] ISED, supra note 1. [10] Ibid. [11] Manwaring, supra note 4. [12] ISED, supra note 1. [13] Manwaring, supra note 4. [14] Ibid. Written by Charlotte Kelso
JD Candidate 2024 UCalgary Law Ordinary Partnerships A partnership is a relationship between two or more people (i.e., partners) carrying on a business together with the aim of making a profit, excluding corporations.[1] A firm of any size in any industry can be classified as a partnership if it meets this definition.[2] There are three types of partnerships: ordinary partnerships, limited partnerships, and limited liability partnerships. This article focuses on ordinary partnerships, which I will refer to simply as "partnerships". In Alberta, the Partnership Act governs partnerships, with similar legislation in place across Canada. The key risk associated with partnerships is that a partner may be personally liable for any debt or obligation that the firm is liable for.[3] For example, if the firm is in default of a bank loan, the bank can recover the debt from the partners' personal funds and assets if needed. Liability is shared amongst partners. This means that an individual partner is financially responsible for the actions and decisions of the other partners during the course of business. Given the liability risks, it is important to know if you are in a partnership. Identifying a Partnership To be a partnership, a business relationship between parties must meet the definition of a partnership. There are three “essential ingredients” of a partnership.[4] First, the parties must carry on a business. Carrying on a business includes the early and preparatory stages of a venture.[5] The duration of the business venture does not need to pass any certain threshold.[6] Second, the business must be carried on “in common” by the parties. In other words, they must be carrying out the same business in tandem. Finally, the business must be carried on with the aim of making a profit. Aiming to make a profit does not require that the firm actually make a profit.[7] Whether the “ingredients” are present is determined by looking at the circumstances and facts of the relationship. Materials like business licences in the partners’ names, correspondence between the parties, and tax returns showing shared profits can point to a partnership. The parties may have an agreement in writing that they have formed a partnership. While this can be indicative of a partnership, it is not necessarily decisive.[8] A lack of evidence that the parties intended to divide profits or carry on a business together suggests that there is no partnership.[9] Where there is no written agreement, words and actions that are consistent with a partnership may establish a partnership.[10] In sum, a partnership is identified based on the circumstances of each business relationship. Converting the Partnership to a Corporation Partnerships often represent a phase in the legal structure of a business which parties may eventually wish to transition out of, especially given the liability risks of a partnership. The Income Tax Act provides an avenue for a partnership to convert to a corporation in conjunction with the wind-up process. First the partners set up a corporation for the purposes of the transition. Then the partnership transfers property to the corporation in exchange for shares. The shares are transferred from the partnership to the individual partners. Then the partnership wind-ups up. The former partners continue on their business venture under the corporation as shareholders. [11] [12] [1] Partnership Act, RSA 2000, c P-3, at s. 1(g). [2] Ibid at s. 1(c). [3] Ibid at s. 11(2) and 15. [4] Spire Freezers Ltd v Canada, 2001 SCC 11. [5] Miah v Khan, [2000] 1 WLR 2163. [6] Supra note 2. [7] Supra note 2. [8] Sproule v McConnell (1925), [1925] 1 DLR 982, 19 Sask LR 319. [9] Big Bend Construction Ltd v Donald, 1958 CarswellAlta 33, 25 WWR (ns) 281. [10] Sabbaugh v Rawdah, 1978 CarswellAlta 409, 16 AR 326. [11] Income Tax Act, RSC 1985, c 1, s. 85(2). [12] Tingle, B. C. Start-Up and growth companies in Canada - a guide to legal and business practice (3rd ed.). LexisNexis Canada Inc, p. 36. Written by Mercer Timmis*
What are Liquidation Preferences? A liquidation preference is a contractual right that may be negotiated by a venture capital firm while providing financing to a business. A liquidation preference entitles preferred shareholders to receive a certain amount of money on the company's liquidation before anything is paid out to the holder of the other classes of shares.[1] Liquidation preferences may be triggered by events such as bankruptcy, winding up the business, an extraordinary sale of all or substantially all of the company's assets, or a change of control of a company. Usually, preferred shareholders get an amount equal to their original purchase price plus any accrued and unpaid dividends (the" liquidation price"). However, venture capital investors ask for additional features, such as a multiple liquidation preference. A multiple liquidation preference gives the investor the right to receive between 1 to 3 times the liquidation price.[2] Current Relevance From 2020 to 2021, venture firms saw a record level of inflowing capital that pushed company valuations higher. This business-friendly market meant that investors settled on a 1 times liquidation preference which ensured they would be paid back their initial investment before founders and employees.[3] Conversely, 2022 presents a different market where venture capital investment dropped to a six-quarter low amidst increasing interest rates, high levels of inflation, and a declining stock market. This weakened funding environment creates a lower risk appetite for investors where investors ask for more onerous terms. As such, investors are asking for a 2 to 3 times liquidation preference, meaning they would be paid back double or triple their money before other stakeholders.[4] The Dilemma Generally, a company's valuation tends to increase for each financing round. However, the current economic climate brings unfavourable company valuations and leads businesses to agree to more onerous terms to prevent a 'down round.' A down round occurs when a company raises money at a lower valuation than its previous round. The consequences of a down round are two-fold. First, raising funds at a lower valuation has a dilutive effect on existing shareholders. Second, it is a red flag that reduces investor confidence and employee morale.[5] As such, liquidation preferences are prevalent in the current market because investors will agree to funding valuations equal to or higher than a company's previous round in return for 2 or 3 times multiple. These terms are attractive because, despite the underlying difficulties of the business, the investor is receiving 2 to 3 times their investment. Options for the Business If a company faces onerous liquidation preferences, the following compromises are available: First, suggest that the liquidation preferences operate only against management and founders' shareholding rather than against the equity of other investors (i.e., any friends or family). Second, place a cap on the return to the preferred shares so that in the event the company sees modest success, the preferred shareholders will do better by converting to common equity rather than relying on the liquidation preference. Finally, when negotiating the terms of liquidation preferences, they should not provide for a "change of control" mechanism that results in the deemed liquidation in the event of an equity investment involving more than 50% of outstanding shares. Instead, the threshold should be much higher.[6] Footnotes: [1] Bryce C. Tinge, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practices, 3rd ed (Canada: LexisNexis Canada Inc, 2018). [2] Ibid. [3] The Information, “Startups Avoid Valuation Cuts with ‘Up Rounds in Name Only’ (11, October, 2022) online: The information < https://www.theinformation.com/articles/startups-avoid-valuation-cuts-with-up-rounds-in-nameonly?utm_source=substack&utm_medium=email>. [4] Bloomberg, “VCs Need the Good Tweets” (13, October, 2022) online: Bloomberg, Matt Levine < https://www.bloomberg.com/opinion/articles/2022-10-13/vcs-need-the-good-tweets>. [5]Supra, note 1. [6] Ibid. *Mercer Timmis J.D. Candidate 2023 University of Calgary, Faculty of Law Authored by Sabrina Sandhu*
A Not-For-Profit, or NFP, is an organization where the purpose is not for owners to generate a profit for themselves, nor is there any distribution of income to members, officers, or directors. The goals of an NFP can vary widely from artistic to scientific, and philanthropic to educational. When starting a NFP in Canada, one must make an important initial decision whether to incorporate federally or provincially. Each confers certain advantages and disadvantages. While the individual provinces have harmonized their process for incorporation, differences do exist in the margins. It is therefore important to understand the requirements of each province under consideration before making a decision on jurisdiction. This post will characterize the key distinctions between incorporating federally in Canada to that of the Province of Alberta. Federal Incorporation The Canada Not-for-profit Corporations Act, or CNCA, is the governing legislation for incorporating federally in Canada. There are several advantages to the organization when incorporating under the CNCA. First, once federally incorporated, the organization may carry out its objectives in any province or territory they choose. Secondly, the name of the organization will remain unique nationally, in contrast to provincial registration where the name is only protected in that specific province. However, it may be more challenging to find a unique name nationally, than at the provincial level. Third, albeit paradoxical, the extent of financial review is lower when federally incorporated, where it may only be necessary to have an independent accountant review financial statements, rather than having to appoint an auditor which can be costly for an NFP. Fourth, under the CNCA only one individual is required to incorporate the NFP, compared to more than one at provincial levels. Fifth, perhaps the most important advantage is that under the CNCA, a federally incorporated NFP may engage in a business or trade to generate revenue specifically for use by the NFP. This enables the NFP the financial means to pursue broader Not-For-Profit objectives. Finally, the downside is that one is required to pay both the $250 online fee to incorporate federally, plus an additional extra-provincial registration fee to be paid in the provinces and territories that the organization conducts its operations in. In Alberta, the extra-provincial fee would be an additional $250. Incorporation in the Province of Alberta. If one were to incorporate in Alberta only, the organization would be incorporated under the Alberta Societies Act, or ASA. The key differences from federal incorporation are as follows. First, the fee to incorporate is only $50, which is less costly than federal incorporation. Second, selecting a name for the organization only requires an Alberta search, not a national database search, and therefore it is easier to obtain. However, if the organization subsequently wishes to pursue expansion into other provinces or territories, then the chosen name must undergo a search and clearance in that province as well. Third, instead of only one individual required to incorporate an NFP federally, the Alberta requires 5 or more individuals. Fourth, Alberta NFPs are required to have their annual financial statements audited, which can be costly to the NFP, whereas federally, as mentioned above, an exemption can be obtained that obviates the necessity for an external auditor. Finally, the most important distinction between federal incorporation is that an organization incorporated under the ASA is not permitted to engage in a business or trade to generate revenue for the organization. If the organization is financed primarily through donations, and it is not necessary for the organization to pursue additional revenue generation streams to fulfill its not-for-profit objectives, then this may not be a concern. If you have questions or require additional information about incorporating an NFP in Canada, please reach out the BVC Clinic to chat with U of C Law Student. *Sabrina Sandhu, MD FRCPC JD Candidate 2023 (University of Calgary) Anesthesiologist and Pain Medicine Physician Clinical Assistant Professor Department of Anesthesiology, Preoperative and Pain Medicine University of Calgary Intellectual Property and Tech Strat-Ups: Protecting Software in Canada
By Saranjit Dhindsa Introduction For tech start-ups, protecting your software is an important step in ensuring that your company can retain the source of its value. There are many forms of IP protection available to protect software, but it is difficult for start-ups to determine which form will strategically protect their valuables, while also being the most cost-effective. Below is an overview of the different forms of IP offered by the Canadian Intellectual Property Office (CIPO), and how they can protect your software. Copyrights (per the Copyright Act) Canadian copyright law gives the author (creator) the sole right to produce and reproduce your work in any form. It provides protection to literary, artistic, musical, or dramatic works – in this case, software falls into the “literary” category. Per copyright laws, copyright subsists in both the source code and assembly code of computer software. But it is important to note that copyright only protects expressions of ideas, not the idea itself.[1] This is important to note, as copyright will only prevent others from copying your specific code but will not help if a competitor independently develops the same software or copies the functionality of the code.[2] It's also important to note that, unlike other forms of IP, copyright does not need to be registered with CIPO. Per section once a copyrightable work is created and fixed in a material form, it is protected by law.[3] But when you register, you are provided with a certificate of registration that can be used in court as evidence of ownership – this can be very beneficial in case of litigation. Copyright generally lasts for the life of the author of the work, plus 50 years.[4] Patents (per the Patent Act) Patents are the most common form of IP, but it is difficult to obtain a patent for software. While you cannot use a patent to protect the lines of code, the functional aspects of software can be patentable. This is what makes a valuable, as it would prevent competitors from reproducing the functional aspects of your software.[5] As such, software patents provide broader protection. To patent software, your software must be:
Essentially, if your software simply automatizes a human task or provides simple/generic components it may not be patentable, as they do not provide any novel function. Furthermore, if the software is considered to be directed to an “abstract idea” it may not be patent-eligible. CIPO guidelines make software eligible if the claims are drafted in a way that essentializes tangible elements (i.e., a computer, phone, circuit board) to the software.[6] In Canada, a patent lasts for 20 years from the date it is filed with CIPO.[7] Trade Secrets/Confidential Information Canada has no legislation governing trade secrets, but rather is enforced through torts such as breach of confidence or breach of fiduciary duties. Additionally, trade secrets can be enforced on a breach of contract claim (i.e., when someone breaks an NDA). The protection of a trade secret requires the following, at a minimum:
When a trade secret has been revealed, you can seek damages (money) in courts. Additionally, trade secrets can potentially last forever – as long as the information remains secret, trade secret protection applies. Integrated Circuit Topography (per the Integrated Circuit Topography Act) Software that has been or can be embedded on a semi-conductor chip can be eligible for protection under Canada’s Integrated Circuit Topography Act. This specific Act provides protection for certain original integrated circuit topographies, whether the design has been embodied in an integrated circuit product or not.[9] The Act protects only the registered topography – this means the idea, concept, process, system or any information embodied is not protected.[10] Like patents, protection for integrated circuit topographies is not automatic – a registration of the topography in Canada must be obtained. The Act protects registered topographies for a period of up to 10 years, beginning from the filing date of the application.[11] Conclusion There are many ways to protect your software using Canadian IP laws – these are just some of the most common. It’s also good to note that you can use a mixture of IP protection to ensure that your software is as protected as possible. Contact the Business Venture Clinic to provide you with legal information on each form outlined above, and some next steps to take in your mission to protect your start-up from IP infringement. Footnotes: [1] https://patentable.com/software-copyright-in-canada/ [2] https://www.mondaq.com/canada/patent/1135896/you-can39t-patent-software-right-or-can-you [3] https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr03915.html [4] https://canlii.ca/t/7vdz#sec6 [5] https://www.mondaq.com/canada/patent/1135896/you-can39t-patent-software-right-or-can-you [6] https://www.dentons.com/en/insights/alerts/2020/june/22/software-patentability-in-canada-and-beyond [7] https://canlii.ca/t/7vkn#sec44 [8] https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr03987.html [9] https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/h_wr02282.html#part1.6 [10] https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/h_wr02282.html#part1.6 [11] https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/h_wr02282.html#part1.10 What Personal Health Information Can Businesses Collect?
Written by Carolee Changfoot As COVID starts to plateau in Canada and restrictions lift, I reflect on the last two years and the role health innovation has played in our lives. We have had several medical innovations such as mRNA vaccinations, new COVID treatment medications, and the rise of telehealth.[1] Health and Fitness Apps saw a 47% increase in adoption as COVID spread globally in 2020.[2] Additionally, funding for digital health start-ups hit a record breaking $57.2 billion last year, a 79% increase from 2020.[3] COVID highlighted just how important our health is. Many businesses seem to recognize this as the global mobile health app market is expected to grow 11.8% from 2022 to 2030.[4] With more businesses expecting to work with health data, it is important for businesses to understand their expectations around collecting and protecting personal information. This blog post is not legal advice but describes some of the requirements private businesses face when collecting personal information. National Requirements The Personal Information Protection and Electronic Documents Act (PIPEDA) establishes national limits on the collection of personal information.[5] PIPEDA applies to every organization that collects, uses or discloses personal information in the course of commercial activities.[6] PIPEDA defines “personal information” as information about an identifiable individual.[7] Medical records are considered sensitive information.[8] Organizations must identify the purpose for which the information is to be used at or before the time the information is collected.[9] The purpose must be specified at or before the time of collection to the individual whose information is being collected.[10] Organizations must make a reasonable effort to ensure that the individual understands the purpose for which their information is to be used.[11] The knowledge and consent of the individual whose personal information is collected is required for the collection, use or disclosure of personal information.[12] Consent in regards to sensitive information, like medical information, must be expressly given.[13] If the business changes how they plan to use the personal information, that business must communicate the new purpose to the individuals whose personal information has been collected and must obtain their express consent before their information can be used for the new purpose.[14] Further, an individual may withdraw consent at any time, subject to legal or contractual restrictions and reasonable notice.[15] The organization shall inform the individual of the implications of such withdrawal.[16] Provincial Requirements In addition to PIPEDA, the provinces have established additional requirements through provincial legislation. The collection, use, and disclosure of private information in Alberta is governed by Alberta’s Personal Information Protection Act (AB PIPA) and Alberta’s Health Information Act (HIA).[17] AB PIPA defines “personal information” as identifiable information.[18] The collection, use, and disclosure of personal information requires the consent of the individual whose information is being collected, used and disclosed.[19] Personal information can only be collected for purposes that are reasonable.[20] The purpose must be communicated to the individual whose information is collected at or before the time the information is collected.[21] It is relevant to note that only organizations classified as “custodians” under the Health Information Act and the regulations made under it are authorized to collect an individual’s personal health number.[22] The definition of custodian does not include a private business or organization.[23] Footnotes: [1] COVID Drugs; COVID Vaccines; Rise of Telehealth [2] Fitness App Growth Q2 2020 [3] 2020 Fitness Health Funding [4] mHealth App Market Growth Expectations [5] Privacy Commissioner of Canada, PIPEDA in Brief [6] S. 4 Personal Information Protection and Electronic Documents Act [7] S. 2 Personal Information Protection and Electronic Documents Act [8] Schedule 1 - S. 4.2.3, Personal Information Protection and Electronic Documents Act [9] Schedule 1 - S. 4.2, Personal Information Protection and Electronic Documents Act [10] Schedule 1 - S. 4.2.3, Personal Information Protection and Electronic Documents Act [11] Schedule 1 - S. 4.3.2, Personal Information Protection and Electronic Documents Act [12] Schedule 1 - S. 4.3, Personal Information Protection and Electronic Documents Act [13] Schedule 1 - S. 4.3.6, Personal Information Protection and Electronic Documents Act [14] Schedule 1 - S. 4.2.4, Personal Information Protection and Electronic Documents Act [15] Schedule 1 - S. 4.3.8, Personal Information Protection and Electronic Documents Act [16] Schedule 1 - S. 4.3.8, Personal Information Protection and Electronic Documents Act [17] S. 2, Health Information Act [18] S.1, Alberta Privacy Information Protection Act [19] S.7(1), Alberta Privacy Information Protection Act [20] S.11, Alberta Privacy Information Protection Act [21] S.13, Alberta Privacy Information Protection Act [22] S.21(1), Health Information Act [23] S. 1(1)(f), Health Information Act We’ve Heard About SAFEs, But What About RBFs?
Written by: Saranjit Dhindsa Start-ups need financing – that much is clear. There are many ways early-stage financing can take shape, but it will either take the form of debt (i.e., a bank loan) or equity (i.e., selling shares to investors to raise capital). One of the most popular forms of early stage outside financing for start-ups comes in the form of a SAFE – a “Simple Agreement for Future Equity.” Developed in 2013 by YCombinator, SAFEs have been viewed as a quick and easy way to secure financing in seed rounds. For more information on them, check out this blog post.[1] However, there is a new kid on the block – and it goes by the name of Revenue-Based Financing (or RBFs; the “r” is sometimes referred to as “royalty”). What is RBF? Revenue-based financing, also known as royalty-based financing, is another method of raising capital from investors. Investors inject growth capital into the business, in exchange for a percentage of future monthly revenues. The investor receives their share of the business’s income, until a predetermined amount has been paid. This amount is often a multiple of the initial investment amount. For example, if an investor initially invests $1 million, the predetermined amount could be a multiple of 3, or 5 times that initial investment (i.e., $3 million or $5 million). On its face, RBF sounds a bit like debt financing, but unlike debt, you do not pay interest on the outstanding investment, nor are there any fixed payments. Instead, payments have a directly proportional relationship to the business, as the payment calculations are based on the business’s income. So, if a business sees a high number of sales, the royalty payment will be higher, and if the sales slump for a month, the royalty payment will be lower. RBF is also different from equity financing, as the investor does not have direct ownership of the business. As such, RBF occupies a weird, hybrid space between debt and equity financing. What Kind of Start-Ups Can Benefit from RBF? Businesses that are experiencing moderate and hyper-growth can benefit well under RBF. As such, RBF can be a good way for growth companies to secure growth capital. In addition, businesses that are approaching profitability or have become profitable can benefit from RBF. RBF can be used where a company is pre, post or anti-venture capital. It can also be used to extend cash runaway or eliminate the need for a final funding round. Currently, RBF is most successful with Software-as-a-Service (SaaS) companies. This is because SaaS companies usually have high gross margins and subscription-based revenue models. So, what are the pros and cons to RBF?[2] Pros:
Cons:
[1] http://www.businessventureclinic.ca/blog/safes-what-are-they-and-when-are-they-used [2] https://flowcap.com/founders-guide-to-revenue-based-financing/ Understanding International Patent Law and Implications for Your Start-Up
Written by Karlee Squires So you have come up with a great invention and are excited to build a business around it. Until you discover that someone has created a similar invention in another country. What can you do? Do you still have a viable business? Do you still have a patentable invention? To answer this question, you need to understand how patents are awarded in Canada and internationally. Understanding Patents in Canada The patent process in Canada is governed by the Patent Act.[1] A patent provides a time-limited, legally protected, exclusive right to make, use and sell an invention.[2] Once approved, a patent lasts for 20 years from the file date.[3] For an invention to be patentable in Canada, it must meet 4 criteria. (1) It must be a matter that can be patented.[4] (2) It must be novel or new.[5] (3) It must be useful.[6] (4) It must be inventive and non-obvious, [7] meaning the invention would not have been obvious to a person skilled in the art or science to which it pertains. What Does a Canadian Patent mean for Other Countries? Patent laws and requirements are different in each country. Receiving a patent in Canada does not guarantee the same invention will be patentable in another country. To exercise an enforceable patent in another country, you will need to apply for the patent right in each country separately. In the same way, the existence of a patent in another country does not automatically mean that patent is granted in Canada. Similarity of a Patent in Another Country However, if a patent or similar patented invention exists in another country, while not enforceable in Canada, it’s existence may affect the ability to obtain a Canadian patent. A similar invention outside of Canada raises issues around the novelty requirement for an invention to be patentable in Canada. How do you get around this issue? When applying for a patent it is important to be clear how your invention differentiates from something similar in other jurisdictions. When submitting your patent application in Canada, you should disclose any patent in another jurisdiction you believe is similar to your own invention. If possible, provide the name of the inventor, the number of the patent, the country and the date of issue of the similar patent. The most important thing you will need to include is a list of the similarities and differences between your product/invention and the previously patented invention.[8] Footnotes: [1] Patent Act, RSC 1985, c P-4 [Patent Act]. [2] Patent Act, supra note 1 at s 42. [3] Canadian Intellectual Property Office, “What is a Patent” (28 February 2022), online: http://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr03716.html [4] Government of Canada, “Manual of Patent Office Practice (MOPOP)” (28 February 2022), online: https://s3.ca-central-1.amazonaws.com/manuels-manuals-opic-cipo/MOPOP_English.html#_Toc95464691 at Chapter 17. [5] Supra note 3 [6] Supra note 3 [7] Supra note 3. [8] Supra note 2, s 67(2). So... You’ve started your own business and want to issue shares?
Written by: Carolee Changfoot How are Shares Issued? Shares represent equity in a corporation. Shares are issued by a corporation from certain classes with certain rights attached to them. Shares must be issued for valid consideration for the issuance to represent a binding contract. Consideration is a quid pro quo, where one party accrues a right, interest, or benefit and another party undertakes a responsibility, loss, or detriment.[1] Additionally, private company shares must be issued in compliance with the Prospectus Exemption under NI 45-106.[2] There are tax implications on the issuance of shares and dividends, either on the corporation or on the shareholder. It is recommended that a company work with a strong corporate tax account for tax planning and advice when issuing shares What are a Shareholder’s Rights? A company’s Articles of Incorporation will establish the classes of shares that a corporation is authorized to issue and what rights are affiliated with shares from those classes.[3] Some common rights are:
Shareholders in the same class must be treated equally.[4] For example, if one shareholder is issued dividends, all shareholders of that class are entitled to dividends. Shareholder Dividend Rights. Profits can distributed to shareholders in the form of dividends. However, the right to dividends is not a legally enforceable right.[5] Dividends can be paid periodically, pursuant to a contract, or as a onetime event.[6] To pay dividends, the issuing company must be “solvent” under the Alberta Business Corporations Act and the company’s Board of Directors must have voted to declare dividends.[7] The right to dividends are either cumulative or noncumulative. In a cumulative dividend, the dividend amount accumulates to the next time the corporation pays the dividend.[8] Shares with cumulative dividend rights must be paid dividends before lower ranking shares are paid dividends. [9] Noncumulative dividends do not accumulate and a shareholder does not have a right to any unpaid dividends. [10] Shareholder voting rights Shares that specifically provide for a vote at shareholder meetings can attend shareholder meetings and vote on general shareholder resolutions. These shares give the shareholder a say in the general operation of the corporation. Non-voting shareholders do not have the right to attend or vote at a shareholder however can vote on matters that affect its share class.[11] Section 176(1) of the Alberta Business Corporations Act provide that a shareholder can vote on:
Additionally, all shareholders have a right to vote on certain special resolutions that affect that class.[12] A special resolution must receive a majority vote of not less than ⅔ of the votes cast in order to be passed.[13] The following are examples of special resolutions that require the vote of all shareholders:
Amending the Articles of Incorporation: Changing a corporation’s Articles of Incorporation requires a special resolution.[18] A corporation’s Articles of Incorporation are required to be amended in the following circusmtances:
Amalgamation or Merger: An amalgamation or merger occurs when two or more corporations combine and continue as one corporation. To complete an amalgamation or merger a corporation’s shareholders must approve of the transaction by special resolution.[19] Extraordinary Sale, Lease or Exchange: A sale, lease or exchange of all or substantially all of a corporation’s property, other than in the ordinary court of business, requires the approval of the corporation’s shareholders by special resolution.[20] Voluntary Liquidation and Dissolution: A director or voting shareholder may propose for the corporation’s voluntary liquidation or dissolution.[21] The proposal must be voted on by special resolution by all the shareholders.[22] Founder Share Considerations Dividing shares among founders is a way to reflect the experience and resources each founder brings to the corporation. Factors that are often considered in the distribution of founder shares are: relative contributions, entrepreneurial experience, and capital consideration.[23] Investor Share Considerations A company might distinguish a share class in its Articles of Incorporation as a “preferred share” class. Investors are typically offered preferred shares because they typically offer greater rights than the corporation’s common shares. [24] For example, the right to a cumulative dividend or a right of redemption. A right of redemption provides the investor with the right to require the corporation to re-purchase their shares. This gives the investor an exit from the company.[25] An investor will likely consider the rights founders shares, the rights of other shareholders (specifically if there are shareholders with greater rights than they are being offered),and how much debt the corporation has before investing.[26] It is recommended not to provide early investors with too many rights as this may deter future investors or the corporation may need to offer future shareholders greater rights than previous investors. [1] Terrafund Financial Inc v 569244 BC Ltd (2000), 2000 Carswell BC2739. [2] NI 45-106, Prospectus Exemptions [3] ABCA, s 6(1)(b). [4] ABCA, s.26(5) [5] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013) at 74. [6] Glossary: Dividends, Practical Law [7] ABCA, ss. 43. 118(3)(c), Practical Law - Board Resolutions: Declaring Cash Dividends [8] Glossary: Cumulative Dividend, Practical Law [9] Glossary: Cumulative Dividend, Practical Law [10] Glossary: Cumulative Dividend, Practical Law [11] ABCA, s,176 [12] ABCA, s 1(1)(ii); 176(1). [13] ABCA, s 1(1)(ii). [14] ABCA, s 173(1). [15] ABCA, s 183(5). [16] ABCA, s 190(6). [17] ABCA, s.212(3), [18] ABCA, s 1(1)(ii); 176(1). [19] ABCA, s.183 [20] ABCA, s.190(6) [21] ABCA, s.212(1) [22] ABCA, s.212(3) [23] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013) [24] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013) at 92 [25] I Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013) at 93. [26] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013). |
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