Business Venture Blog
This is where we post about business, ventures, law, and business venture law.
Anything interesting, really.
Anything interesting, really.
Amendments to Trademark Legislation
On June 17, 2019 the Trademarks Act will undergo substantial changes. The changes are an attempt to help align Canada with the rest of the developed world in regards to Intellectual Property legislation. This article will briefly summarize some of the proposed changes, and outline how it may affect Canadian businesses.
Registering a Trademark
Currently, Canadian trademark legislation requires applicants to include details outlining the trademarks “use”. Therefore, applicants need to claim or declare that they had “used” the trademark in Canada. Additionally, they would have to include a date of first use. Alternatively, if applicants had not “used” the trademark in Canada, then a Declaration of Use would need to be submitted before a registration could be filed. On June 17, 2019 details of use and registration of the trademark abroad is no longer required. Anyone will be able to file a trademark application regardless of whether they intend to use the trademark or whether the trademark was previously used.
Unfortunately, these changes have opened up Canadian trademarks to “trolls” (or “squatters”). Since the announcement that the Trademarks Act would undergo changes in 2014, trolling applications are on the rise. In 2017 there were 427 “all-class” applications on the Canadian database. Compared to the 4 filed in 2016, this represents a significant increase in the number of filings. This increase appears to be due to trademark trolls. This increase in trademark trolling creates problems for brand owners. To avoid becoming a victim of these trolls, many intellectual property law firms are advising clients to file their applications in Canada promptly, especially in cases where a trademark has a reputation abroad but not in Canada.
The amendments will require all goods and services listed in a trademark application to be classified in accordance with the Nice Classification system. This differs from the current system which allows the registrants the option to indicate the classes of goods and services into which the trademark will be associated with.
Trademark term length and eligibility
Trademark term length will be shortened from 15 years to 10 years, requiring trademark holders to apply for renewals more frequently. Renewals will cost $400 CAD for the first class of goods and services, with an extra $125 CAD for every additional class the holder wants to renew in. Therefore, if you are a current owner of a multi-class trademark that expires after June 17, 2019 it may be wise to renew while there are no fees attached to each class.
Under the new amendments what may be considered an eligible trademark for registration purposes will be broadened. Colours, holograms, animated images, sounds, scents, tastes, and textures will soon be eligible for trademark protection. These non-traditional trademark classes will be vetted for their distinctiveness at the time of use. Distinctiveness will be determined based on the unique characteristics the trademark holds, not based on consumer recognition and goodwill.
This post highlights just some of the changes to the Trademarks Act. If your business is looking to file a trademark in the near future, it will be beneficial to familiarize yourself with the proposed changes. If you have any questions related to trademarking in Canada feel free to contact the BLG Venture Clinic.
Tyler Anthony is a member of the BLG Business Venture Clinic, and is a 2rd year student at the Faculty of Law, University of Calgary.
 Christopher Heer, Toba Cooper and Daryna Kutsyna, “Amendments to the Trademarks Act will Come into Force of July 17, 2019 – Are you and Your Business Ready?” (26 January 2019), Heer Law Resources (blog), online: <https://www.heerlaw.com/upcoming-changes-trademarks-act/>.
 Anna Loparco, “Upcoming changes to Canada’s trademark and anti-counterfeit laws” (19 July 2018) Dentons Insights (blog), online: <https://www.dentons.com/en/insights/alerts/2018/june/11/major-changes-to-canadas-trademark-laws/>.
 Philip Lapin, “ The date is set: June 17, 2019 – Canada’s New Trademark Law will be in Force” (14 November 2018) Smart & Biggar Fetherstonhaugh Articles (blog), online <http://www.smart-biggar.ca/en/articles_detail.cfm?news_id=1491/>[Lapin].
 Kohji Suzuki and Jamie-Lynn Kraft, “ The Trolls have arrived: Suspicious trademark applications on the rise” (12 March 2018), Smart & Biggar Fetherstonhaugh Articles (blog), online <http://www.smart-biggar.ca/en/articles_detail.cfm?news_id=1368/>.
 Lapin, supra note 3.
 Heer, supra note 1.
 Lapin, supra note 3.
 Heer, supra note 1.
How CASL Affects your Ability to Market your Start-up
Canada’s Anti-Spam Legislation (“CASL”) came into effect in 2014. CASL governs businesses or individuals (“the Sender”) that send promotional materials, through electronic channels, to a Canadian recipient (“the Recipient”). It is important to understand this legislation if you or your company is using emails, texts, or other electronic means for promotional purposes.
It is vital to understand the terminology used in CASL. CASL applies to any commercial electronic message (“CEM”) that is sent to an electronic address. Here are some terms you should be familiar with:
There are three elements the Sender needs to meet to send a CEM:
Consent is often an issue for a new start-up that lacks an extensive network of potential customers. It is important to note that consent can be implied or expressly given. There are three situations for which consent can be implied:
Overall, relying on any type of implied consent is difficult. The onus of proving that there is implied consent lies with the Sender. The few cases that have discussed these sections of CASL have shown that the courts construe implied consent narrowly.  It is best for any start-up to get express consent to send any type of marketing message. Contravening CASL by not getting consent can result in very high administrative monetary penalties.
Rick Josan is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary
 Parliament of Canada, “House Government Bill: 40th Parliament, 3rd Session” (20 February 2019), online: Parliament of Canada LEGISinfo <https://www.parl.ca/LegisInfo/BillDetails.aspx?Language=e&Mode=1&billId=4543582&View=6> [https://perma.cc/SW4M-PXTJ].
 An Act to promote the efficiency and adaptability of the Canadian economy by regulating certain activities that discourage reliance on electronic means of carrying out commercial activities, and to amend the Canadian Radio-television and Telecommunications Commission Act, the Competition Act, the Personal Information Protection and Electronic Documents Act and the Telecommunications Act, RSC 2010, c 23 [CASL] at s1(2).
 Ibid at s 1(3)
 Ibid at s 1(1).
 Government of Canada, “Frequently Asked Questions about Canada’s Anti-Spam Legislation” (last modified1 February 2019), online: Canadian Radio-television and Telecommunications Commission <https://crtc.gc.ca/eng/com500/faq500.htm> [https://perma.cc/7FBV-C25E] [FAQ].
 Government of Canada, “Canada's Anti-Spam Legislation (Infographics)” (last modified 16 August 2018), online: Canadian Radio-television and Telecommunications Commission <https://crtc.gc.ca/eng/internet/infograph.htm> [https://perma.cc/XHX6-NPPA].
 CASL, supra note 2 at s 11.
 FAQ, supra note 5.
 CASL, supra note 2 at s 6(1)(a).
 CASL, supra note 2 at s 10(9).
 FAQ, supra note 5.
 Blackstone Learning Corp, Re  CarswellNat 12052,  CarswellNat 12053.
 PIPEDA Report of Findings No 2016-003, Re  CarswellNat 2533,  CarswellNat 2534.
 FAQ, supra note 5.
Quick Guide to Bankruptcy Law
Entrepreneurs seeking to expand their businesses must consider the law that applies when things turn sour. While unpleasant, organizing capital and planning for contingencies is a necessary step to prevent higher costs that may arise in the future. As for a potential bankruptcy, the following is information regarding its procedures.
When consulting a lawyer in connection to planning for bankruptcy, according to professional ethics, he or she cannot provide advice on diverting assets in any way that might delay, defeat or hinder creditors. Doing otherwise may place him or her in risk of liability, professional disbarment or imprisonment. As a result, the retainer may not mention any form of guaranteed result. In addition, an accounting of assets would be required to determine whether there are sufficient funds to pay the creditors upon transfer. If a transfer renders a client insolvent, the courts may reverse it. This includes giving a trustee the power to reel-in any transfer that a client makes to gain a fraudulent exemption or place property outside the jurisdiction.
An accounting of assets could go as far back as five years. This includes any accounting of corporations that the client controls, manages or acts as an agent for.
How does this relate to business law?
A client would be required to consider the rules of bankruptcy in the case of corporations, partnerships, or other business entities. In all cases, it is important to know whether the client is insolvent or in financial difficulties, or would be thus immediately subsequent to any transfer or reorganization.
In the case of corporations, a shareholder would generally not be liable for all debts of the corporation; this is because liability is limited to the equity investment. However, the courts may render director shareholders liable to creditors by employing the oppression remedy in the Business Corporations Act. To reduce this risk, a corporation should split divisions into several subsidiaries and avoid any cross-collateralization or guarantees that would create interdependency. This way, liability to creditors would be narrowed to each corporate entity rather than the group as a whole. Furthermore, when there are multiple shareholders, the shareholder agreement should contain appropriate clauses for each remedy concerning shareholder bankruptcies, matrimonial issues or estate freezes.
The same applies to franchises. If the client keeps the franchise separate and independent, there would be little risk of issues regarding creditor liability bleeding into the other business units.
Finally, partnerships have a bit of a different application. Each entity is composed of separate units — the partners — that invest capital into the business. Liability extends to the partners jointly and severally, which means that a creditor may collect from one partner who may sue the others for the difference. However, limited partners or those within professional LLPs have liability restricted to their initial capital investment or each of their own negligence, respectively.
Nick Konstantinov is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.
General Data Protection Regulation – The Global Standard
What is it?
The General Data Protection Regulation (“GDPR”) is a regulation that came into force on May 25, 2018 on consumer data protection and privacy for all individuals within the European Union (“EU”). However, though the Regulation was introduced by the EU, it can apply to any individual or corporation who processes “personal data” regardless of their location.
The GDPR Regulation should be taken seriously as it is designed to help consumers gain a greater level of control over their data, while offering more transparency throughout the process.
Factors to think about to be GDPR Compliant
The GDPR Regulation is a lengthy and complex document that took over 4 years of negotiation to establish. Therefore, using a general perspective, the basic factors that an individual or corporation should be thinking about to be GDPR compliant are listed below:
Consequences for Non-Compliance
There are two tiers of fines that can be used as penalties for non-compliance:
The GDPR is an important piece of regulation that affects global corporations and individuals. When you intend to obtain “personal data” keep in mind the factors above and ensure that your corporation is GDPR compliant to limit any further consequences.
Vikas Chadha is a member of the BLG Business Venture Clinic, and is a 2nd year student at the Faculty of Law, University of Calgary
Start-Ups and E-Commerce
While online shopping has become prevalent due to its ease and convenience, many are still unaware of how they are impacted by laws governing e-Commerce. These laws have implications on both the online buyer and the online seller and are of particular importance to a start-up company that engages in e-commerce and operates largely online.
When a purchase is made online, the seller and the buyer are entering into a contract. In order to enter into the agreement, the seller must provide the buyer with certain information regarding the business to allow the buyer to make a fully informed decision when purchasing a product or service. The necessary information is as follows:
Finalizing the Internet Sales Contract
Before finalizing any agreement, the sellers’ website must be designed to allow the buyer to correct any errors that may arise in the course of making their purchase. An example of such an error is the buyer choosing to purchase two units of a product when it was their intention to purchase one. Before completing the transaction, the buyer should be provided with a summary of the transaction allowing them to recognize their error and make the necessary corrections before completing their order. If a buyer was not provided with the opportunity to review their order for errors prior to the transaction being finalized, this may provide them with cause for the cancellation of the order upon receipt, so long as this is done within a reasonable amount of time.
Once the internet sales contract has been finalized and entered into by the buyer, the seller must provide a receipt of the transaction. It is acceptable for this receipt to be provided by e-mail to an e-mail address provided by the buyer. The receipt should contain the buyers name, the date the order was placed and should be provided within 15 days of when the order was placed.
Right of Cancellation
In addition to the right to cancel where an opportunity to review the order prior to completion was not provided, there are other situations where a buyer may cancel an internet sales contract. A buyer may cancel an internet sales contract any time prior to the commencement of the services or delivery of the goods if:
If the buyer wishes to cancel for any legitimate cause, they must do so by providing notice to the seller. If the buyer fails to communicate cancellation to the seller despite having legitimate cause such as the examples discussed above, the contract will not be cancelled. Methods by which a buyer may cancel an agreement with a seller include mail, e-mail, phone or fax. Keep in mind that the buyer must be able to prove what day they requested the cancellation. The date will be relevant in determining whether the cancellation was justified.
Richie Aujla is a member of the BLG Business Venture Clinic, and is a 2nd year student at the Faculty of Law, University of Calgary
 Alta Reg 81/2001, s 4(1).
 Ibid, s 4(2).
 Ibid, s 5.
 Ibid, s 6(2).
 Ibid, s 6(3).
 Ibid, s 8(1).
 Ibid, s 8(3).
Blockchain: Decentralized Ledgers & Smart Contracts
A blockchain is a ledger, similar to a Microsoft Excel spreadsheet. A blockchain is maintained in a decentralized manner. Blockchain ledgers keep track of “transactions”. Transactions occur without external third parties, no escrow needed. These transactions are grouped together in a data structure called a block, where the term block refers to a group of transactions that have been processed at the same time. The transactions are related temporally and are recorded serially. Each block includes a hash (a cryptographicaly generated code) that refers to the last block so any attempt to change a prior block has a cascading effect on each subsequent block. This relationship between blocks gives rise to the term blockchain. Every user on a blockchain sees and maintains the same copy of the ledger through a concept called “reaching consensus”. A reliable consensus procedure is required to ensure the accuracy of the ledger and maintain the security of the system. A blockchain can be public, where anyone can participate, or the blockchain can be permissioned, where only authorized participants can access and add transactions to the ledger.
A blockchain is a peer-to-peer system with no central authority managing the data flow. To maintain data integrity a large distributed network of independent users is encouraged. The computers making up the network are in more than one location. The term “node” typically refers to a computer in the network.
Blockchains are built to create trust between unknown parties. Blockchains are meant to be honest systems that self correct without the need of a third party to enforce the rules. A consensus algorithm enforces the rules. Consensus develops agreement among a group of commonly mistrusting shareholders. Each blockchain relies on its own algorithm for creating agreement within its network.
The main focus areas for decentralized ledger technology are:
Hashgraph as an example of a decentralized ledger
Hashgraph is a virtual-voting decentralized ledger technology. Everyone is a node on the network and each can submit data in parallel at the same time on the graph.
Hashgraph is not blockchain but boasts that it can provide a comparable or possibly better security level while simultaneously performing transactions faster. Hashgraph patented its algorithm to ensure stability. Hashgraph has a governance system where 39 international, independent blue chip organizations control two thirds of the network’s cryptocurrency. The governance system is based on Dee Hock’s formative book, One From Many: VISA and the Rise of Chaordic Organization, that chronicles the creation of the VISA network among other things where banks associated to benefit all customers.
Smart contracts are contracts formed with blockchain technology. They are not subject to linguistic interpretations and are marketed as a way to prevent ambiguity, ensuring both parties understand exactly what has been agreed to. A smart contract uses computer code to determine the relations and obligations between parties. The resulting interpretation is designed to be more predictable. Smart contracts can remove third-party or escrow agents since performance can automatically be determined by monitoring compliance with a set of conditions. The contract is administered as the conditions are met. This may lead to an “inexorability” problem if a vulnerability within the code is exploited.
Szabo predicted that smart contracts would overcome legal barriers that prevent local businesses from entering global markets.
“Smart contract” has evolved to encompass more than one meaning. When referring to blockchain application development, smart contract does not refer to a legal contract but rather a snippet of programming code that gets executed on the blockchain, typically in an automated fashion (although some parts may require human input and control). To simplify things, the snippet of programming could be referred to as “smart contract code” and the entire legal contract expressed and implemented in software could be referred to as a “smart legal contract”.
Ricardian contracts as an example of smart contracts
A Ricardian contract records the “intentions” and “actions” of a particular contract, no matter if it has been executed or not. The same Ricardian contract has to be both readable by people and parsable by computer programs. Each Ricardian contract has its own unique hash that refers uniquely to that document (a cryptographic message digest). That hash ensures the Ricardian contract is immutable (not susceptible to change). While it is possible to implement a Ricardian contract as a smart contract, not every Ricardian contract is a smart contract. The creator, Ian Grigg (a specialist in financial cryptography working at Systemics Inc), defines a Ricardian Contract as a single document that is:
While a Ricardian contract is a design pattern that captures the intent of the agreement of the parties before performance, it can implement the concept of the smart contract by using a hash as a reference that links to external documents of code.
Ricardian contracts have not been presented in Canadian court, however, contract law will apply if the agreement has the basic components of a contract, regardless of the form. To prove a meeting of the minds all the essential terms of contract must exist: 1. an offer, 2. an acceptance, 3. certainty of the agreed terms, 4. consideration, and 5. the intention to create legal relations.
Shannon Peddlesden is a member of the BLG Business Venture Clinic and a 2nd year student at the Faculty of Law, University of Calgary.
Shawn S Amuial, Josias N Dewey, Jeffrey R Seul, The Blockchain: A Guide for Legal and Business Professionals, (Danvers, MA: Thomson Reuters®, 2016).
Digital Economy Update, “Smart contracts – can code ever be law?” (1 March 2018), online: < www.ashurst.com/en/news-and-insights/legal-updates/smart-contracts---can-code-ever-be-law/>.
Hackernoon, “Merkle Trees” (15 December 2017), online: < https://hackernoon.com/merkle-trees-181cb4bc30b4>. Hashing refers to transforming data of any size into short, fixed-length values, this incorporates a technology called Merkle trees. Merkle trees allow for efficient and secure verification of large amounts of data.
EliNext, “Smart vs. Ricardian contracts: what’s the difference?” (28 February 2018), online: <https://www.elinext.com/industries/financial/trends/smart-vs-ricardian-contracts/>.
Choosing a Business Name
One of the most important steps when starting a new business is choosing the right name. There are, of course, a number of common concerns about the quality of a business name. It must appeal to your target market. It ought to suit your business and industry and work well in marketing. It should be catchy and memorable, helping your business stand out from the competition. It should be able to be used online easily and not already have an existing social media presence. However, there are also a number of legal concerns when it comes to choosing and potentially registering a business name.
The first question you should ask yourself is whether or not your business is a corporation. If you are not incorporated then your business name will not constitute its own separate legal entity but will simply be the name you conduct business under, or a “trade name”. You will also not be allowed to use the words incorporated, limited or corporation (or their abbreviations) in your trade name. In Alberta when you run a business as the sole owner under a name other than your personal name you must register this trade name. You may also register your trade name in a partnership, limited partnership, limited liability partnership, or sole proprietorship that uses only the owner’s legal name with no additions - but you aren’t required to do so under the Partnership Act. You are also not required to provide a NUANS (Newly Upgraded Automated Name Search) business name report when registering a business name, but it is generally recommended. While a business name does not have to be unique, you can still be taken to court by an existing business with a similar trade name.
If you are incorporated there are additional requirements as you will often carry out business under the name of your corporation. An Alberta corporation name must consist of 3 elements: distinctive, descriptive, and legal. For example, ‘XYZ Consulting Ltd.’. A distinctive element must be the unique word(s) of the business name. The made up title or potentially even the location of the business, in this example ‘XYZ’ is the distinctive element. The descriptive element describes what a business is or does, in this case ‘consulting’. Finally, a corporation name must have a legal element at the end of their name to indicate to the world their status as a corporation and put clients on notice that it is a limited liability business. These legal elements are listed in the Business Corporations Act as Limited, Incorporated, Corporation, Ltd., Inc., or Corp.. In this example the legal element is ‘Ltd.’. Corporate names must also be unique. So if you don’t wish to use the assigned ‘number name’ from the Corporate Registry you must get an Alberta NUANS report on your proposed name. This is required for federal incorporation as well. You may also choose to register a business name for your corporation, as a corporation may carry on business under a name other than its corporate name. However, this business name cannot use the legal elements listed above, must still be unique and must still comply with the trade name rules under the Partnership Act.
Overall, naming your business remains a crucial decision in any start-up but keeping in mind these simple requirements can help the decision a bit simpler.
Kiara Brown is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.
 Business Corporations Act, RSA 2000, c B-9, s. 10(3).
 Partnership Act, RSA 2000, c P-3, s. 110(1).
 Alberta Government, Incorporate an Alberta corporation, https://www.alberta.ca/incorporate-alberta-corporation.aspx
 Supra note 1 at s. 10(1)
 Ibid at s. 12(1)
 NUANS Corporate name search, https://www.nuans.com/eic/site/075.nsf/eng/home
 Government of Canada, Steps to incorporating, https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06642.html#toc-02
 Supra note 1 at s. 10(9)
Tailored for Success – Shareholders’ Agreement
What is a Shareholder’ Agreement?
A shareholder’ agreement is a legal agreement between the shareholders of a corporation or between a corporation and its shareholders. It regulates the behaviour of shareholders and outlines certain rights and obligations.1 A shareholder’s agreement is “principally concerned with allocating management control and setting out the terms on which shareholders may sell their interests in the business.”2 Unlike the articles of incorporation and bylaws of a company, a shareholder agreement is optional.3
Why might I want one?
Shareholder agreements are a way to formally set out the expectations of shareholders. They can be used to protect the rights of minority shareholders or restrain their power in certain situations. A shareholder agreement can be used to address potential conflicts between shareholders and require the use of an arbitrator to resolve issues that arise. They can be used to restrict the transfer of shares to control ownership of a company. They can also mandate a valuation mechanism to determining share price for transfers under the agreement. Far from an exhaustive list, this is a small sample of why shareholders might want to implement a shareholder agreement.
The use of a standard form agreement is not advisable. There are different types of shareholder agreements and their contents can range broadly. Below is an overview of the different types and a sample of common provisions. It should be apparent that the agreement needs to be tailored to the needs of the individuals and the corporation in involved.
There are Different Types?
Unanimous Shareholder Agreement
A Unanimous Shareholder Agreement (USA) must be in writing and include all shareholders of a corporation (or of a certain class of shares).4 This is commonly found in owner managed corporations. The purpose is to transfer some or all the powers of the directors to the shareholders. USAs exists under the Canadian Business Corporations Act5 and similar provincial legislation. They can offer certainty to existing shareholders; because if the corporation’s share certificate references the agreement, all future shareholders automatically become a party to the agreement.6 Unlike other shareholder agreements, USA’s are treated similarly to other incorporation documents such as articles of incorporation and bylaws.7 As such, USAs can amend or supersede these documents.
Shareholder agreements that are not unanimous shareholder agreements (USA) are largely explained above, under the heading “What is a Shareholder’ Agreement?”. They are treated as an ordinary contract as opposed to constating documents of a corporation. Unlike USAs, depending on the contents of the document, they do not require unanimous agreement to be amended. New shareholders do not automatically become subject to the agreement by purchasing shares of the company. A provision can be included that requires selling shareholders to ensure purchasers sign the shareholder agreement. This provision does not offer the same certainty as a USA, because if the shares are sold to a good faith purchase who is unaware of the provision, the purchaser will not be bound by the agreement. Unlike USAs the provisions of a shareholders’ agreement cannot amend or supersede other incorporation documents such as articles of incorporation and bylaws.
Example of Common Provisions
The following is a non-exhaustive list of common provisions found in shareholder agreements. The descriptions are superficial, and the intention is to show the array of combinations that can be found in a shareholders’ agreement.
Pre-emptive rights provide current shareholders with the right to participate in future financings.8 The shareholders’ participation can often be direct or indirect.9 The purpose of pre-emptive rights is to prevent the dilution of existing shareholder equity.
Right of First Refusal
“Rights of first refusal require any shareholders intending to sell their shares to first offer them to their fellow shareholders or to the corporation.”10 There are two variations of this provision. One is “hard”, meaning the selling shareholder must acquire an offer from a third party, then provide that offer to the existing shareholders for their consideration. The other is “soft”, meaning the selling shareholder must first offer the shares to the other shareholders, then if not purchased, can offer to third parties. The purpose of a right of first refusal is to allow shareholders to sell their shares while giving the existing shareholders the power to determine who can become owners.
Mandatory Share Sales
These provision “contemplate that in a variety of circumstances – death, divorce, bankruptcy, breach of the agreement – the affected shareholder will be obliged to sell his or her shares back to the corporation or to the other shareholders.”11 The purpose is to prevent people that are not a party to the corporation from becoming shareholders.
Shareholder Remedies and Conflict Resolution
Shareholder remedies and conflict resolution provisions “ensur[e] there is a solution to a breakdown in the relationship between the various managers of a business.”12 These provisions are typical of owner managed businesses as opposed to growth companies or publicly held companies. They help provide a mechanism for conflict resolution and help avoid litigation. An example of one of these provisions is a shotgun clause.
Non-Compete, Non-Solicit, Non-Disclosure
These provisions “contemplate that, in one capacity or another, the shareholders will take on some or all of the duties of the directors.”13 Their purpose is to ensure that shareholders do not abuse their powers in these circumstances.14
“In general, a well-drafted and considered shareholders’ agreement anticipates reasonably likely future events and provides for methods of dealing with them, which can help avoid or resolve future disputes among shareholders, and ultimately save time, money and the stresses associated with conflict resolution. However, shareholders’ agreements can also result in burdensome conditions, making it more difficult to effect decisions and run a business.”15 The key is to ensure the agreement is well drafted and appropriate for the company and its shareholders. As suggested above, there is a vast array of contents that can be drafted in a shareholders’ agreement. There is no one-size-fits-all and the needs of the parties should be appropriately reflected in the document.
Founders of a company should seek independent legal advice when considering a shareholders’ agreement. “Founders are often not sophisticated and Canadian courts have set aside agreements because they did not receive their own legal advice.”16
For more information on how the BLG Business Venture Clinic can help draft a tailored shareholders’ agreement for your company please contact us at http://www.businessventureclinic.ca/contact.html.
Neil Thomas is a member of the BLG Business Venture Clinic, and is a 2rd year student at the Faculty of Law, University of Calgary.
Prospectus Exemptions in Securities Law
One of the most significant barriers to growing a business corporation is financing. Among other methods, start-up founders may choose whether to secure a line of credit, acquire government subsidies or trade their cash for shares in a corporation. However, these options are restricted to the founders’ capacities of obtaining capital. In order to expand the pool of funds without violating the complex legal rules of expensive prospectus requirements, small business owners may consider offering shares to an exceptional group of friends, family or associates as detailed in the Canadian securities National Instrument 45-106.
Under Canadian securities law, a corporation must file a prospectus, which is a comprehensive legal document that discloses the material facts of an investment offering, prior to distributing its securities to the public. The public requires a prospectus in order to make an informed decision about purchasing respective shares. Such a requirement can be an expensive task, involving many professionals including investment bank underwriters, accountants, financial advisors and legal teams, which creates prohibitive obstacles for budding firms. Recognizing this limitation and driven to encourage small firm growth, the government passed the National Instrument 45-106.
The National Instrument 45-106 is a set of rules that governs all securities’ jurisdictions in Canada — except for Ontario, which permits exemptions under its own legislation not discussed here. Using the exemptions detailed in the instrument, a small firm may seek capital through distributing shares, without filing a prospectus, in certain transactions or to a limited group of investors. These investors include close family members, close business associates, or accredited investors, rich and sophisticated individuals for whom a significant amount of protections provided through securities legislation would be unnecessary. Below are a few examples of the exemptions available using this instrument.
According to section 2.3 of the National Instrument, the prospectus requirement does not apply if an issuer distributes securities to an accredited investor. An accredited investor includes financial institutions, banks, advisors, dealers, trusts, government organizations, or individuals who, alone or with their spouses, own assets exceeding $1,000,000 or $5,000,000 (the latter do not have to sign risk acknowledgement forms), or have net incomes of at least $200,000 in the past two years (or $300,000 with a spouse). A corporation may also fit into this category provided the fulfillment of certain conditions, such as having net assets of at least $5,000,000; however, the exemption does not apply if a corporation was created solely to hold securities as an “accredited investor”.
Family, Friends and Business Associates
Under section 2.5, a corporation may distribute securities to founders, employees, directors, officers, control persons or affiliates, their close family members, their close personal friends or business associates, or respective trusts or estates. The court has determined “close” by asking whether it would be acceptable to use a friend’s, family member’s, or business associate’s bathroom without asking.
The issuer may choose to distribute offering memorandums through the required form of section 2.9 in lieu of a full prospectus. A corporation may issue shares to certain qualifying investors in Alberta without a prospectus, provided that:
While using an Offering Memorandum may widen the group of potential investors, this exemption carries the same level of disclosure and liability as issuing through a prospectus.
The private issuer exemption applies to companies that have restrictions from trading securities in the open market without the director’s approval, that don’t have more than 50 shareholders, and that don’t report to any Securities Commission. Under these circumstances, a company may distribute securities to those connected to the firm, such as directors, officers, employees or control persons, their close family members, their close friends or business associates, or accredited investors. Furthermore, unlike the exemptions above, private issuers are not required to publicly report each distribution.
In conclusion, the National Instrument 45-106 provides opportunities for small companies to raise funds through share distribution under certain circumstances without the expensive prospectus requirement. If your organization is looking to make use of the opportunity or has questions regarding details of securities law, please do not hesitate to contact a caseworker at the BLG Business Venture Clinic.
Nick Konstantinov is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.
Business and Product Liability
Many businesses operate by producing and selling various products. However, as the manufacturer of a product a business may open itself up to certain legal claims if a customer is injured by their product. What follows are some considerations for product manufacturers regarding product liability.
What is your Liability for Injuries Resulting from a Product?
Start-ups may encounter claims from customers who were injured by faulty or defective products. The burden lies with the customer to prove that but for the product being faulty or defective in some way, they would not have been injured. If this is successfully established by the customer the manufacturer of the product will be held liable for the injury of the customer. While this situation may be avoided through heightened quality control measures and adequate product testing, there are circumstances when an injured customer may bring forward a claim even if the product was functioning properly.
Duty to Warn
The manufacturer of a product must provide sufficient warnings regarding the risks of using their products. If there were not sufficient warnings provided, a customer may still sue a manufacturer even if the product was functioning properly and the injury resulted from the normal use of the product. The extent of the warning required hinges on two factors:
How Can a Manufacturer Defend Themselves from an Injury Claim?
The Injury was not a Result of the Product
In the event that a customer has chosen to bring a claim due to being injured by a manufacturers’ product, there are certain defenses available to the manufacturer. For one, the manufacturer may contend that a separate and distinct event was the cause of the injury. For example, if an individual is injured in a car accident because their breaks failed, this would indicate that the manufacturer may be liable for the injury. However, if it is determined that the breaks failed because of an error made by the customer’s mechanic then this may absolve the car manufacturer of liability. This is because the injury was a result of the negligent mechanic, and not any fault on the part of the manufacturer in manufacturing the vehicle.
The Customer Assumed the Risk of Injury
A manufacturer may also defend themselves by suggesting that the injured customer was aware of issues with the product. This is because the customer was aware that the product was altered or defective in some way, and still chose to operate it despite the heightened risk of injury. An example of this would be a customer choosing to use a knife even after knowing that the blade was faulty. If the blade were to snap and injure the customer the manufacturer may raise the defense that the customer assumed the risk when they chose to use the faulty or defective product.
The Customer Used the Product Negligently
Another possible defense that a manufacturer may raise is that the customer was injured because they used the product negligently in a manner that it was not meant to be used. For example, if an individual chooses to stand on a laundry hamper in order to change a light bulb and is injured because the hamper topples over, the manufacturer may argue that the injury was a result of the customers’ negligence. This is based on the customer using the hamper in a manner that that it was not meant to be used, and the argument that but for the misuse, the customer would not have been injured.
The bringing forward of a claim by an injured customer is subject to a statutory limit. This means that a claim by an injured customer can only be brought forward within a specific period of time once the injury has occurred. This period varies from province to province, but in Alberta it is generally within 2 years of the time the injury occurred. Additional information regarding limitation periods can be found in the Alberta Limitations Act.
Richie Aujla is a member of the BLG Business Venture Clinic, and is a 2nd year student at the Faculty of Law, University of Calgary