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Written by Charlotte Kelso
JD Candidate 2024 | UCalgary Law In early 1999, Sean Parker and Shawn Fanning were busy starting one of the world's pioneering online music platforms which later became known as Napster. Sean and Shawn were both newly minted entrepreneurs in their early 20's so when Shawn's uncle, John Fanning, volunteered to support them as a co-founder of Napster, they accepted. John incorporated Napster and gave himself a whopping 70% of the company (despite having contributed nothing and his primary future contribution being his "credibility"). John's entrepreneurial history of dubious financial practices and unpaid loans bode poorly for Napster. As a founder, John contaminated the company with poor decision-making and drove away or vetoed potential investments all while failing to make any real contribution to the company.[1] Napster's issues with respect to John are not unique. Start ups suffer at the hands of a founder all the time. The solution? Founder-proofing. Founder-proofing is a blanket term referring to the assortment of steps founders can - and should - take to protect their business from themselves. But why would a firm need protection from the very people who brought it to life? Founders can become unnecessary, unhelpful, or even hostile to a venture. Unfortunately there is no crystal ball through which to foresee such issues and therein lies the value of founder-proofing. A key characteristic of a founder-proof company is that founders are not permanent fixtures of the company. Potential investments - the lifeblood of a start up - can hinge on changes to the company's management team which sometimes makes funding contingent on ousting a founder. Founders who are not contributing or who are actively unhelpful or hostile to the company should not benefit from entrenchment. There is a variety of corporate documents that could theoretically serve to entrench a founder, including the by-laws, shareholders' agreements, and founders' agreements. These documents should be drafted carefully with legal oversight to confirm founder-proofing is in place. Some red flags that may indicate a company's documents have entrenched the founders include founder employment agreements with high severance requirements and shareholders' agreements that give the founders veto power over basic decisions of the corporation, including hiring and firing of senior directors. Conversely, a lack of appropriate documentation could also have the inadvertent effect of entrenching a founder depending on the circumstances. Another cornerstone of founder-proofing is to moderate the power given to a founder. An over-saturation of power in the hands of the founders can result in the founder's interests and ideas being prioritized over those of the company and its stakeholders. One strategy to better distribute power in a company is to establish a well-balanced board of directors who meets regularly. Ideally, the balance of power on the board will be held by independent directors with representation from the founders and the most significant outside directors.[2] A red flag that may indicate a power imbalance is a class of superior voting shares distributed only to the founders. As a founder, it may be uncomfortable to implement measures to protect the firm from yourself. However, a company's ultimate purpose is arguably to return dividends to its shareholders, not to protect the interests of its founders. For the sake of the company, implementing founder-proofing is a valuable step in setting up corporate governance. [1] Menn, Joseph. All the Rave: The Rise and Fall of Shawn Fanning’s Napster. New York, Crown Business, 2003. [2] Tingle, B. C. Start-Up and growth companies in Canada - a guide to legal and business practice (3rd ed.). LexisNexis Canada Inc.
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Written by Sarah Dallyn
JD Candidate 2024 | UCalgary Law Starting a business is an exciting venture, however, entrepreneurs face many challenges in getting their enterprise off the ground. One of the biggest challenges start-up companies face is securing financing in the initial stages of development. In Canada, there are various sources of financing available for early-stage start-up companies. This blog will provide an overview of the common types of financing available to entrepreneurs and will discuss the benefits and disadvantages associated with each funding source.
[1] Bryce C. Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 3rd ed (Toronto: LexisNexis Canada Inc., 2018) at 267 at 268 [2] Investopedia, Love money: https://www.investopedia.com/terms/l/lovemoney.asp [3] Supra note 1 at 269 [4] Supra note 1 [5] ATB Financial, https://atbentrepreneurcentre.com/ [6] Supra note 1 at 270 [7] Supra note 1 at 272 [8] Supra note 1 at 24 [9] Government of Canada, List of designated organizations – start up visa, online: https://www.canada.ca/en/immigration-refugees-citizenship/services/immigrate-canada/start-visa/designated-organizations.html#angel [10] Canadian Securities Administrators, https://www.securities-administrators.ca/investor-tools/understanding-your-investments/start-up-crowdfunding-faqs/ [11] The Business Development Bank or Canada, https://www.bdc.ca/en/financing [12] Government of Alberta, https://www.alberta.ca/small-business-resources.aspx [13] Supra note 1 at 313 [14] Supra note 1 at 333 [15] Canadian Venture Capital & Private Equity Association, https://www.cvca.ca/ Written by Phil Vanderkhoke
JD Candidate 2023 | UCalgary Law When moving provinces with a corporation, you should first ask if your corporation was incorporated federally under the Canada Business Corporations Act (“CBCA”) or provincial legislation. Although a federally incorporated company can operate anywhere in Canada, there are additional steps to take.[1] In this post, we take the example of an Ontario resident moving their federally incorporated business to Alberta. A federal corporation is authorized to carry on business in all provinces and territories in Canada. This authorization includes the right of a federal corporation to use its corporate name in each province of Canada. Yet, a federal corporation is not exempt from the extra-provincial registration laws and regulations enacted by each province and territory in Canada.[2] A Federal corporation must complete an extra-provincial registration in each province or territory where it carries on business. When you first incorporate federally, you must also register your business in any province where it carries on business. This provincial registration requirement depends on the province where the corporation is located. In our example, Ontario does not require federal corporations to register provincially. This exception is specific to Ontario. On the other hand, a corporation not incorporated in Alberta must register as an extra-provincial corporation in Alberta within 30 days of carrying on business in Alberta. In our example, the company would be carrying on business in Alberta as soon as one of the following were met:
Applying for Extra-Provincial Registration in Alberta Extra-provincial registration in Alberta requires you to submit an application package consisting of:
Once the application package is reviewed, the registrar will issue a certificate of registration allowing the corporation to carry on business in Alberta. Once registered, a corporation must file an annual return with the registrar. When moving, you must also file a change of registered office address with the federal government. Employment standards, taxes and other important regulations also differ between provinces. These considerations should be taken into account before the move. For further information regarding moving your company to a new province, please contact the BLG Business Venture Clinic. [1] Canada Business Corporations Act, RSC 1985, c C-44 at 15(2). [2] R. v. Thomas Equipment Ltd., 1979 CarswellAlta 1 (S.C.C.). [3] Business Corporations Act, RSA 2000, c B-9 at s.277(1). [4] Ibid., at 280 Written by Chiara Lasquety
JD Candidate 2023 | UCalgary Law The overarching principle in company law is that the corporation is a separate legal entity and is therefore distinct from its members.[1] However, this principle does not exist in a legal vacuum. Practically speaking, the company is a legal fiction, and the directors and officers are the agents – i.e., the ones who exercise the will of the company and control the company’s affairs.[2] This has led to numerous legislative provisions in Canadian law that allow directors to be held personally liable for a number of matters.[3] This blog post provides a non-exhaustive list of some of the potential sources of liabilities that directors may face. Potential Sources of Director Liability
Conclusion While lawsuits against directors are relatively rare, this blog post is illustrative of the various sources of director liability should such liability arise in exceptional circumstances. For further information regarding any of the foregoing, or how to protect directors generally, please contact the BLG Business Venture Clinic. [1] Stephanie Ben-Ishai & Thomas G.W. Telfer, Bankruptcy and Insolvency Law in Canada: Cases, Materials, and Problems, (Toronto: Irvin Law, 2019) at 343. [2] Ibid. [3] Ibid. [4] Environmental Protection and Enhancement Act, RSA 2000, c E-12, s 227. Written by Derek Hetherington
UCalgary Law | JD Candidate 2023 Non-profit institutions are a significant component of the Canadian economy. In 2020, community non-profit institutions generated $29.9 billion in economic activity, and business non-profit institutions added $16.4 billion.[i] Given the scale and continued growth of non-profit activity in Canada, non-profit law is an important, if often overlooked aspect of the Canadian legal landscape. There are a variety of benefits to operating as a non-profit rather than a business corporation. Non-profits can apply for charitable organization status, allowing them to solicit donations and issue tax receipts. They may also be eligible for government and private funding that is unavailable to profit-seeking enterprises. While there may be advantages, a prospective non-profit venture founder may rightly ask whether they will be allowed to pay themselves for their work. Indeed, we cannot survive on goodwill, and even those of us with the noblest and most selfless intentions have bills to pay. The answer to this question is simple: it depends.[ii] The issue of director compensation is treated differently from province to province. Some allow fair and reasonable compensation for services rendered, while others impose more onerous limitations. One should consult the governing statute in their province to ensure any compensation drawn from the organization is allowable. The requirements for charitable organizations in Ontario, to use one example, are set out in the Charities Accounting Act[iii] as amended by Regulation 4/01. In that province, directors may not receive a salary or fees simply for occupying the position of director,[iv] but they can be compensated for goods, services, and facilities provided to the charity. Other requirements include:
These requirements also apply to persons connected to a director, which includes, but is not limited to, a director's family, any employers of the director's family, and corporations of which the director owns or controls more than 5% of the shares or more than 20% of the voting membership interests. To ensure that the process is fair, a director cannot be present at any discussion, or vote on any matter, related to his or her own compensation, or the compensation of any connected persons.[ix] Moreover, the total number of directors receiving payment under the amended regulations cannot exceed 20% of the number of voting directors,[x] meaning that if one director is being compensated, there must be at least four other unrelated and uncompensated voting directors.[xi] In practical terms, this means that to compensate a second director, the organization must expand its board to 10 members. One workaround to these requirements may be to rotate the director that is compensated. For example, if the board decides that it is in the best interest of the organization to compensate both Director A and Director B, they would first pass a resolution to compensate Director A for a certain term between board meetings. At the next meeting, the board would pass another resolution to end Director A’s compensation and hold a new vote to compensate Director B. Director A would not participate in the discussion or vote related to Director A’s compensation, nor would Director B participate in the discussion or vote related to Director B’s compensation. Assuming the board meets every 3 months, such an arrangement would allow an Ontario non-profit or charity to compensate up to four directors in any given year. Should a charity or non-profit wish to provide compensation outside of the rules provided in Regulation 01/04, this may be possible by obtaining a court order under section 13 of the Charities Accounting Act.[xii] Non-profits that are also charitable organizations are subject to additional Canada Revenue Agency requirements. Directors of these organizations should also consider that their charitable status may be revoked if director compensation, whether direct or indirect, appears excessive. Thus any renumeration should be commensurate with the time and resources a director contributes to the organization. In conclusion, directors of non-profits may receive compensation, but there are certain rules that must be followed that vary by province. Whether a non-profit is also a charitable organization will raise additional considerations. In general, where compensation is possible, it must be reasonable and directly linked to actual goods or services rendered to the organization. [i] Statistic Canada, “An overview of the Non-Profit Sector in Canada, 2010 to 2020” (last accessed 19 November 2022), online: <https://www150.statcan.gc.ca/n1/pub/13-605-x/2022001/article/00002-eng.htm>. [ii] Three years of law school has taught me that “it depends” is the answer to almost all legal questions. [iii] Charities Accounting Act, R.S.O. 1990, c. C.10 (last accessed 20 March 2023) online: Government of Ontario <https://www.ontario.ca/laws/statute/90c10>. [iv] O. Reg. 4/01: Approved Acts of Executors and Trustees s. 2(4)1 (last accessed 20 March 2023) online: Government of Ontario <https://www.ontario.ca/laws/regulation/010004>. [v] Supra note 3 at s. 2(5)a. [vi] Ibid at s. 2(5)b. [vii] Ibid at s. 2(5)c. [viii] Ibid at s. 2(6)a. [ix] Ibid at s. 2(8). [x] Ibid at s. 2(9). [xi] Ibid at s. 2(7). [xii] Supra note 4 at s. 13. Authored by Mercer Timmis
JD Candidate 2023 | UCalgary Law WHEN IS IT TIME TO INCORPORATE IN THE U.S.A Incorporating in the U.S.A. can be a strategic move for Canadian start-ups, as it can provide access to a larger market, more significant funding opportunities, and a more business-friendly environment. However, it is important to note that generally, incorporating in the United States is a bad idea unless you are conducting significant business in the U.S.[1] Additionally, there is serious litigation for risk for the following reasons: (i) the U.S. does not have loser pay rules (i.e., the other party pays expenses); (ii) it is easier to organize class action lawsuits; (iii) U.S. courts permit juries for civil trials; and (iv) the U.S. has 5x more lawsuits in comparison to Canada.[2] CONSIDERATIONS FOR INCORPORATING IN THE U.S.A Nonetheless, if you plan to incorporate in the U.S., there are a few key considerations. First, companies should choose their jurisdiction wisely. Typically, you will want to create a U.S. subsidiary in a favourable jurisdiction. For instance, many companies select Delaware due to its long history of promoting business-friendly policies and its establishment of a legal framework that makes it relatively easy for companies to incorporate.[3] Second, Canadian start-ups should also consider the regulatory environment in the U.S.A., including tax laws, employment laws, and intellectual property laws. When establishing a U.S. corporation, it is crucial to examine the operations of both the Canadian and U.S. companies to create a structure that reduces Canadian and U.S. tax liabilities, aligns cash flow with the business plan, and facilitates tax-efficient repatriation of profits back to Canada. It is also important to devise an effective transfer pricing strategy. However, it is important to note that this is costly for businesses because it requires the assistance of tax lawyers and accountants. Third, incorporating in the U.S.A. can open up new funding opportunities, including access to venture capitalists, angel investors, and government grants.[4] As such, it may benefit you to incorporate in the U.S. if you expect your future investors to be American. Further, a company may want to consider if government grants are only available to companies incorporated in the United States. Fourth, many Canadian start-ups are formed as Canadian-controlled private corporation (CCPC). If a CCPC carries on business in the U.S. through a permanent establishment, any income derived from that P.E. will not qualify for the small business deduction.[5] Further, if you provide services in the U.S. (even without a P.E.), the income from those services is not normally eligible for the small business deduction. As such, this income could be taxed at a higher corporate rate in Canada. Finally, before incorporating in the U.S.A., growth companies should evaluate whether there is a significant market opportunity for their product or service in the U.S.A. This can involve researching market size, competition, and customer demographics. [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] March Kusner et al., “Should Canadian Entrepreneurs Incorporate in the United States”, (8 May 2020). [4] Voyer Law, “Revisiting ‘Should I incorporate my Canadian startup in Delaware”, Voyer Law (March 20, 2021). [5] André Perey et a., “Should Canadian entrepreneurs incorporate in the United States?”, Alberta Bar Association (22 January 2020). By 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 This blog is about protecting what might be the highest valued asset in your company – the Intellectual Property. Intellectual property rights can confer many benefits to a business. If your idea is one of the first to market, the longer you can protect it from the competition, the more of the market share you will garner. Greater Market Share = Greater Profits Taking the appropriate legal steps to protect your intellectual property adds barriers to entry for your competition. While you are further refining your product/service, expanding your brand, establishing a loyal client base, your competition is merely trying to find a way in. Having legal protections allows you to benefit from the intellectual property and preventing others from taking value from it. What is Intellectual Property? Intellectual property can take many forms. Although it's an intangible asset, intellectual property can be far more valuable than a company's physical assets. Examples include names, designs, logos, slogans, and images. What are different types of Intellectual Property protections? Common intellectual property protections include copyright, patents, trade secrets, and trademarks. The author of a work generally owns the copyright to it. The inventor of an invention generally owns the interest in it and can patent it. (a) Copyright In general, copyright covers the rights to protect and profit from any original literary, dramatic, musical and artistic work.[1] An “original” work means that it has not been copied from another work, and has been created through some exercise of the author’s skill and judgement.[2] Copyright protects ideas when expressed in works, but does not protect ideas on their own.[3] Copyright includes the sole right to produce or reproduce a work or any substantial part of it, and the right to publish an unpublished work or any substantial part of it.[4] (b) Patents Having patents for your business’s innovations can increase the value of your company, since they provide you (or your investors/partners) with the ability to control the use of your software, which can make your business more attractive as a potential investment. To be protected, an “invention” must be a “new and useful art, process, machine, manufacture or composition of matter, or any new and useful improvement in any art, process, machine, manufacture or composition of matter”.[5] The subject matter of an invention must be non-obvious to a person skilled in the art or science related to the patent.[6] (c) Trade Secrets Trade secrets are valuable information of a business where the value comes from the information’s secret nature.[7] These include methods, processes, or research and analysis data.[8] Unlike patents, copyrights, and trademarks, trade secrets do not have formal statutory protection.[9] Trade secret protection requires that a business keep the information secret and take measures to protect its secrecy.[10] (d) Trademarks Trademarks are signs that distinguish a company’s goods and services.[11] Holders of registered trademarks have exclusive rights to use the mark, and prevent others from making, selling, or advertising any goods or services under the trademark or a confusing trademark or name.[12] If you have an idea that you are considering protecting, please contact the Business Venture Clinic for additional information. [1] Copyright Act RSC 1985, c C-42, s 5(1)(a). [2] CCH Canadian Ltd v Law Society of Upper Canada, 2004 SCC 13 at para 25. [3] Ibid at para 8. [4] Copyright Act RSC 1985, c C-42, s 3. [5] Patent Act RSC 1985, c P-4, s 2. [6] Patent Act RSC 1985, c P-4, s 28.3. [7] CIPO, “What is a trade secret?” (last modified 01 December 2015), online: Government of Canada <https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr03987.html>. [8] CIPO, “Trade Secrets” (last modified 10 July 2020), online: Government of Canada <https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr04318.html>. [9] Ibid. [10] Ibid. [11] CIPO, “Trademarks guide” (last modified 14 June 2019), online: Government of Canada, <https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/h_wr02360.html?Open&wt_src=cipo-tm-main&wt_cxt=learn>; Trademarks Act, RSC 1985, c T-13, s 2. [12] Trademarks Act, RSC 1985, c T-13, ss 19-20. By Martika Ince | JD Candidate 2024, UCalgary Law
There are several different types of classes of shares that a corporation may issue, including common shares and preferred shares. Common Shares All corporations must issue common shares. As a shareholder of a corporation, the holder of common shares has certain fundamental rights. In Alberta, these rights are governed by the Business Corporations Act (ABCA).[1] The three fundamental rights of holders of common shares in Alberta are the right to vote, the right to dividends, and the right to liquidating distributions.[2] Right to Vote Shareholders are entitled to vote on matters such as the election of directors, the approval of auditors, and major corporate decisions. Each share typically entitles the shareholder to one vote, although the articles of incorporation may provide for different voting rights for different classes of shares. The right to vote allows shareholders to participate in the decision-making process of the corporation and have a say in how the corporation is run. This right is critical in ensuring that the interests of the shareholders are represented and that the corporation is managed in a manner that aligns with the shareholders' objectives. Right to Dividends The second fundamental right of a holder of common shares in Alberta is the right to receive dividends. Dividends are payments made by the corporation to its shareholders out of its profits. The right to receive dividends allows shareholders to share in the profits of the corporation. Dividends are typically paid quarterly and may be subject to the approval of the board of directors and the availability of profits. Right to Liquidating Distributions The third fundamental right of a holder of common shares in Alberta is the right to share in the distribution of assets. If the corporation is dissolved or liquidated, the proceeds from the sale of its assets will be distributed to the shareholders. The distribution of assets is typically made in proportion to the number of shares held by each shareholder. However, since the common shareholder only has claim to the residual after all other claims against the corporation are satisfied, the volatility risk of common shares is greater than any other corporate security. Preferred Shares Preferred shares are typically non-voting shares, but have certain preferences or privileges over common shares. These preferences may include the right to receive a fixed dividend before any dividends are paid to the holders of common shares, the right to receive a specified amount upon the liquidation of the corporation before any amounts are paid to the holders of common shares, and the right to vote separately on certain matters affecting the corporation. Classes of Shares A class of shares is a group of shares in a corporation that has certain characteristics that distinguish it from other classes of shares. The three fundamental rights discussed above must be present across the classes of shares, but do not all have to be present in each class.[3] The articles of incorporation may provide that two or more classes of shares, or two or more series within a class of shares, have the same rights, privileges, restrictions and conditions.[4] It is important for businesses to understand the requirements in creating classes of shares upon incorporation. If you have questions or require additional information, please reach out to the BLG Business Venture Clinic. [1] Business Corporations Act, RSA 2000, c B-9. [2] Ibid, s 26(3). [3] Ibid, s 26(4)(b). [4] Ibid, s 26(6). By: Reed Boothby, JD Candidate 2023 | UCalgary Law
As start-up’s grow, there often comes a time when they must hire staff. Employment matters are occasionally given less attention than other business, such as raising capital or generating sales, for instance. Employment matters should not be overlooked, however, as the process of hiring and managing employees is an important aspect of a start-up’s success. A written employment agreement defines various rights and obligations between the employer and employee for the purposes of reducing the risk of future dispute and liability. Without a written employment agreement, disputes between the employee and employer will be resolved by applying common law principles and looking for evidence of the parties’ intentions from pre-employment conduct and communications, which may lead to uncertain and potentially undesirable outcomes. A written employment agreement can reduce risk by expressly establishing the relations between the employer and employee, including matters relating to (non-exhaustive):
Employment matters are a crucial aspect to the viability of many start-ups. A start-up can limit future risks related to hiring and maintaining its staff by setting out important matters within an employment agreement, such as (among others): Job Description; Termination; Intellectual Property rights; Confidentiality; Non-competition; and Non-solicitation. For assistance drafting an employment agreement or for further information about the contents of this blog, please contact the BLG Business Venture Clinic. [1] Bryce Tingle, Start-Up and Growth Companies in Canada, 3rd ed (Canada: LexisNexis, 2018) at page 126. [“Tingle’] [2] Ibid. [3] Tingle, at page 128. [4] Employment Standards Code, RSA 2000, c E-9; See also Machiner v Hoj Industries Ltd., S.C.J. No. 41, [1992] 1 S.C.R. 986. [5] Tingle, at page 130. [6] Tingle, page 136; See also GD Searle & Co. v. Novopharm Ltd., [2007] F.C.J. No. 625, [2007] S.C.C.A No. 340 (S.C.C.). [7] Tingle, page 136. [8] Practical Law Canada Employment, “Employee Confidentiality and Non-disclosure Agreements” (2023), online: < https://ca.practicallaw.thomsonreuters.com/9-621-6711>. [9] Practical Law Canada Employment, “Employee Non-Compete and Non-Solicit Agreements” (2023), online: <https://ca.practicallaw.thomsonreuters.com/3-619-0337>; See also Tingle, at page 131. [10] Ibid; See also Tingle, at page 135. Written by Ivana Palacios
UCalgary Law | JD Candidate 2024 There are many duties to which the directors and officers of a company are subject. It is unlikely that the average businessperson is aware of all of them. While this may be of initial concern for a new director or officer, there is good news. There are factors working in favour of directors and officers in Canada. Significantly, one of them is the defense of the Business Judgement Rule.[1] The Duty of Care is one of the fiduciary duties that are owe by directors and officers, the Business Judgement Rule (BJR) provides a defense when this Duty is called into question. In 2004, in what has become known as the People’s case[2], the Supreme Court of Canada officially adopted the BJR. This meant that the courts should give deference to business decisions due to the risk of hindsight bias when considering a decision made in the past. The BJR has three key elements:
The standard by which a board, director, or officer’s decision will be examined is whether it was made prudently and on a reasonably informed basis.[5] The BJR helps directors and officers’ defended decisions made when they are call in to question in hindsight. There are many duties that directors and officers owe and this is only one of the factors working in favour of Directors and Officers in Canada. [1] Bryce Tingle, Start-Up and Growth Companies in Canada, 3rd ed (Canada: LexisNexis, 2018) at 192. [2] Peoples Department Stores Inc. (Trustee of) v Wise, [2004] SCR 461, 2004 SCC 68. [3] Ibid., at para 67. [4] Supra note 1 at 193. [5] Supra note 4. |
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