LEGAL PERSONALITY
The Default StructuresSo, you want to start a business and can’t wait to build that new prototype of your ground-breaking, market-disrupting product. Maybe this is a joint effort, and you get together with some tech savvy friends, and borrow some seed money from yet more friends to get started. So, what’s the problem here?
 
When you start a business by yourself (a Sole Proprietorship), there is no distinction in the eyes of the law between yourself and the business. Taxes are filed together, money earned is considered personal income, and most importantly, obligations of the business are your personal obligations. You are personally on the hook for everything the business does or does not do. This is the first default way of doing business.
 
When you get together with others to “carry on a business in common with a view to profit” you’ve triggered the second default way of doing business, by entering into a Partnership. Like the previous default structure, there is no distinction made between the business and the partners. Partnership income is the same as the partner’s income, but with the added catch that if no agreement is made between the partners, that income (or loss) is to be divided equally among the partners. The Partnership Act governs some of the key elements, but the interpretation of the above underlined terms is found in the case law.
 
In addition, partners owe to each other stringent fiduciary duties that compels them to act in the best interests of the partnership. In practice this includes: not competing with the partnership, the sharing of any benefits accrued from the partnership, full disclosure of information pertaining to the partnership, and confidentiality, among others. Liability incurred by the partnership for wrongs committed against a third party is also joint and severable between the partners[1]. This means that an injured third party may claim against any partner for the full quantum of damages.
 
There surely are some benefits for using these default structures but that is a topic for another time. However, one of the biggest risks is the personal exposure to liability.
 
The Corporate Form
​A popular alternative to the above default structures is the corporate form. This is not a default way of doing business because it requires positive procedural steps to trigger its formation. A corporation does not arise automatically from indirect actions of the involved parties. To start a corporation, you must follow procedures in a Business Corporations Act[2]. There is both a federal and provincial version of this act with a large degree of similarly (albeit there are some differences too). Incorporation can be done under either of them, but not both simultaneously.
 
The main benefit of the corporate form is that it effectively splits ownership from management in the eyes of the law. This gives the corporation “legal personhood”, sometimes also called a “juridical person”. A corporation therefore is considered a separate entity that files taxes, declares income, borrows money, and incurs liability on its own, separate from the true owners[3]. The owners in this case are the “shareholders”, and the management of the corporation is led by the “board of directors”. The trick here is that the owners are protected from liability above the amount they have invested in the corporation. This protection is known as the “corporate veil”. Only on very limited and extreme occasions is the corporate veil breached by a Court to hold the owners personally liable for an action of the corporation.
 
Ownership of a corporation is therefore comparatively less risky, which facilitates activities such as obtaining new investment from people looking to buy shares or from institutions looking to lend capital. Another benefit is that ownership does not preclude the individual from also being a manager or employee[4]. However, unlike the owners, individuals acting as managers do have to contend with other legal duties and potential liability.
 
The shareholders maintain control over the board of directors by using statutory mechanisms in the Business Corporations Act and also through provisions in the “articles of incorporation”. The articles are akin to a corporate constitution, and it will govern the relationship between the owners and managers. It does this through restrictions on what the company can and cannot do, and through the rights associated with the shares that a company can issue.
 
The distribution of liability between the managers depend on the scope of their relationship to the company. The board of directors will carry the largest burden because they are ultimately responsible and in charge of making strategic decisions for the corporation. In addition, they owe a fiduciary duty of loyalty and care to the corporation itself[5]. In practice, this often means that they attempt to maximize benefits for the shareholders. To attract and retain competent directors, a corporation will typically indemnify directors for liability that they could personally incur so long as they were acting in good faith and did not breach their fiduciary duties.
 
Senior officers include managers that are hired and appointed directly by the board of directors. Officers owe a fiduciary duty to the corporation because their influence over the affairs of the company are analogous to that of the directors[6], and because they are included alongside directors under the fiduciary provision in the Business Corporations Act[7]. Other managers of a corporation may also owe a fiduciary duty to the company, but the scope of the duty will be circumscribed by:  1) the degree of influence they exert over the daily operations, and 2) the terms in their employment contract. As a general rule, the more senior and influential a manager is, the more likely they will owe a fiduciary duty and the greater the scope of that duty.
 
Finally, the employees of a corporation generally do not owe any additional duties to the corporation beyond those that arise from general principles under the common law, and through their employment contract. This often means that any non-competition, non-solicitation, and confidentiality restrictions on an employee are spelled out in a contract.

       _______________
[1] Partnership Act s.15
[2] Alberta Business Corporations Act [“ABCA”] and Canada Business Corporations Act [“CBCA”]
[3] Salomon v Salomon & Co.
[4] Lee v Lee’s Air Farming Ltd.
[5] ABCA s.122
[6] International Corona Resources v Lac Minerals
[7] ABCA s.122

Shareholder Agreements vs Unanimous Shareholder Agreements
 
When incorporating, the question of whether or not to establish a shareholder agreement, or a unanimous shareholder agreement for that matter, should be considered. This blog will cover the major benefits and drawbacks of each while attempting to clarify in what situation each type of agreement is most suitable.
 
Purpose
Shareholder agreements outline the expectations and guidelines on how to resolve specific problems that may arise between shareholders. Essentially, these agreements allow shareholders to address any situation in the manner in which they choose. Often, the agreements will establish how corporations make decisions, and how shareholders dispose of or acquire additional ownership interests.
 
In small, closely held corporations, shareholder agreements are paramount as any change in ownership is typically of great interest to the company and its remaining shareholders. Change in ownership could even result in a material event. Without any such agreement, provincial or federal statute will govern shareholder relationships. Applicable laws tend not to be the most comprehensive and often leave unforeseen situations wanting.
 
Shareholder Agreement vs. Unanimous Shareholder Agreement
In Canada, there are two types of shareholder agreements, regular shareholder agreements (“SA”) and unanimous shareholder agreements (“USA”).
 
Scope
SAs will only be applicable or bind those who sign it. In order for the agreement to apply to a specific shareholder, that shareholder must be a party or a signatory to the agreement. Note, that shareholders can become a party to the SA at any time. Conversely, USAs bind all shareholders provided that notice is given. No signature required. The USA will apply to any shareholder regardless of when the shares are acquired.
 
Objective
SAs are a form of commercial contract. It may provide rights and obligations to shareholders, resolutions to specific disputes and good management or governance practices. A USA is a combination of a commercial contract and a constitutional document similar to the articles of incorporation. A USA can override the common law rule against fettering the discretion of the directors.[1] This means that it can withdraw or restrict a director’s power and transfer it to the shareholders.[2]
 
Important Points of Distinction
USAs involve withdrawing or restricting decision-making power from the director and placing that power onto the shareholders. By doing so, directors can no longer be held liable for the rights or liabilities that have been fettered by the USA. Additionally, USAs should be flexible enough to allow minority shareholders to have a say in the direction of the company, but it should also permit the majority of shareholders to make corporate decisions without being blocked or restricted by the minority.[3]
 
Choosing the Right Structure
 
Prior to incorporation, one must first characterize the venture. Consider a growth company and a small privately-owned corporation. A growth company is defined by its rate of change.[4] Rapid growth inevitably leads to instability in the corporation’s composition including the number of investors and frequent management changes among other things. Such changes lead to varying corporate and legal needs that are difficult to anticipate.[5] As a result, greater flexibility is needed to avoid impeding growth and development. Small privately-owned corporations have different needs. This type of company opts for stable growth with the ultimate goal of remaining small and closely held. Predictability is key in these organizations.
 
Growth Company
A SA suits a growth company’s need for flexibility. SAs allow for effective management while the number of passive shareholders tends to increase. USAs are inappropriate for companies that seek rapid growth and anticipate a larger number of investors or shareholders.[6] Essentially, a SA will protect the company from a wide range of shareholders while staying attractive to investment as it doesn’t transfer a disproportionate amount of power to founders as is typical of USAs.[7]
 
The distinctive characteristics of the USA present challenges to growth companies should a disgruntled founder or shareholder aim to hold up the business’ activities. Further, passive investors won’t want to bear the risk of liability resulting from the transfer of rights and obligations from the directors onto the shareholders.[8] Finally, USAs are part of the constating documents. As such, a growth company is likely to quickly outgrow an agreement written at incorporation. The ability to amend or withdraw a USA requires a unanimous vote as per the Alberta Business Corporations Act, which could be difficult to acquire with a large number of shareholders.[9]
 
Small Privately-Owned Corporation
USAs are ideal for small, privately-owned corporations. The distribution of shares can be controlled. Shares can therefore remain closely held. For corporations that intend to stay small, USAs can control shareholders and founders in the event of diverging opinions. The agreements allow for all shareholders to have a say in how the business is run. A USA can be drafted to include provisions ensuring the continued operation of the company regardless of founder or shareholder disagreements. 
 
Application to a New Venture
Provisions that are appropriate for a small, privately-owned company may be harmful for a growth company. In particular, USAs are generally inappropriate for growth companies whereas SAs are well-suited for such companies. Prior to incorporation, founders should consider which type of venture is anticipated. Early consideration of the nature of the venture will inform the breadth of desired legal agreements. 
 
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[1] Mihai Gheorghe Cioc, Why should you have a shareholders’ agreement in Canada? Online: LexStart <https://lexstart.ca/en/legal-articles/why-should-you-have-a-shareholders-agreement-in-canada/>.
[2] Brian Graves, Shareholder Agreements (2005) online: McCarthy Tetrault LLP <https://marcomm.mccarthy.ca/pubs/insight_paper_ver_two.pdf>.
[3] Mihai Gheorghe Cioc, Why should you have a shareholders’ agreement in Canada? Online: Lex Start <https://lexstart.ca/en/legal-articles/why-should-you-have-a-shareholders-agreement-in-canada/>.
[4] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013) at 2 [Tingle].
[5] Ibid at 4.
[6] Ibid.
[7] Ibid at 107.
[8] Ibid at 106.
[9] Business Corporations Act, RSA 2000, c B-9, at 146(8).

Sole Proprietor to Incorporation & Section 85 Rollovers
 
Frequently, small business owners will initially operate as a sole proprietorship in the early stages of business development. This can be beneficial as it facilitates the deduction of business losses against other personal income and reduces legal, accounting, and administrative costs until the business’ viability has been demonstrated. As a business grows, however, the desire to limit liability, facilitate raising funds through the sale of shares and the ability to defer taxes by retaining corporate profits within the corporation and pay dividends in lieu of salary often make incorporation preferable.
Unfortunately, the sole proprietor learns that if an asset has gained in value and then is transferred it attracts capital gains tax. Fortunately, the Government recognized it would be unfair to not encourage businesses to grow properly. Thus, when a sole proprietor incorporates his or her business, section 85(1) of the Income Tax Act (the “Act”) allows the business owner to transfer business assets out of the sole proprietorship and into a corporation without triggering tax liabilities due to a disposition of property.[1] This is known as a Section 85 rollover.

Section 85 Conditions:
There are 5 primary conditions for determining the applicability of a section 85 rollover, these include:

1.Eligible transferor;
2.Eligible transferee;
3.Eligible property;
4.Consideration consists of at least one share of capital stock; and
5.A joint election must be filed by the prescribed deadline.
​
An eligible transferor includes individuals (i.e. a sole proprietor), trusts and corporations.[2] An eligible transferee must be a taxable Canadian corporation (i.e. the newly incorporated business)[3] A corporation is a taxable Canadian corporation if it was incorporated in Canada (and therefore deemed to be a resident of Canada by section 250(4) of the Act) or a resident of Canada from June 18, 1971and is not tax exempt under the Act.[4]
 
Eligible property is defined in Section 85(1.1) of the Act and includes[5]:

• Depreciable capital property (includes eligible capital property);
• Non-depreciable capital property;
• Canadian resource properties;
• Foreign resource property;
• Inventories; and
• Real estate property owned by a non-resident but used in a business carried on in Canada.

 
Section 85(1) transfer requires that, in exchange for the eligible property, the eligible transferor must receive at least some share consideration.[6] The eligible transferor may also receive a non-share compensation in exchange for the eligible property, but the total compensation package must include shares in the corporation and must not exceed the fair market value of the property transferred.[7]
 
The joint election is a filing that must be made with the Canada Revenue Agency using the prescribed form (T2057) in order for Section 85(1) to apply to a disposition of property.[8]
 
Section 85 Elected Amounts:
When filing a joint election, the transferor and transferee must choose an elected amount, which represents the proceeds of disposition for the transferor and the cost to the transferee corporation. The actual value exchanged must be FMV (i.e., the corporation must pay the sole proprietor FMV for the transfer) but the elected amount is the deemed value for the tax purpose of avoiding capital gains tax. The Act prescribes the following upper and lower limits on the elected amount:[9]

1. The elected amount cannot exceed the FMV of the property at the time of the transfer.
2. The elected amount cannot be less than the FMV of the non-share consideration received by the transferor.
3. The elected amount cannot be less than the lesser of the FMV of the property and the cost amount of the property to the transferor at the time of disposition.
4. Where ii. and iii. differ, the greater of the two amounts represents the lower limit.

Example:
If a Section 85 rollover is warranted, it is common to transfer assets from the sole proprietorship to the corporation at FMV (but elect at cost and take back shares equal to FMV). The individual (shareholder) takes back shares from the corporation equivalent to the FMV of the assets transferred into the corporation.  So, for example, if an individual transfers $50,000 worth of assets, they would take back $50,000 worth of shares (preferred or common shares).
 
It’s important to have a valuation done or at least a reasonable attempt made to understand the value of assets transferred, including intangible assets such as ‘goodwill’ (brand, customer lists, etc.).  More often than not, goodwill is an asset that is transferred.
 
In this scenario, there is no immediate tax consequences.  If the shares or assets of the corporation are sold at a future date, tax is paid then (if the transaction includes a gain on the sale of shares or assets).
 
Conclusion:
 
It is important for business owners to take note that a Section 85 rollover provides only a deferral or postponement of tax. It does not amount to tax avoidance. Any increase in value of the assets that was not realized when the transfer occurred will be taxed at the time the assets are sold or otherwise disposed of by the newly incorporated business. The Section 86 rollover can be an important election that can help small businesses lower their tax burden when they want to expand or make changes in their business structure. Use this if you want to convert your sole proprietorship business into a corporation but ensure you seek qualified advice from a lawyer and your accountant before doing so.
 
    ________________
[1] Income Tax Act, RSC 1985, c 1 (5th Supp). [ITA].
[2] Ibid at s 85(1).
[3] Ibid at s 89(1).
[4] ITA, supra note 1.
[5] Ibid.
[6] Ibid.
[7] Ibid at s 85(1)(f).
[8] Ibid at s 85(6).
[9] Ibid at ss 85(1) (a), (b), (c).

Sole Proprietorships – A Closer Look
 
Sole proprietorship is the simplest form of business organization. It is also by far the most popular structure amongst business founders, as 64% of new Canadian businesses chose to register the onset of their business in the form of sole proprietorship.[1] This blog post aims to take a deeper dive into sole proprietorships in Alberta by providing 1) an overview of sole proprietorships, 2) legal requirements of operating a sole proprietorship, as well as 3) briefly evaluate its advantages and disadvantages.
 
1. Overview

Sole proprietorships come into existence when an entrepreneur start to carry on business for his or her own account without taking the steps necessary to adopt other form of organization, such as a corporation.[2]

A sole proprietor has sole ownership of the business and there is no separation between the sole proprietor, as the individual owner, and its business. This means that the individual owner of the sole proprietor assumes total responsibility over the management and the business’s assets, profits, and losses. The sole proprietor is also exclusively responsible for all torts committed by him or her personally in connection with the business and will be vicarious liable for all torts committed by employees in the course of their employment.[3] Most crucially, a sole proprietor bears unlimited personal liability.[4] As a result of this unlimited liability, the sole proprietor’s personal assets, as well as assets contributed to the business, may be sized in fulfillment of the obligations of the sole proprietor’s business.
 
2. Legal Requirements and Registration Process

There are two main legal requirements associated with the use of a sole proprietorship: 1) trade name registration and 2) licensing requirements.
​
            The sole proprietor may either use the sole proprietor’s given name or trade name as their business names. Carrying on business under the sole proprietor’s given name does not require registration, unlike operating under a trade name. Under the Alberta Partnerships Act, using a trade name to run a sole proprietorship does require registration. According to Partnerships Act section 110, “[e]ach person who...
           (a)    is engaged in business for trading, manufacturing, contracting or mining purposes,
           (b)    is not associated in partnership with any other person or persons, and
           (c)    uses as the person’s business name
                                  (i)    some name or designation other than the person’s own, or
                                  (ii)    the person’s own name with the addition of “and company” or some  other word or phrase indicating a plurality of members in the firm, shall sign and file with the Registrar a declaration in writing of the fact.”[5]
 
Trade name registration is a straightforward process. All that the sole proprietor has to complete a Declaration of Trade Name Form (found here) and file it at one of the Alberta Corporate Registry service providers. Note that despite the requirement in Partnerships Act section 110(2)(d) that the Declaration be “filed within 6 months after the time when the business name is first used,”[6] section 110(3) suggests that no penalty will be imposed if the sole proprietor were to file the Declaration over the 6-months limit.
 
Unlike a corporation, a sole proprietorship does not have perpetual existence. A sole proprietor who wishes to cease carrying on business of the trade name can do so by filing a Cancellation Declaration (found here).
 
The other requirement for sole proprietorships, which applies equally to all forms of business organizations, is licensing. Licensing requirements will vary from different business types and the levels of government, whether it be federal, provincial, or municipal. The BizPal permit/licensing finder filter can be found here.
 
3. Advantages & Disadvantages
 
As mentioned earlier, one of the main characteristic that makes a sole proprietorship attractive to business founders is its simplicity. Unlike incorporation, which comes with certain paperwork requirements, such as filing of articles of incorporation pre-incorporation and bylaws and minute books post-incorporation as well as annual returns in subsequent years,[7] sole proprietorships has virtually no paperwork that needs to be done save for a trade name registration.
 
Sole proprietors may also be attractive if the businesses incur losses in its early start-up years. This loss may be applied against the income received by the entrepreneur from other sources. If the losses cannot be used in the current year, it can be carried back for three years to recover taxes previously paid or it can be carried forward 20 years to offset future earnings.[8]
 
On the flip side, a chief disadvantage of the sole proprietorship is unlimited personal liability. All of the sole proprietor’s personal assets may be taken by third parties in satisfaction of obligations of the business. As the scale of the business and related liabilities increase, this exposure to personal liability makes sole proprietorships increasingly less attractive. By comparison, incorporation provides protection against personal liability. While it is true that a sole proprietorship could manage liability risks through insurances or contractual provisions, incorporation is cheaper and in most cases, more effective.
 
Another problem with sole proprietorship is raising capital. As a business grows, it will require additional investment. Since it is impossible to divide ownership of the sole proprietorship, the only financing option available is debt. Not only that, non-friends and family investors will also be interested in acquiring an ownership interest in the business without being exposed to the venture’s liabilities. In that case, a sole proprietorship could provide neither the liability protection or the equity mechanism.[9]
 
            To conclude, it is the legal nature of the sole proprietorship as an unlimited liability and unincorporated entity that is determinative of its relative advantages and disadvantages as compared to a corporation. While sole proprietorships have its simplicity and loss-offsetting tax advantages to boast at the beginning of a venture, incorporation may provide further capital raising avenues and better protection against liabilities as the business matures and develops. For more information on the registration process of a sole proprietorship or how it compares to a corporation, contact the BLG Venture Clinic for further details.

     ____________________
[1] Bryce C. Tingle, Start-up and Growth Companies in Canada 4th ed (Lexis Canada Inc, 2018) at page 36.
[2] Anthony J. VanDuzer, The Law of Partnerships and Corporations, 3rd ed (Toronto: Irwin Law Inc., 2018) at page 6.
[3] Ibid at page 8.
[4] Ibid.
[5] Partnership Act, RSA 2000, c P-3 [Partnership Act], s 110.
[6] Partnership Act, s (110)(2)(d).
[7] Business Corporations Act, RSA 2000, c B-9, s 21.
[8] Income Tax Act, s. 111(1)(a).
[9] Supra note 1 at page 36.

Can I Patent That?
What Exactly Is A Patentable Creation?
What is Intellectual Property?Before discussing patents specifically, it is helpful to first have a general understanding of what exactly is intellectual property (“IP”). IP, stated broadly, is a “creation of the mind”[i] and includes things like logos, inventions, literary works, and designs.[ii] IP is a type of intellectual asset which, though intangible, plays a crucial role in providing businesses with a competitive advantage so that they can succeed in today’s increasingly knowledge-based economy.[iii] As a result, it is important for entrepreneurs to be able to identify their business’s value-creating IP and understand how to protect it.
There are various forms of IP protection in Canada, with each form focused on protecting a specific range of subject matter. Patents fit into this Canadian IP protection framework as being the form of protection that can be used to protect inventions… provided that those inventions meet certain criteria.

​Defining Patents: The Criteria for PatentabilityAs mentioned above, patents are the form of IP protection concerned with protecting inventions.[iv] Inventions are defined in the Patent Act[v] as “any 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”[vi].
For an invention to be “new” it must distinctly demonstrate its novelty or ingenuity over a previous patent.[vii] This novel or ingenious use can includes a new use of an existing substance, such as discovering a new application for an existing drug.[viii] For a patent to be “useful” it must have a demonstratable utility or a sound prediction that it works at the time the patent application was filed. This can be a single or recurring use.[ix]
In addition to being new and useful, the subject matter of an invention must have not been obvious to a person skilled in the art or science to which the subject matter of the invention pertains at the time the patent application was filed.[x]

An Art is a broad category of subject matter which includes new and inventive methods of practically applying skills or knowledge to create commercially useful results.[xi] A Process is a mode or method of operation where the end product is produced from the application of physical or chemical action, element or power of nature, or of one substance to another.[xii] A Machine is a physical or mechanical embodiment of a process which, when used, can deliver a desired effect.[xiii] A Manufacture is the action or process of making articles or material through the application of physical labour or mechanical power.[xiv] And a Composition of Matter is a substance formed by a combination or mixture of various ingredients.[xv]
With these criteria of what constitutes a patentable invention in mind, lets now turn to some examples of subject matter that can fall within these parameters.
What Is and Is Not Patentable Subject Matter?If the subject matter of an invention meets the above the criteria, it is typically patentable. Consequently, patentable subject matter can range from door locks[xvi] to genetically modified cells[xvii]. However, there are some notable exclusions and areas of contention with respect to what can and cannot be patented. Some key examples of these are discussed below.

Unpatentable Subject Matter
Scientific principles and abstract theorems cannot be patented.[xviii] Moreover, creations of nature, like cross-bred plant species, cannot be patented since they are not deemed to have been invented by the discoverer.[xix] Presently, forms of energy such as electromagnetic and acoustic signals are not considered patentable either.[xx]
Broadly speaking computer programs are not patentable subject matter.[xxi] However, if the software is imbedded in a computer – such as in the form of algorithm tied to a physical, read-only computer chip – then it may be patentable.[xxii] It is also important to note that if a computer program is used to make an otherwise unpatentable discovery, the fact that a computer program was used to make the discovery does not change that unpatentable discovery into a patentable one.[xxiii] For example, the fact that a computer was used to discovery a new scientific principle does not make that scientific principle patentable.
Professional skills such as novel ways to describe and lay out land in a subdivision are also not patentable,[xxiv] nor are high life forms such as mice[xxv]. Medical and surgical methods are not patentable in Canada,[xxvi] however the medical products used in those processes can be patented.[xxvii]

Possibly Patentable Subject Matter
A business model can be patentable subject matter, however for a business model to be patentable it must meet all the criteria described in the above “Defining Patents” section and have physicality.[xxviii] This physicality requirement demands that the business model somehow physically exist beyond manifesting its usefulness through the application of a physical tool.[xxix] How this can be done exactly is not clear, however there is some United States case law which suggests that if a business model were imbedded in a software of some kind that it may be patentable.[xxx]

Alternatives to PatentingPatents are just one example of the intellectual property protections available in Canada. Copyrights, Trademarks, and Industrial Designs are other examples of other IP protection available in Canada. Protecting IP through keeping it as a trade secret is also an option for business, and is an IP protection strategy commonly used by start-ups and growth companies.[xxxi] As a result, if you cannot patent your invention, you may want to review the Clinic’s other blogs about IP or book an appointment with the Clinic to learn more about these other forms of IP protection!
 
Duncan Pardoe is a caseworker at the BLG Business Venture Clinic and a second-year law student at the Faculty of Law, University of Calgary.

 

       _________________
[i] World Intellectual Property Organization, “What is intellectual property” (February 21, 2021) online: World Intellectual Property Organization < https://www.wipo.int/about-ip/en/> [WIPO: Defining IP].
[ii] WIPO: Defining IP.
[iii] Government of Canada, “Intellectual assets” (February 21, 2021) online: Canadian Intellectual Property Office < https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr03585.html?Open&wt_src=cipo-ip-main>.
[iv] Government of Canada, “What is a patent” (February 21, 2021) online: Canadian Intellectual Property Office < https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr03716.html?Open&wt_src=cipo-patent-main> [CIPO: What is a patent].
[v] Patent Act, RSC 1985, c P-4 [Patent Act].
[vi] Patent Act, at s 2.
[vii] Whirlpool Corp v Camco Inc, 2000 SCC 67, at paras 64-67.
[viii] Apotex Inc v Wellcome Foundation Ltd, 2002 4 SCR 153.
[ix] AtraZeneca Canada Inc v Apotex Inc, 2017 SCR 943 at paras 46; 53; 55-56.
[x] Patent Act, at s 28.3.
[xi] Progressive Games v Canada (Commissioner of Patents), 177 FTR 241, at para 16.
[xii] Canada, Government of Canada, Manual of Patent Office Practices (2020) online: Canadian Intellectual Property Office < https://s3.ca-central-1.amazonaws.com/manuels-manuals-opic-cipo/MOPOP_English.html#_Toc57035319>, at s 17.01.02 [MOPOP].
[xiii] MOPOP¸ at s 17.01.03.
[xiv] Harvard College v Canada (Commissioner of Patents), 2002 SCC 76 [Harvard College v Canada].
[xv] Harvard College v Canada.
[xvi] CIPO: What is a patent, at “What you can patent”.
[xvii] Monsanto Canada Inc v Schmeiser, 2004 SCC 34, at para 22.
[xviii] Patent Act, at s 27(8).
[xix] Pioneer Hi-Bred Ltd v Canada (Commissioner of Patents), 1989 1 SCR 1623.
[xx] MOPOP, at s 17.03.04.
[xxi] Schlumbereger Canada Ltd v Canada (Commissioner of Patents), 1982 1 FC 845 (CA) [Schlumbereger Canada Ltd v Canada].
[xxii] Re Motorola Inc’s Patent Application No 2,085,228, 1998 86 CPR (3d) 71 (Pat App Bd & Commissioner of Patents).
[xxiii] Schlumbereger Canada Ltd v Canada.
[xxiv] Lawson v Commissioner of Patents, 1970 62 CPR 101 (Ex Ct).
[xxv] Harvard College v Canada.
[xxvi] Tennessee Eastman v Canada (Commissioner of Patents), 1974 SCR 11.
[xxvii] Cobalt Pharmaceuticals Company v Bayer Inc, 2015 FCA 116.
[xxviii] Canada (AG) v Amazon.com Inc, 2011 FCA 328 [Canada (AG) v Amazon.com Inc].
[xxix] Canada (AG) v Amazon.com Inc.
[xxx] Alice v CLS Bank International, 573 US 208 (2014).
[xxxi] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 3rd ed (Canada: LexisNexis Canada, 2018) at 140.

Should Your Start-up Consider an Innovative Equity Model?
 Choosing the right structure and equity allocation for a new venture can create stress for a lot of entrepreneurs. Unfortunately, the equity issue usually comes at a time when there are many other things that the founders are dealing with. Disparity in finances, hours being put in, connections, and any other possible resources can create problems when people are trying to decide how to divide their start-up and allocate equity. Slicing pie, a concept by Mike Moyer, aims to solve this initial hurdle entrepreneurs often face in his book, The Slicing Pie Handbook: Perfectly Fair Equity Splits for Bootstrapped Start-ups.
 
Moyer teaches Entrepreneurship at Northwestern University and the University of Chicago Booth School of Business. He is a staunch advocate of slicing pie, enthusiastically pointing out all of the problems it can solve and the opportunities it may create. However, solutions to the problems within slicing pie itself are much less plentiful and without an exuberant spokesperson.
 
The slicing pie concept itself is fairly simple. Implementing it in Canada however, as opposed to the United States where slicing pie originated, is a lot more uncertain and complicated.
 
The idea is that everyone is compensated for their specific contributions to the company. This means that when someone invests with time, money, ideas, relationships, supplies, equipment, facilities or anything else someone provides without full payment that they are then allocated ‘slices’ of the pie. The pie represents the company, and the slices are a proxy for the individual shares of each person who the pie is split among. The model is dynamic because it adjusts every day as the contributions are made by those working on business. The idea is that if you contributed on a given day, your piece of the pie should reflect that immediately.
 
The formula is an individual’s % share = individual's Slices ÷ all Slices. This applies until the company starts to break even or they raise enough capital to pay the equity holders for their contributions. When one of these events happens, the pie would ‘bake’ or the split would be frozen and the allocation at that time would determine the distribution of dividends or proceeds of a sale.
 
The reason for slices and not shares in the traditional sense is the defence mechanisms the concept has built in. With equity, if someone were to leave the company, they maintain that equity. With slices of pie, the idea is that anyone who leaves would be forfeiting their contributions. This is billed as an advantage of slicing pie because it is supposed to keep people committed and bought in to the business’ success for a longer period of time.
 
However, Canadian courts may not uphold this type of arrangement. In Canada, the principle of equitable relief, such as that referenced in section 16 of the Alberta Judicature Act, means that courts may find anyone who left a company with slices, and not shares, is entitled to the value of those slices anyways. Since the solution slicing pie is offering is to essentially force someone to give up all contributions they have made to a company if they do what is within their rights to do and leave, it is quite logical to think courts will deem that to be unfair. If the courts felt it was unconscionable for the person leaving to receive nothing from their work, it could fundamentally eliminate one of the reasons to use slicing pie.
 
At this point there is not case law in Canada dealing with the issues slicing pie presents for Canadian law so we cannot be certain as to how the common law and equity would handle a slicing pie dispute. The important thing is that it is a potential issue, and one which is not mentioned or addressed by the very limited slicing pie literature. As time passes and the model is not so new, hopefully there will be answers from the courts and from the relevant tax authorities on how the slicing pie model will be treated.
 
Another issue with the legally absent equity allocation slicing pie temporarily creates is that the division of the pie may not be honoured. When it comes time to bake the pie, there isn’t a guarantee that everyone will get the share they had with the slices. Everyone involved must trust each other that they will get what they were supposed to. This leads to the second potential issue. Slicing pie claims that because there is no formalized equity until an event that bakes the pie, and therefore terminates the model, there are no potential tax consequences. If one were to try to get around the risk of someone not honoring the slicing pie arrangement by legal agreement, they would be defeating the whole purpose of the model by effectively setting an equity arrangement. This could possibly catch the attention of the Canadian Revenue Agency which may determine equity was held much earlier on, before the pie was officially baked, than claimed.
 
Slicing pie also theorizes that it will incentivize people into staying committed to the business longer. However, since the slices convert to equity once the company sees success, someone could simply wait until that event and then leave. Alternatively, if the company never returns value then the equity they gave up by leaving had no value anyways, rendering the threat slicing pie implies empty. In the meantime, if they are truly disinterested in the company, they have no reason to contribute more to the pie. They may not officially break off the relationship but could for all intents and purposes stopped adding value of any kind. To think someone that would otherwise leave a venture will stay and work hard for that business’ success because of slicing pie seems to be an untested and flawed theory.
 
While the slicing pie model advertises that it solves the issue of conflict during equity allocation, and it very well might, it may also just shift the problem. Similar to competing interests wanting different equity decision, there still needs to be negotiation and agreement about what contributions result in slices. For example, one party may have more financial resources while the other has much more time to put into the business. How to properly weight cash contributions compared to an hour of someone’s time must still be agreed upon. In a sense, slicing pie may just be shifting around where the difficult negotiations points exist. 
 
Unfortunately, as with most things slicing pie in Canada, there is a lack of information or certainty. Since the theory was formed by Mike Moyer, and the information on it is contained on his slicing pie website (https://slicingpie.com/) and in his books, there is a deficit of objective and critical information dealing with the challenges the model may face. This is especially true for jurisdictions that are not the United States.
 
While slicing pie is an exciting and innovative model for helping start-ups deal with equity distribution, there are still many unknowns. Anyone considering the model should take careful consideration of the potential tax and legal uncertainty while also thinking about whether the model will add value to the business or if it will cause as many issues as it solves.

Common Negotiation Terminology
Negotiations are common and important for entrepreneurs, as any start-up business will require negotiating financing rounds, board decisions and salary for employees, among many other things. In our last negotiation centered blog post, we discussed interest-based negotiations and how they are effective (link in footnotes).[1] In this negotiation-based post, I will outline many common negotiation tactics and present some useful tips on how to use them.
 
Best Alternative to a Negotiated Agreement (“BATNA”)

• Viewed as your safety net, your BATNA describes what you (and the other party) would do if you fail to reach an agreement. Usually the party that has the best BATNA has more leverage.
• Before the negotiation, have a clear idea of what your BATNA is, and also consider the BATNA of the other party. If it is not clear, then conducting further research is required. If you have a good understanding of each party’s position, you can negotiate more effectively.
• Additionally, having one BATNA is good, but two or more are better.[2] Because a BATNA can fall through, having more options is better and provides better understanding of the party’s different positions.

Zone of Possible Agreement (“ZOPA”)

• Once you have an idea of the BATNA for yourself and the other party, you can determine if a zone of agreement exists. For example, if one party will buy your product for $15-25, and you will agree to sell for $20-30, then a ZOPA of $20-25 exists. However, if a party won’t sell anything for under $19, and the other will not buy for over $18, then no ZOPA exists. [3]
• Since uncovering a party’s BATNA and ZOPA come from knowledge of the other party’s position and interests, conducting research beforehand is essential. If research is impractical, then asking the other party questions during the negotiations to uncover their interests and reservation points is recommended. If a ZOPA is discovered, then negotiations can run smoothly and quickly.

Bottom Line

• The bottom line is the lowest offer a party will accept before they walk away. Any lower and the BATNA is preferred.  If you will accept a price of $15-25, then $15 is your bottom line.
• It is important to know your bottom line before heading into negotiations. This will prevent you from being pressured into accepting an offer that is too low. Also, it is crucial not to disclose your bottom line too early in negotiations (or at all). If the other party knows you will accept a weaker offer, it could be difficult to move past that. Do your research, know your bottom line and negotiate with it in mind.

​
Anchoring

• The anchoring bias is the idea that the first number or position given in a negotiation will have a large amount of weight (hence the “anchor”), and there will be little adjustment from that initial position.[4] For example, if you would accept $2000-3000 for something and you get an initial offer of $2100, the anchoring bias tells us that the price you decide to sell for won’t be too far away from $2100.
• It follows that whoever gives the first number or position in a negotiation has a slight edge. There are some considerations when deciding whether or not you should give the first offer. The first is whether you have an idea of your own ZOPA. The second is whether you have a good assessment of the other party’s ZOPA.[5] If you do not have a good idea of the ZOPA, then dropping an effective anchor will be difficult as you risk making a bad offer. In these cases, it is best sitting back and allowing the other party to make the first offer.
• If the other party drops the first anchor, be careful not to quickly counteroffer. If you want to defuse the anchor, first state that their offer was unacceptable and out of the bargaining zone before you give a counteroffer.[6] This will not only defuse their anchor but put you back in the driver’s seat.

 
Midpoint Rule

• The midpoint rule is “that the best predictor of the final outcome of the negotiation is the midpoint between the first semi-reasonable offer and counter”.[7] As all negotiations must come to an end, knowing that the middle ground between each reasonable offer will likely be the final outcome can speed up negotiations.
• However, do not jump to the middle point right away, as large concessions at the beginning might signal to the other party that you're willing to make more. Make smaller and smaller concessions to alert the other party you are coming to final position.[8]

     
         ___________________
[1] “Interest-Based Negotiation” (23 December 2020), online blog): Business Venture Clinic <http://www.businessventureclinic.ca/blog/december-23rd-2020>.
[2]Katie Shonk, “6 Bargaining Tips and BATNA Essentials” (19 January 2021), online (blog): Program on Negotiation Harvard Law School < https://www.pon.harvard.edu/daily/batna/bargaining-tips-batna-essentials/>.
[3] Katie Shonk, “How to Find the ZOPA in Business Negotiations” (10 August 2020), online (blog): Program on Negotiation Harvard Law School < https://www.pon.harvard.edu/daily/business-negotiations/how-to-find-the-zopa-in-business-negotiations/>.
[4] Katie Shonk, “What is Anchoring in Negotiation?” (19 May 2020), online (blog): Program on Negotiation Harvard Law School https://www.pon.harvard.edu/daily/negotiation-skills-daily/what-is-anchoring-in-negotiation/.
[5] Ibid.
[6] Ibid.
[7] David Wright, Law 508 – Negotiation (Faculty of Law, University of Calgary, 2020).

Should Your Canadian Start-Up Become a Benefit Company?
​Effective June 30, 2020, British Columbia became the first Canadian province in the country to enact legislation regarding a new corporate form known as a 'benefit company'.[1] The concept originated in Maryland in the United States and has since been adopted by 35 other states.[2]
 
The amendment to the British Columbia Business Corporations Act [BCBCA] was introduced as a private member’s bill with the aim to support companies who choose to pursue social and environmental goals at the heart of their mission.[3] However, the question remains if entrepreneurs and start-ups should adopt this new for-profit structure and if more provinces will adopt the legislation considering the success the United States has seen.
 
What Is a Benefit Company?To become a benefit company in British Columbia, your start-up must include a 'benefit statement' and 'benefit provision' in its notice of articles.[4] The benefit statement must make clear its commitment to conducting business in a sustainable and responsible manner while also advocating one or more public benefits.[5] The benefit provision needs to detail the 'public benefits' it intends on promoting. The BCBCA broadly defines a 'public benefit' as having a positive effect on communities, organizations, the environment, or a class of persons other than shareholders of the company.[6] This positive effect can be artistic, charitable, cultural, economic, educational, environmental, literary, medial, religious, scientific, or technological in nature.[7] In the benefit company’s articles it also needs to explain the company’s commitments to conducting business sustainably and responsibly as well as highlight its specified public benefits.[8]
 
What are the Benefits?
In 2004, the Supreme Court of Canada expanded a director’s fiduciary duties to include social morals by not enforcing a shareholder primacy rule. [9] This means fiduciaries may choose to pursue broader matters beyond increasing profits for its shareholders. Despite these rules, there are still some advantages of transitioning to a benefit company. For example, it can provide clarity and certainty regarding a company’s purpose, even if the founders decide to move on at a later date. This type of entity can also help attract capital from ethically motivated investors who wish to make a positive impact.
 
The amendment even restricts who can sue the company in relation to its duties and allows shareholders to bring an action against a benefit company’s directors if a member of the board chooses to disregard the start-up's primary purpose and is in violation of their duty relating to its purported public benefits.[10]
 
What are the Disadvantages?
Despite the success in the United States, critics of the amendment have many questions about the benefits to a start-up from both a business and legal perspective. From a business perspective, it is unknown how attractive becoming a benefit company is to investors, consumers, and potential new employees. It is also yet to be established which industries should consider exploring this type of entity. Legal experts are wondering how directors will balance their duties of the new amendment with their existing fiduciary responsibilities. There is also a question of how a benefit company will measure the well-being of people impacted by its efforts. It is also unclear what happens if benefit expectations are not met.
 
How to Find Out if You Should Become a Benefit Company?While some questions remain to be answered about benefit companies, it is worth discussing with a legal professional if this avenue is worth exploring or if the existing legislation is sufficient in supporting your social purpose.
 
The BLG Business Venture Clinic can assist in answering your legal questions as well as provide advice on how to start your new venture. Get in contact with us today and find out how we can help.
 
       _______________
[1] Business Corporations Act, SBC 2002, c57 [BCA].
[2] Mondaq (2020, 7 2) Canada: Benefit Companies Arrive in B.C. Retrieved from mondaq.com: https://www.mondaq.com/canada/shareholders/960856/benefit-companies-arrive-in-bc.
[3] Ibid.
[4] BCA, supra note 1, s. 1.
[5] Ibid at s. 51.992 (1).
[6] Ibid at s. 51.991 (1).
[7] Ibid.
[8] BCA, supra note 1, s. 51.992(2).
[9] Peoples Department Stores Inc. v Wise 2004 SCC 68.
[10] Lexology (2020, 6 5) In a First for Canada, Benefit Companies Are Coming to British Columbia. Retrieved from lexology.com: https://www.lexology.com/library/detail.aspx?g=d18e8fb6-c356-4a16-96ea-cc80c267cabe.

Moving Online: Virtual Considerations for Start-ups
 
For many small businesses, COVID-19 has likely brought about a shift toward virtual operations. This post outlines some considerations for start-ups in Alberta as they navigate the trend toward virtual and electronic operations.
 
Electronic Meetings
The COVID-19 pandemic created a need for many Canadian corporations to host virtual meetings in order to avoid risks presented by in-person meetings and obey public health orders.[1] Although some challenges remain, virtual meetings can present various benefits for companies, especially in current circumstances, and they may be here to stay.[2]
Alberta corporations are required to hold annual shareholder meetings within specified time ranges.[3] Recently-incorporated Alberta corporations must also hold an organizational meeting of directors.[4] Due to COVID-19, the provincial government suspended these statutory requirements to hold in-person meetings for a limited time in 2020.[5] However, this suspension is no longer in effect and companies may need to consider virtual platforms and other options for holding required meetings as well as other company business.
Companies that would like to host corporate meetings virtually may need to check their corporate documents to ensure they are able to do so. Shareholders of Alberta corporations can participate in shareholders’ meetings electronically, as long as all participants are able to communicate with each other, but only if allowed under the corporation’s bylaws or by the consent of all of the shareholders entitled to vote at the meeting (subject to the bylaws).[6] Similarly, an entire shareholders’ meeting may be held electronically if provided for in the bylaws.[7] Shareholders can also vote electronically if the corporation makes electronic means of voting available, and as long as the bylaws do not prohibit electronic voting.[8] Corporations legislation also allows directors to participate in board meetings electronically, but only if this is allowed under the corporate bylaws or where all of the directors provide consent.[9] Additionally, certain communications related to corporate meetings, such as notices to shareholders or directors, may be sent by electronic means.[10]
As an alternative to holding meetings, matters can generally be passed by a resolution signed in writing by all directors or shareholders entitled to vote on the resolution, as applicable, and this will be as effective as passing the matter by a vote at a board meeting or shareholder meeting.[11]
 
Electronic Documents
Alberta law provides for the use of electronic documents in business settings, which may help facilitate companies’ transitions to virtual operations.
“Functional equivalency” rules provide that legal requirements for information to be in writing can generally be fulfilled by using or providing information electronically, as long as it is in an accessible form and can be further referenced and/or retained by the people receiving it.[12] Requirements for records to be signed can be satisfied with electronic signatures, although additional considerations may apply to ensure reliability of the signature.[13]
Agreements and contracts can also be formed online by providing information in electronic form, or by taking actions “intended to result in electronic communication” (for example, clicking an icon can show a person’s intent to electronically communicate acceptance of a contract offer).[14]
Companies that execute signed contracts virtually may consider whether contracts include a “counterparts” clause. These are standard clauses that may be used where parties to a contract do not sign the document while together. A counterparts clause generally provides that the agreement may be executed in separate parts that are electronically circulated, and those parts together will be considered to form the same agreement.
 
Data Protection
            Companies shifting toward virtual operations may begin to share more documents electronically and use electronic document storage and sharing platforms to manage files. This can raise considerations for companies related to privacy law and data breach concerns.
            Under Canadian privacy laws, organizations remain responsible for personal information (any information that can be used to identify an individual) that they transfer to third parties.[15] This may apply for organizations using online platforms or “cloud computing services” to share, store, or back up files containing personal information.[16] Privacy commissioners suggest that organizations review the terms of service for cloud computing providers to ensure personal information is handled by the provider in a way that is meets the organization’s privacy obligations.[17] Federal privacy law, where applicable, specifically requires organizations to use “contractual or other means to provide a comparable level of protection” for information being processed by a third party.[18] Companies considering transitioning files and sharing information using online service providers may consider conducting a review of these and other privacy law obligations to ensure they are prepared for virtual business operations.
            Additionally, businesses transitioning files, meetings, and communications online may consider the risk of data breach when using virtual platforms. Movement of business operations online often involves use of virtual private networks and cloud computing and raises concerns of increased cybersecurity risk.[19] As noted by the Canadian Centre for Cyber Security, “the more Internet-connected assets an organization has, the greater the cyber threat it faces”.[20] Businesses may consider their information security policies and how to manage risk of data breach and meet any obligations in the event of a breach. Under privacy laws, organizations must protect personal information by using “security safeguards” or “reasonable security arrangements” to prevent unauthorized access and other risks.[21] If there is a breach of an organization’s security safeguards and it is reasonable in the circumstances to think there is a “real risk of significant harm to an individual”, then the organization must report the breach to the relevant privacy commissioner, and it may be required to notify the affected individuals.[22] A previous blog post from the Business Venture Clinic discusses data breach preparedness in more detail.[23]
           
       ________________
[1] See, e.g., federal government recognition of the risks of corporate meetings in Corporations Canada, “Annual meetings of federal businesses, not-for-profits and cooperatives during COVID-19 in 2021” (last modified 30 December 2020), online: Government of Canada <http://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs08888.html>.
[2] See Dan Healing, “More corporate meetings to go virtual after success during pandemic” (3 August 2020), online: <www.ctvnews.ca>.
[3] Business Corporations Act, RSA 2000, c B-9, s 132(1) [ABCA].
[4] Ibid, s 104(1).
[5] Service Alberta, Ministerial Order no. 009/2020 (9 April 2020), s 5(1), available online: <https://open.alberta.ca/dataset/ministerial-order-no-sa-009-2020-service-alberta>. 
[6] ABCA, supra note 3, s 131(3).
[7] Ibid, s 131(3.1).
[8] Ibid, s 140(4), (5).
[9] Ibid, s 114(9).
[10] Ibid, s 255(5), see also s 258(2).
[11] Ibid, ss 117, 141.
[12] Electronic Transactions Act, SA 2001, c E-5.5, ss 10-13.
[13] Ibid, s 16.
[14] Ibid, s 27.
[15] Personal Information Protection and Electronic Documents Act, SC 2000, c 5, Part 1, Schedule 1, ss 4.1, 4.1.3 [PIPEDA]; Personal Information Protection Act, SA 2003, c P-6.5, s 5(1) and (2) [PIPA]. For the definition of personal information, see PIPEDA, s 2(1); PIPA, s 1(1); Office of the Privacy Commissioner of Canada, “Summary of privacy laws in Canada” (last revised January 2018), online: <https://www.priv.gc.ca/en/privacy-topics/privacy-laws-in-canada/02_05_d_15/>.
[16] Office of the Information and Privacy Commissioner of Alberta, Office of the Privacy Commissioner of Canada, and Office of the Information & Privacy Commissioner for British Columbia, “Cloud computing for small and medium-sized enterprises” (June 2012), online: <https://www.priv.gc.ca/en/privacy-topics/technology/online-privacy-tracking-cookies/online-privacy/cloud-computing/gd_cc_201206/>.
[17] Ibid.
[18] PIPEDA, supra note 15, Schedule 1, s 4.1.3.
[19] See, e.g., Canadian Centre for Cyber Security, Cyber Threat Bulletin: Impact of COVID-19 on Cyber Threat Activity (last modified 10 June 2020), online: Government of Canada <https://cyber.gc.ca/en/guidance/cyber-threat-bulletin-impact-covid-19-cyber-threat-activity>; Canadian Centre for Cyber Security, CYBER THREAT BULLETIN: Impact of COVID-19 on Cyber Threat Activity (2020) at 4, online (pdf): Government of Canada <https://cyber.gc.ca/sites/default/files/publications/COVID_19_Continued_Impact_Threat_Bulletin_TLPWHITE-1.eng_.pdf>.
[20] Canadian Centre for Cyber Security, National Cyber Threat Assessment 2020 (2020) at 21, online (pdf): Government of Canada <https://cyber.gc.ca/en/guidance/cyber-threats-canadian-organizations>.
[21] PIPEDA, supra note 15, Schedule 1, s 4.7; see also PIPA, supra note 15, s 34.
[22] PIPEDA, ibid, s 10.1(1); PIPA, ibid, s 34.1; Federal privacy law also requires notification to the individual (PIPEDA, s 10.1(3)) and Alberta privacy law may require notification at the discretion of the privacy commissioner (PIPA, s 37.1).
[23] “Preparing for the (Inevitable) Data Breach” (23 February 2020), available online: BLG Business Venture Clinic <http://www.businessventureclinic.ca/blog>.

Articles of Incorporation Basics
 
Background
If you have the opportunity to start your business off on the right foot, why not capitalize on it? Having an effective and well thought out legal structure is not only conducive for business growth, but it can also save a lot of headaches and future problems down the road. Articles of Incorporation is going as far back, legally, as possible. Understanding what these documents are is critical to understanding how the law can directly impact your business.
 
Articles of Incorporation are part of a legal document that is submitted to either the provincial, territorial, or federal government which registers a business as a corporation within Canada. For the purposes of this blog post, we will be examining two jurisdictions. The first is Alberta-based corporations which is governed by the Business Corporations Act (Alberta).[1] The second is federally incorporated companies which are governed by the Canada Business Corporations Act.[2]
 
As a refresher, operating under a corporate entity separates the business from its owners. The liability attributed to the corporation is only in regard to the corporation’s assets, not the assets of the owners of the corporation. This is important if the business is being subject to any legal action or debt recovery; it limits shareholder and director liability.
 
What is included in the Articles?
Articles of Incorporation include specific information for all corporations. Requirements of the Articles are found in S.6(1) of the ABCA and CBCA. The legislation mandates the inclusion of the name of the corporation, the corporation’s share structure, the number of directors of the corporation, and restrictions. Found on the legal Articles document is the corporation’s address and date of filing.
 
Business Name
A business name is always included in the Articles. Often, you will see companies named ###### Alberta Inc., or ###### Canada Inc. This would be the legal name of the business, but the Articles allow you to have a named corporation as well like ABC Company Inc. To make sure there are no other companies with your business’ chosen name, you will have to do a NUANS report to confirm that no duplicates exists.
 
Directors and Officers
All directors’ names and their addresses must be included in the Articles. Federally, if there are only one or two directors in the company, at least one of them must be a Canadian resident.[3] In Alberta, there is a similar rule, but the Alberta corporation only mandates that one in four directors must be resident.[4] Non-Canadian residents can also be directors of the corporation, however, and in most instances, provinces will still require the company to have an attorney for service or someone in the province to be able to receive mail and more, on behalf of the corporation. When this is not the case, most provinces will require an attorney for service or someone in the province to be listed. Residential addresses for all directors are required to confirm residency status.
 
Although officers are not legally mandated in corporations, in a small owner-operated business, it is common for the shareholder(s), director(s), and officer(s) to be all the same. For example, if Bryce is the CEO of 123456 Canada Inc, Bryce can also be listed as a director and a shareholder on the Articles. However, officers manage the operations of the business and therefore, the decision to select them should not be taken lightly.
 
Head Office
The Articles must include the corporation’s head office address. The head office of the corporation needs to be located in the province or territory in which the business is being registered.
 
Restrictions
Any restrictions that apply to the business must be included in the Articles. Restrictions generally relate to the company’s share structure and share transfers. Restrictions on share transfers allow shareholders to control who can become a shareholder in the corporation. Having this embedded in the Articles makes sure that changes cannot be made without updating the Articles with the government. In order to update the Articles, shareholders must vote to pass the amendments with a two-thirds vote.

     _________________
[1] Business Corporations Act, RSA 2000 c B-9 (ABCA).
[2] Canada Business Corporations Act, c C-44 (CBCA).
[3] Ibid at s 105(3.3).
[4] ABCA, supra note 1 at s 105(3).