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Should you Extra-Provincially Register your Company?
Written by: Bilal Qureshi If your Company, which is provincially incorporated in Alberta and wishes to “carry on business” in a province other than Alberta, it may need to be registered in that other province it wishes to “carry on business” in. This is called an extra-provincial registration. What does “carry on business” mean? Each province has its own statute defining what “carry on business” means, which will determine whether your Company is required to extra-provincially register in that other province. For example, in British Columbia, the governing statute to determine what “carrying on business” means is defined in the Business Corporation Act (“BCA”). The BCA requires that foreign entities be registered as an extra-provincial company in accordance with the BCA within two months after beginning to carry on business in British Columbia.[1] A foreign entity is defined as “a foreign corporation or a limited liability company”.[2] Pursuant to the BCA, a foreign entity is deemed to carry on business in British Columbia if:
However, section 375(4) in the BCA provides an exemption for a foreign entity from being registered under the BCA while allowing it to carry on business in British Columbia.[4] The foreign entity may do so if it does not maintain in British Columbia a warehouse, office or place of business under its own control or under the control of a person on its behalf.[5] Each province will have different requirements for what “carrying on business” means. For example, unlike in British Columbia, Quebec and the Quebec’s Act Respecting the Legal Publicity of Enterprises considers companies to be “carrying on business” in Quebec if it has representatives in Quebec for the purpose of making profit.[6] Contact Us! To avoid unnecessary fees and penalties, it is better to be proactive in determining if your company requires to be registered extra-provincially. Please feel free to contact the BLG Business Venture Clinic for further information! Bilal Qureshi is a member of the BLG Business Venture Clinic and is a 2rd year student at the University of Calgary Faculty of Law [1] Business Corporations Act, SBC 2002, c 57. at s 375(1). [2] Ibid at s 1. [3] Ibid at s 375(2). [4] Ibid at s 375(4). [5] Ibid. [6] Act respecting the legal publicity of sole proprietorships, partnerships and legal persons, CQLR c P-45, s 21(4).
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TSX Venture Exchange – Security Based Compensation Policy Change
Written by: Ryan Amaral On November 24th 2021, the Toronto Stock Exchange Venture Exchange (TSXV) announced amendments to their policies regarding security based compensation. These changes will allow greater flexibility to issuers in terms of their ability to offer a variety of security-based compensation options. As the TSXV is focused on early-stage and growth companies, these amendments are particularly relevant to start-ups who frequently utilize security-based compensation as a mechanism to attract and retain employees. While a number of changes were made, some of the key changes are outlined below. Additional Forms of Security Based Compensation The former policy (Policy 4.4 – Incentive Stock Options) only addressed traditional stock options, whereas the new policy (Policy 4.4 – Security Based Compensation) now covers other forms of security-based compensation such as:[1]
By expanding upon the previous policy, these additions will effectively allow TSXV issuers greater ability to tailor their compensation plans to the specific needs and peculiarities of their organizations. Vesting Changes Additionally, a key change in relation to these incentives is that they may not vest for a period of at least 12 months from the date of grant or issuance, subject to limited circumstances which may provide for acceleration.[2] Security Based Compensation Plan Changes Further, the new policy expands upon the previous one by providing for two additional types of security-based compensation plans, while also amending the previous stock option plans to include the new forms of security-based compensation. These four new categories include:[3]
Categories (i) and (ii) are unchanged from the previous policy, except as to including the new additional types of Security Based Compensation. Category (iii) is termed by the TSXV to be a “hybrid” category, designed to provide additional flexibility to Issuers. Category (iv) is a subset of (ii) in that it permits a fixed number up to 10% only, and it is further limited only to Stock Options.[4] Cashless Exercise and Net Exercise Formerly, the exercise price of a stock option was required to be paid in cash where the option holder would pay the issuer the strike price at the time of exercise. The new policy now allows for these options to be exercised under either a “cashless” or “net” method. A "cashless exercise" is one where a brokerage firm facilitates the exercise of an option, and the issuer still receives the exercise price in cash.[5] A "net exercise" is one where the participant receives the shares based on a five-day volume weighted average trading price calculation, provided that the participant is not an investor relations service provider.[6] These amendments took effect as of November 24th, 2021. For further information regarding these changes, check out the TSXV’s bulletin notice here. Ryan is a member of the BLG Business Venture Clinic and is a 2nd year student at the University of Calgary Faculty of Law. [1] TMX Security Based Compensation Bulletin Notice (2021), online: <https://www.tsx.com/resource/en/2758> [2] John E Piasta et al, “TSX Venture Exchange Updates Security-Based Compensation Policies”, (December 10, 2021), online: <https://www.bennettjones.com/Blogs-Section/TSX-Venture-Exchange-Updates-Security-Based-Compensation-Policies> [3] Supra note 1 [4] Ibid [5] Rick Moscone and Sabrina Alaimo, “Canada: TSX Venture Exchange Announces Amendments to Security-Based Compensation Policies”, (December 16, 2021), online: <https://www.mondaq.com/canada/shareholders/1142220/tsx-venture-exchange-announces-amendments-to-security-based-compensation-policies> [6] Ibid What Amendments to the Alberta Business Corporations Act Mean For Your Business
Written by: Devon Slavin Alberta’s Business Corporations Act (ABCA) has been amended - and the amendments will impact companies of all sizes in Alberta. In a provincial release, the Government of Alberta stated that the aim of the reform is to attract investment and “ensure that Alberta is the first choice for business”.[1] Key changes include the removal of the residency requirement for directors, and provisions that create an agent for service requirement and allow for virtual annual general meetings (AGMs). Residency Requirements for Directors Previously, the ABCA required at least 25% of an Alberta Corporation’s directors to be resident Canadians.[2] This requirement also applied to quorum at meetings, requiring 25% of those present to be Canadian residents.[3] In summer 2021, the residency requirement was removed, meaning that ABCA corporations no longer need to have resident Canadians on their boards. The stated goal of the amendment is to promote economic growth and job creation by eliminating unnecessary burdens.[4] This will impact companies by being a welcome change for foreign investors. Before a company alters the composition of the board, it is important to review the company’s by-laws to determine if the by-laws contain residency requirements. If a company wishes to take advantage of the new flexibility in the ABCA, it may be necessary to amend the by-laws. Agent for Service Requirement According to the change in residency requirement, an ABCA corporation may no longer have any directors located in Canada. Therefore, all ABCA corporations are now required to appoint an Agent for Service.[5] The Agent for Service must be a resident Albertan and have an office that is accessible to the public during normal business hours[6]. Existing ABCA corporations have until March 29, 2022, to appoint this agent for service. This is important for ABCA corporations to be aware of, because if the company does not appoint and register the Agent for Service within the time frame, the Registrar of Corporations can dissolve the corporation. Virtual Shareholder Meetings Previously, under the ABCA, meetings could only be held by electronic means if the bylaws expressly permitted it. With the new amendment, Alberta organizations can now automatically hold board, shareholder and member meetings by “electronic means”. The ability to hold virtual shareholder meetings is now restricted only by the bylaws of the company.[7] In this context, “electronic means” requires that the meeting take place in real-time, meaning that all attendees can communicate instantaneously.[8] Devon Slavin is a member of the BLG Business Venture Clinic and is a 2rd year student at the University of Calgary Faculty of Law Footnotes: [1] “Ensuring Alberta is the First Choice for Business” (15 November 2021), online: Government of Alberta https://www.alberta.ca/release.cfm?xID=80375781B96F2-E5F6-7FFC-34F563DC2D7A540D. [2] Business Corporations Act, RSA 2000, c B-9, s 105(3) [ABCA], as amended by Red Tape Reduction Implementation Act, 2020. [3] Bryan Haynes and Adrienne Roy, ”Important Changes to the Alberta Business Corporations Act Now in Effect” (13 April, 2021), online (blog): Bennett Jones Blog https://www.bennettjones.com/Blogs-Section/Important-Changes-to-the-Alberta-Business-Corporations-Act-Now-in-Effect. [4] Ibid. [5] ABCA s 20.1. [6] Ibid. [7] Katherine Prusinkiewicz. “Amendments to the Alberta Business Corporations Act Have Come Into Force” (30 March 2021), online (blog): Norton Rose Fulbright Thought Leadership https://www.nortonrosefulbright.com/en/knowledge/publications/36bbb4d5/amendments-to-the-alberta-business-corporations-act-have-come-into-force. [8] ABCA s 1(p.1). ASC Dealer Registration Exemption
Written by: Gordon Walters On November 10, 2021, the Alberta Securities Commission (“ASC”) adopted a dealer registration exemption under ASC Blanket Order 31-536 Alberta Small Business Finder’s Exemption (“the Order”).[1] The exemption allows a finder who meets certain conditions to intermediate the sale of the securities of an Alberta Small Business Issuer under certain prospectus exemptions. The exemption is effective as of November 10, 2021, and expires November 11, 2024.[2] The ASC is revoking the current ASC Blanket Order 31-305 Registration Exemption for Trades in Connection with Certain Prospectus-Exempt Distributions.[3] Substance and Purpose The new small business finder’s exemption is intended to help small businesses use finders to raise money.[4] Start-up and small businesses are an important part of Alberta’s provincial economy, serving as key contributors to employment, quality of life, and income within communities.[5] In fact, as of 2019, small businesses (defined as having between 1 and 99 paid employees) employed 8.4 million individuals in Canada, or 68.8 percent of the total private labour force.[6] In 2016, small businesses contributed 41.9 percent to gross domestic product (GDP) generated by the private sector. Although the size of these capital raisings are not traditionally supported by registered dealers, they can be assisted by finders who may have close friends, family, and business associates in the community that wish to invest in these types of opportunities.[7] It was through this lens that the ASC reviewed Blanket Order 31-305 and the current exemptions from the prospectus requirement to design a more targeted exemption from the dealer registration requirement for finders. Finders Finders are individuals who introduce two or more parties they believe have a mutual interest and who subsequently allow those parties to work out a transaction between themselves.[8] A finder may be compensated for his or her introductory services.[9] The finder is required to disclose the details of the compensation received from the Alberta Small Business Issuer in relation to each purchaser’s purchase in the Risk Acknowledgement Form provided to the purchaser. If a finder does more than say “there is an investor/company” and instead sells or acts as the go-between person in a securities transaction, they are likely in violation of applicable securities laws by acting as an unregistered broker-dealer.[10] To register for the exemption, the finder can be an individual, as defined in the Securities Act (Alberta) as a natural person, or a company in respect of which the only registered shareholders and beneficial shareholders are an individual and the individual’s spouse alone or together.[11] The finder cannot be a party registered under securities legislation in Canada or a foreign jurisdiction, cannot previously have provided services as a registrant to the purchaser, and cannot be a “bad actor” (subject to a court or regulatory sanction relating to fraud, theft, deceit , or misrepresentation).[12] Dealer registration requirement The dealer registration requirement prohibits a person or company from acting as a dealer unless registered in accordance with Alberta Securities Laws.[13] A person or company is only required to be registered as a dealer if the person or company engages in or holds itself out as engaging in the business of trading in a security or exchange contract as principal or agent, or acts as an underwriter. However, under ASC Blanket Order 31-536, the dealer registration requirement does not apply to a finder in connection with a specified distribution, provided they do so in compliance with the Order. The Order A summary of the material aspects of the Exemption are as follows:[14] a) Which issuers can finders act for?
b) When can a finder participate as a salesperson in financing?
c) What can’t a finder do?
Transition Period The ASC has included a six-month transition period before the revocation of Blanket Order 31-505 is effective.[15] The six-month period will allow finders that are currently relying on the dealer registration exemption contained in Blanket Order 31-505 a transition period in which to complete private placements that are in progress. Gordon Walters is a member of the BLG Business Venture Clinic and is a 2rd year student at the University of Calgary Faculty of Law Footnotes: [1] ASC Blanket Order 31-536 Alberta Small Business Finder’s Exemption (2021), online: ASC Notice of Implementation: <https://asc.ca/securities-law-and-policy//-/media/ASC-Documents-part-1/Regulatory-Instruments/2021/11/5976826-ASC-Notice-Blanket-Order-31-536.ashx>. [2] Alberta Small Business Finder’s Exemption, 2021 ABASC 172, s 8. [3] ASC Blanket Order 31-536 Alberta Small Business Finder’s Exemption (2021), online: ASC News Release: <https://asc.ca/News-and-Publications/News-Releases/2021/11/Nov-10-ASC-adopts-new-small-business-finders-exemption-to-facilitate-capital-raising>. [4] Ibid. [5] ASC Notice of Implementation, supra note 1. [6] Canada, Key Small Business Statistics, Report by Government of Canada (2020), online (pdf): Government of Canada <https://www.ic.gc.ca/eic/site/061.nsf/eng/h_03126.html>. [7] ASC Notice of Implementation, supra note 1. [8] “What you need to know about finders, agents & brokers” (n.d.), online: Venture Law Corporation <http://venturelawcorp.ca/finders_agents_brokers.html>. [9] ASC Notice of implementation, supra note 1. [10] Supra note 8. [11] Alberta Small Business Finder’s Exemption, supra note 2 at s 2. [12] Ibid at s 6. [13] Securities Act, RSA 2000, c S-4, s 75(1)(a) [14] ASC Notice of interpretation, supra note 1. [15] Ibid. SAFEs: What are they and when are they used
Written by: Devan Fafard A SAFE, short for “Simple Agreement for Future Equity”, is a popular form of early stage outside financing for start-up companies. The SAFE was created in 2013 by YCombinator, the well known start-up incubator, as a quick and easy alternative to convertible notes for seed financing rounds that avoids the quirks of California lending laws.[1] The attractiveness in using a SAFE is, as the name suggests, its simplicity in negotiation and execution. The standard form SAFE document is quite short and, by design, contains few negotiable terms. Another attractive feature is that it piggybacks off of future valuation work by institutional investors, converting into shares of the company in relation to a future priced financing round. This allows a seed investment to be made without undertaking the arduous work of trying to value a company in its infancy. Negotiable Terms The terms of a SAFE that are meant to be negotiable, besides the amount of the investment, are the discount rate to the future equity investment that the SAFE will convert at, the financing threshold or “qualified financing” at which the SAFE will convert into equity, and the valuation cap at which the conversion can be priced at. The discount to the future equity investment may be included to recognize that the SAFE investor invested their funds at an earlier time when the company presumably had a lower valuation. By having the SAFE convert at a discount on a price per share basis to the priced equity financing the SAFE recognizes this time period difference in valuation while still using the valuation work done by the priced equity financing round. The typical discount range is between 10-20%.[2] The financing threshold provides for the required value of the subsequent equity financing that will automatically trigger the conversion of the SAFE into shares. This sets the minimum financing amount required before the SAFE will convert and the founders will be diluted. The valuation cap sets the ceiling for the valuation that the SAFEs will convert at during a future equity financing. This term was brought in for SAFE holder protection in response to rapid increases in the value of start-ups.[3] This term functions so that if there is an equity financing at a valuation above the set cap the SAFE will convert as though the financing occurred at the valuation cap amount.[4] This results in the conversion price reflecting the early stage of the SAFE investment and prevents the SAFE investor ownership position being diluted during the subsequent priced financing round past a certain point. Do SAFEs Make Sense in Canada? Despite the popularity of SAFE instruments in the start-up community, from an investor perspective they may not be the best financing fit for start-ups in Canada. The SAFE was born as a solution to work around strange lending registration requirements in California.[5] In the absence of these registration requirements in Canada, convertible notes can have longer maturities and provide investors with more downside protection than SAFEs can offer. Canada also lacks the venture capital infrastructure that results in good ideas being subsequently financed and properly valued by sophisticated investors.[6] There is a risk in Canada that either the start-up is not financed at all or is financed and valued by an unsophisticated retail investor who lacks the experience to properly value the venture.[7] Both scenarios are potentially damaging to SAFE investors and indicate that convertible notes may be the better option. While heralded for their simplicity, it is important to know the pros, cons and mechanics involved in using SAFEs to finance or invest in a start-up business. Seeking out the qualified advice of a legal professional to make sure that a SAFE fits your individual situation is advisable before engaging in this type of seed financing. Devan Fafard is a member of the BLG Business Venture Clinic and is a 3rd year student at the University of Calgary Faculty of Law Footnotes: [1] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 3rd ed (LexisNexis Canada, 2018) at 274 [Tingle]. [2] Michael E Reid et al, “Demystifying SAFEs: The good, the bad, and the ugly,” (30 July 2020), online: < https://www.dlapiper.com/en/canada/insights/publications/2020/07/demystifying-safes/> [Demystifying SAFEs]. [3] Tingle, supra note 1 at 273. [4] Ibid. [5] Ibid at 274. [6] Ibid. [7] Ibid. Financing the Start-up Company
Written by Viviana Heather Securities regulation in Canada is a matter of provincial jurisdiction, where it governs every issuance of securities by a growth company. The legal requirements concerning securities offering are substantially the same between the provinces. As a result, there are two bedrock principles in the Canadian securities regime: (a) no one may buy or sell shares unless a registered dealer (in other words, an investment bank) is involved in the sale; and (b) a prospectus must be used every time a corporation distributes its shares to investors.[1] However, growth companies will unlikely raise early financing under this system due to the high costs associated with a prospectus and retaining a registered dealer.[2] This blog post provides an overview of the exemptions from prospectus requirements. The Private Issuer Exemption This exemption is invariably the exemption applied to startups and small issuers for the initial distribution of shares to their business partners. The private issuer exemption requires the following:
This exemption is similar to the Private Issuer Exemption. Eventually, a company will cease to be a private issuer because they have too many shareholders or they distribute shares to the public (which violates the requirements under 3 and 4 of the Private Issuer Exemption).[4] The individuals that fall under this exemption include:
This exemption is usually used by angel and venture capital investors. While there are different categories of accredited investors, the most commonly used ones are as follows:
This prospectus exemption is available in every province, but there are significant differences in how it operates.[11] The general concept is that the exemption allows a company to raise money from any person so long as that person is provided with an offering memorandum in a prescribed form prior to agreeing to purchase the security.[12] The offering memorandum discloses basic information about the issuer, its business, financial status and management, terms of the offering, and it describes the securities that are to be sold.[13] The Employee Exemption This exemption is typically not used as a financing mechanism, but NI 45-106 provides an exemption for trades by an issuer with its employees, directors, senior officers and those consultants that spend a “significant amount” of time working with the company.[14] However, these individuals are also covered in other exemptions such as the Private Issuer Exemption and the Family, Friends and Business Associates Exemption. The Minimum Amount Investment All provinces subscribe to this exemption, which provides for an exemption from prospectus requirements where an investor acquires more than $150k worth of securities.[15] Conclusion To make an offering of securities in Canada without using a prospectus and involving a registered dealer, a growth company must rely on a prospectus exemption in order to finance their enterprise. Viviana Heather is a member of the BLG Business Venture Clinic and is a 3rd year student at the University of Calgary Faculty of Law Footnotes [1] Securities Act (Alberta), s 75; Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 3rd ed (LexisNexis Canada, 2018) at 252 [Tingle]. [2] Tingle, ibid. [3] Prospectus and Registration Exemptions, NI 45-106, s 2.4 [NI 45-106]; Ibid at 254. [4] Tingle, supra note 1 at 255. [5] NI 45-106, supra note 3. [6] It is a rebuttable presumption. See Securities Act (Alberta), s 1(1). [7] NI 45-106, supra note 3. [8] See e.g. Re Brittain, 1993 CarswellSask417 (WL Can), 2 CCL 109 (SK Securities Commission). [9] NI 45-106, supra note 3. [10] Ibid. [11] Tingle, supra note 1 at 258. [12] Ibid. [13] Ibid. [14] Ibid at 260. [15] Ibid at 261. CSA Regulatory Sandbox
Written by Nikolas Kalantzis If your start-up is in the business of trading or advising securities you are subject to Canadian securities laws and must register under the Alberta Securities Commission (ASC). Securities may include stocks in a company, corporate bonds, profit-sharing agreements, shares in an investment fund, or investment contracts. And yes, according to CSA Staff Notice 21-327, when cryptocurrencies are traded on a platform they are also considered a security. Spurred into action by the QuadrigaCX fiasco, securities regulators across Canada have now stepped up their game to more closely regulate financial technology (fintech) start-ups and cryptocurrencies (crypto) while still allowing some innovation and experimentation in the market. In doing so, the ASC has created a Financial Innovation in the Capital Markets unit in partnership with the Canadian Securities Administrators (CSA) and have released a regulatory Sandbox to exempt fintech start-ups from certain securities regulations. What is the Sandbox? The Sandbox is a coordinated relief initiative to allow fintech start-ups the chance to apply their ideas and test their products on the securities market. The CSA allows relief across Canada subject to local regulators. It is also in collaboration with international fintech networks allowing international testing of their innovative product or service. A regulatory sandbox can be defined as a “safe space” that allows start-ups to work in “a limited capacity and receive regulatory relief from traditional rules” such as waivers or no-action letters (Clements 2019, 8). This provides the necessary regulatory oversight that promotes start-ups to work more precisely than the traditional Silicon Valley tech start-ups of the “move-fast-and-break-things” ethos (Clements 2019, 9). As such, financial markets and consumers are still protected while allowing Canadian start-ups the chance to innovate and grow. Who’s Allowed In? Applicants must be a fintech start-up or business with an innovative product, service, or application. Fintech itself has a wide net that covers processes, products, technology, and innovations that materially effect financial markets, business transactions, or financial systems (Clements 2019, 3). This may include more efficient ways to trade securities, promote financially underserved markets, enhance customer-user experiences, and reduce transaction costs. While the CSA is not explicit in defining fintech, your start-up should likely fit into this area to operate within the Sandbox. To date, crypto and crypto trading platforms makeup the majority of the Sandbox. The ASC defines crypto as generally referring to coins or tokens that are digitally represented assets produced by cryptography or blockchain technology. The CSA puts out an online decisions list of the various decisions or recommendations to applicants of the Sandbox. Before applying, interested fintech start-ups may want to consider these decisions to see the types of relief previously requested and the responses that the regulators gave. The Rest of the Playground Fintech is a new an exciting place with many growing start-ups. But outside the safe space of the Sandbox, fintech start-ups are likely subject to many regulatory requirements under Alberta’s Securities Act. This may include filing a prospectus, dealer registration, continuous disclosure, and market manipulation conditions among others. Fintech start-ups who are not registered with the ASC or another jurisdiction’s regulator may not have the normal safeguards in place such as trustworthy record keeping, confidentiality protections, fair pricing mechanisms, disclosure of fees, and risk warnings. Hop-in! If you have more questions about the Sandbox or just want to discuss the legal options for your fintech start-up please contact the BLG Business Venture Clinic. You can also contact the ASC directly at: regtechsandbox@asc.ca Nikolas Kalantzis is a member of the BLG Business Venture Clinic and is a 2nd year student at the Faculty of Law, University of Calgary. Sources: Clements, Ryan 2019. “Regulating Fintech in Canada and the United States: Comparison, Challenges and Opportunities”: View of Regulating Fintech in Canada and the United States: Comparison, Challenges and Opportunities (ucalgary.ca) CSA Regulatory Sandbox - Canadian Securities Administrators (securities-administrators.ca) Financial innovation in the capital markets | ASC (albertasecurities.com) Securities Act, RSA 2000, c S-4, <https://canlii.ca/t/5541x> retrieved on 2021-10-25. The Problem with Using Shares as Compensation for Future Services
For growth companies, offering shares as compensation to employees and contractors can be effective early-stage strategy. This is especially true for companies still waiting to see revenues coming through the door. However, there are important considerations to keep in mind when using shares as compensation. This article will outline the issues with using shares as compensation for future services, and then discuss two possible solutions to this problem. When can shares be used as compensation? Both the Alberta Business Corporations Act and the Canada Business Corporations Act outline that shares cannot be issued until the consideration for the share is fully paid.[1] This presents a problem when a corporation wishes to issue shares for future services. Based on the wording of these Acts, a share issuance given for future services would be an improper issuance. What can happen if shares are improperly issued as compensation for future services? There are currently two different views in the case law on what results when shares are improperly issued. The first line of cases has found that an improper issuance results in the shares being a nullity, while the second line of cases has instead used what is known as the "contextual" approach and allowed the courts to fashion the remedy to the situation. According to the line of cases which follow Javelin International v Hillier, if shares are issued for inadequate consideration, the issuance is considered a nullity.[2] This case, and the others which followed in its footsteps have noted that the legislation outlines that shares shall not be issued until consideration for the shares is fully paid. According to these cases, the use of the word "shall" signifies that without proper consideration, the issuance must be considered a nullity. In Alberta, the nullity stream of cases appears to have been rejected by the Alberta Court of Appeal in favour of the contextual approach. In Pearson, The Court of Appeal highlighted that corporate legislation does not spell out what should result if an improper issuance occurs.[3] The case expressly outlines that an improper issuance of shares under section 27 does not automatically make the shares void.[4] Other courts have come to a similar conclusion as Pearson, and determined that in the absence of guidance from the legislation, it is up to the courts to determine the proper remedy in situations where shares are improperly issued. In this situation, courts have typically taken one of three positions: (a) The shares are a nullification; (b) The directors are liable for the improper issuance; or (c) The shareholder is permitted to pay the subscription price to validate the issuance.[5] While this approach does offer the potential for an improper share issuance to be remedied, corporations will not want to rely on the discretion of the courts to validate their share issuances. Instead, two potential solutions are proposed below. Potential Solutions There are two potential avenues that a corporation may take that may allow it to issue shares as payment for future work. One Canadian scholar has suggested that the shares may be issued as consideration for entering into an employment agreement with the corporation.[6] However, if a corporation wishes to do this, it must keep in mind that section 27(3) of the Alberta Business Corporations Act requires that the consideration for the shares be "the fair equivalent of the money that the corporation would have received if the share had been issued for money."[7] Therefore, the value of having the employee join the company must equal the fair market value of the shares being issued. This will typically only be possible in the early stages of a corporation's life. The other strategy that a corporation may use requires further foresight. This strategy involves an existing shareholder transferring a portion of their shares to the contractor or employee. In this scenario the shares will have already been issued to the founder for good consideration. The founder is then free to deal with her shares as she sees fit. In order to execute this type of plan, it can be wise for a corporation to issue a founder extra shares when the corporation is founded for the purpose of later transferring those shares to new employees or contractors. Alternatively, the founding shareholders may agree to transfer shares to a new employee or contractor on a pro-rata basis. Conclusion Granting shares to potential employees and contractors in exchange for future work may be something a growth company wishes to do in its early stages. If it does do this though, it must ensure it does not run afoul of corporate legislation. The shares should either be transferred from the holdings of a current shareholder, or the shares must be issued in consideration for entering into an agreement with the company. ________________ [1] Business Corporations Act, RSA 2000, B-9, s 27(3); Canada Business Corporations Act, RSC 1985, c C-44, s 25(3). [2] Javelin International Ltd. (Receiver of) v Hillier, 1988 CarswellQue 28, 40 BLR 249, para 24. [3] Pearson Finance Group Ltd. v Takla Star Resources Ltd., 2002 ABCA 84, para 9. [4] Ibid, para 22. [5] Marshall Haughey, "Issuing Shares for a Promissory Note", (2014) 24:8 Can Current Tax 85, at 87. [6] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 3rd ed (LexisNexis Canada, 2018), at 154. [7] Supra Note 1, s 27(3). How to Protect your Billion-Dollar Idea: An Overview of Copyrights, Patents and Trademarks
Written by Skylar Caldwell So you've finally thought of the next billion-dollar startup idea. Before you book the next available spot on Dragon's Den or let the Facebook, Amazon, and Apple shaped-stars in your eyes cloud your vision, you may be wondering what steps you can take to protect the information that is valuable to your future-unicorn company. Canadian legislation provides several options to protect intellectual property and other information that is valuable to a business. This blog post provides an overview of three of the most common ways businesses protect their information; copyright, patent, and trademark. Copyright: For Creative Works A copyright is the right a person holds in a creative work. Do you intend on building a literary empire à la Stephen King? If yes, copyright is for you. Copyright provides protection for literary, artistic, dramatic, musical works, computer programs, and other subject matter known as performer's performances, sound recordings, and communication signals.[1] In general, copyright means the sole right to produce or reproduce a work or substantial part of a work in any form. In order to successfully apply for a copyright, a work must be original, creative, and recorded in some way. Creative, in the context of copyright, does not exclusively refer to artistic works. It simply means that the copyrighted work must be the product of knowledge and judgement. Haven't been able to find a publisher willing to take on your literary masterpiece? Don't sweat it- unlike trademark protection, copyright protection under the Copyright Act applies to works that have not been published or otherwise made known. In fact, copyright includes the right to publish a work or a substantial part of a work. Registering a copyright is not necessary. However, copyright gives the creator the presumption of ownership in any legal disputes that may arise surrounding the copyrighted material, as well as precludes a person who infringes on the copyright from claiming innocence.[2] It should be noted that not every incidence of copying copyrighted material is considered to be a violation. For example, section 6 of the Copyright Act specifies that exceptions are made in instances of copying for the purpose of "research, private study, education, parody or satire".[3] Additionally, the copyright must be monitored by the copyright holder.[4] This means that the onus is on the holder of the copyright to recognize any infringements on their copyright and bring forth an action against the individual infringing on the copyright. A copyright is typically valid for the entire creator's life, and extends to 50 years beyond the year of the creator's death.[5] Copyrights can be registered through the Canadian Intellectual Property Office (the "CIPO"). The process involves filling out an online form and paying a $50 fee. Patents: For Inventions Patents exist for the protection of inventions. Does your future-unicorn startup involve the invention of a product to protect dog's ears to solve the incessant problem of not being able to bring your pup along to concerts? I have bad news, Animal Ear Protectors have already been patented. If you have another invention, defined under the Patent Act 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"[6], a patent may be the right option for protecting your business. Patentable inventions must be new, useful and not obvious to an individual working in the relevant field or industry. Unlike copyright, there is no automatic protection for creators of the patented material. In order to legally protect your invention, a patent must be granted. Patent protections are typically stronger than copyright protections, as they give the holder the right to exclude others from making, using or selling the invention, even in instances where another person developed the patented invention independently. Patents last for 20 years, and cannot be renewed.[7] The first step in obtaining a patent is to file an application. The patent application fee is $204 for small entities and $408 for other businesses.[8] Once the application has been filed, the applicant must request an examination, which can take up to two years to occur. During the examination stage, an application may be granted, or the examiner may object to all or part of the application. In instances where there is an objection, the applicant must respond to the objection or else the application will be considered abandoned. If the applicant responds to an objection, there may be additional objections made by the examiner or the application may be denied in whole. If an application is rejected, the applicant can appeal the decision to the Commissioner of Patents. If an application is granted, the owner of the patent must pay maintenance fees every year to maintain the patent. The maintenance fee for the second, third, and fourth years following the filing date of the patent is $50 for small entities and $100 for other businesses.[9] The maintenance fees increase the longer you hold the patent for. On the fifth, sixth, seventh, eighth and ninth years following the filing date of the patent, the maintenance fee is $100 for small entities and $204 for other businesses.[10] Trademarks: For Business Names, Slogans and Logos The word "Tesla" is inextricably associated with innovation and the quirky, visionary leadership of its founder Elon Musk. If you foresee your billion-dollar startup obtaining a similar type of powerful brand recognition, you should consider filing a federally registered trademark under the Trademarks Act.[11] Trademarks can be any "combination of words, sounds, or designs used to distinguish the goods or services of one person or organization from those of others".[12] Trademarks can include business names, logos, and slogans, and can be important components of ensuring continuity in brand recognition. After all, where would Nike be without its association with the intensely inspirational and instantly recognizable "Just Do It" slogan? When registering a trademark, a person is granted "the sole right to use the mark across Canada for 10 years".[13] The holder of a trademark is also provided the option to renew the trademark every ten years. A trademark is not required to be registered. This is because, if the use of a trademark has persisted for a certain length of time, the trademark may be protected under common law. [14] The two most common types of trademarks in Canada are ordinary trademarks and certification marks.[15] An ordinary trademark includes words, designs, tastes, textures, moving images, modes of packaging, holograms, sounds, scents, three-dimensional shapes, colours, or a combination of these used to distinguish foods or services of one person or organization from those of others.[16] A certification mark can be licensed to many people or companies for the purpose of showing that certain goods or services meet a defined standard with respect to: (a) the character or quality of the goods or services; (b) the conditions under which the goods have been produced or the services performed; (c) the class of persons by whom the goods have been produced or the services performed; or (d) the area within which the goods have been produced or other services performed.[17] Certification marks are trademarks that serve as a guarantee that the goods or services with which the mark is associated conform to a particular standard. The owner of a certification mark is responsible for establishing the defined standard indicated by the mark. The owner may adopt the mark and register it with the Canadian Trademarks Office so long as it does not itself manufacture, sell, lease or hire the goods, or perform the services, in association with which the certification mark is to be used. Instead, the Trademarks Act provides for a licensing scheme under which the owner of the certification mark may license others to use to mark in association with their own goods and services, so long as those goods or services meet the owner's defined standard.[18] A trademark application may be filed on the CIPO website. There is a $336 base application fee if a business submits their application online through the CIPO website, and a $438 base application fee if a business submits through another channel.[19] An application for a trademark may be refused if it is confusingly similar to a previously filed trademark.[20] This is bad news for you if your billion-dollar idea involved a soft drink company called "doca dola". In order to expedite the process of filing a trademark, a business can search the Canadian Trademarks Database to look for similar trademarks before submitting their trademark application to determine whether their proposed trademark is confusingly similar to an existing one. The Trademarks Act deems a trademark to be adopted once it has been filed for registration in Canada. The filing date of an application is the date that the Registrar received an application meeting all its filing requirements. Once you've taken all the necessary steps to protect the valuable information involved in your startup, you can start building your entrepreneurial empire. So get out there, maybe get a small loan of $1 million from your father, and use your copyrighted, patented, or trademarked billion-dollar idea to build your unicorn startup! __________________ [1] Copyright Act, RSC 1985, c C-42 s 2. [“Copyright Act”] [2] Ibid at section 53(2). [3]Ibid at section 29. [4] Ibid at section 35(1). [5] Ibid at section 6. [6] Patent Act, RSC 1985, c P-4 [Patent Act]. [7] Ibid at section 44. [8] Government of Canada, “Patent Fees” (1 February 2021), online: Canadian Intellectual Property Office <https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr00142.html>. [9] Ibid. [10] Ibid. [11] Trademarks Act, RSC 1985, c T-13. [12] Government of Canada, “What Are Trademarks?” (3 July 2019), online: Canadian Intellectual Property Office <https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr03718.html>. [13] Government of Canada, “A Guide to Trademarks” (24 July 2020) online: Canadian Intellectual Property Office < https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/h_wr02360.html?Open&wt_src=cipo-tm-main&wt_cxt=learn> [TM Guide]. [14] Ibid. [15] Ibid at "Understanding Trademarks". [16] Ibid. [17] Ibid. [18] Ibid. [19] Canadian Intellectual Property Office, “Complete list of fees for trademarks” (28 April 2017) online: Canadian Intellectual Property Office <http://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr04194.html>. [20] Ibid.  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 |
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