Raising Capital in Alberta’s Capital Markets – Private Issuer Exemptions and Securities Laws11/14/2024 Written by Robert Rizzuti
JD Candidate 2025 | UCalgary Law Start-ups and entrepreneurs often require capital to fund their rapidly growing businesses. As such, when seeking investments in return for capital, whether from friends, family, or other sources, it’s important to understand that such transactions trigger securities laws, such as the Alberta Securities Act (Alberta)[1] or the provincial securities act of the applicable jurisdiction. Canadian securities laws apply to any issuer of securities, even a private start-up. Any transaction involving securities – i.e., giving shares to private investors to help a business – triggers these laws. As a result, startups and early-stage issuers often unintentionally violate securities laws. Fortunately, an issuer may qualify for certain reporting exemptions as a “private issuer”. This article highlights key aspects of exemptions, and securities laws to be aware of avoid the serious consequences of non-compliance. Prospectus Requirements There are two primary principles in the Canadian securities regime: 1. No person or company may buy or sell securities unless registered as an advisor or dealer;[2] and 2. a prospectus must be filed with the Alberta Securities Commission (the “ASC”) when a person or company distributes its shares to investors.[3] A prospectus requires “full, true and plain disclosure” of the issuer’s business and the securities being offered. This provides investors with complete and accurate information to make an informed investment decision. Filing a prospectus is costly and time-consuming, especially for a startup that is attempting to grow with limited funds. Additionally, registering as a dealer and filing a prospectus eliminates or reduces the chance of a growth company raising early rounds of financing.[4] Fortunately, prospectus exemptions may be relied on pursuant to National Instrument 45-106.[5] Private Issuer Exemption Start-ups often use the private issuer exemption and will exhaust this exemption before relying on the other potentially applicable prospectus exemptions. This exemption will apply if:[6]
The securities can only be offered to the company’s directors, officers, employees, founders, and control persons or their close family members, close personal friends, and close business associates. In addition, accredited investors are included on the enumerated list.[7] It is important to note that a family member includes parents, grandparents, siblings, and children. The practical effect of fitting under this exemption is not having to file a costly and time-consuming prospectus with ASC or other provincial securities regulators. In addition, the company is exempted from filing form 45-106 F1 (the “Report of Exempt Distribution”) in Alberta. Other Common Exemptions Eventually, a company will cease to be a private issuer either because it has too many shareholders or because it has distributed shares to members of the public. Yet, companies could be allowed to sell shares to certain classes of investors under the following exemptions. The Family, Friends and Business Associates Exemption is used when the investor has a special relationship with the company.[8] Under this exemption, a close personal friend is an individual who knows the other well enough and has known them for a sufficient period of time to be in a position to assess their capabilities and trustworthiness.[9] A close business associate is an individual who has had sufficient prior business dealings with the other to be in a position to assess their capabilities and trustworthiness.[10] The narrowly used Employees, Directors, Senior Officers and Consultants Exemption is used for trades by an issuer with its employees, directors, senior officers, and those consultants (with a written consultant agreement)[11] that spend a “significant amount” of time working with the company. There is an Accredited Investor Exemption that is predicated on the fact that some high-income and net-worth investors,[12] due to their resources and financial knowledge are sophisticated enough to make investment decisions without the protections afforded by a prospectus and registration requirements. This exemption is often used by angel investors and venture capital investors in growth companies. The most common categories of accredited investors include:[13]
When the investor is an incorporated entity a less commonly used exemption is the Minimum Amount Investment Exemption, which provides an exemption from prospectus requirements where a company acquires more than $150 thousand worth of securities.[14] Except for the Employees, Directors, Senior Officers and Consultants Exemption, all the other common exemptions mentioned in this section require filing the Report of Exempt Distribution within 10 days at the ASC, and potentially in each jurisdiction in which the distribution takes place. Other Rules and Best Practices
Conclusion Start-ups and entrepreneurs looking to attract capital from investors should be aware that a prospectus is required to be filed with securities regulators unless a private issuer exemption is applicable. Relying on an exemption is a great way to raise capital from a limited number of investors without burdensome and costly prospectus requirements, especially where the company is looking to grow in a cash-strapped environment. However, caution is warranted, there are serious pitfalls and traps in the Canadian securities regulatory field with serious consequences for being offside an exemption under NI 45-106 or making prohibited representations about a company’s future. Navigating the complexities of securities law in the start-up landscape is crucial since non-compliance with Canadian securities laws can have significant consequences, including penalties and fines, trading restrictions, and in severe cases jail time. Overall, one should remain vigilant to ensure compliance with securities laws, and understand that properly relying on a prospectus exemption can offer flexibility when raising capital. We encourage you to reach out to the Business Venture Clinic for legal information or to seek professional counsel for tailored legal advice. ________ [1] Securities Act, RSA 2000, c S-4 [ASA]. [2] Ibid, s 75. [3] Ibid, s 110. [4] Bryce C. Tingle, Start-Up and Growth Companies in Canada: A guide to Legal and Business Practice, 3rd ed (Toronto, Canada: LexisNexis Canada Inc, 2018) [Growth Companies], ch 12 at 251. [5] National Instrument 45-106 [NI 45-106]. [6] Ibid, s 2.4(1). [7] Ibid, s.2.4(2). [8]NI 45-106, supra note 5, s 2.5(1). [9] Companion Policy 45-106 [CP 45-106CP], s 2.7. [10] Ibid, s 2.8 [11] NI 45-106, supra note 5, s 2.24. [12] NI 45-106, supra note 5, s 1.1. [13] NI 45-106, supra note 5, s 2.3. [14] NI 45-106, supra note 5, s 2.10. [15] National Instrument 45-102, s 2.5-2.6. [16] Multilateral Instrument 45-106. [17] Subscription Agreement (Equity), by Practical Law Canada Corporate & Securities (Thomson Reuters). [18] Growth Companies, supra note 4, ch 13 at 279-284.
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Written by Zach Kennedy
JD Candidate 2024 | UCalgary Law In the unpredictable entrepreneurship landscape, not every startup embarks on a journey to success. Amidst the exhilarating pursuit of innovation, founders must also prepare for possible setbacks and losses. Effective tax planning emerges as a crucial strategy in this context, offering founders avenues to mitigate potential financial losses. By strategically navigating tax regulations, founders can safeguard their assets, optimize deductions, and minimize tax liabilities, even in the face of business challenges. Section 88(2) of the Income Tax Act (“ITA”) is one of those tax planning tools that can assist in minimizing the possible tax consequences for founders who wish to wind up their operations. "Winding-up" is used in connection with the winding-up of a business and the winding-up of a corporation's existence, whether voluntary or otherwise.[1] Imagine Bill having started such a business; as it stands the total value of the corporation's assets is $100,000, but Bill just doesn’t see a future for the business, so they wish to wind it up. Bill is the sole shareholder. In winding it up, Bill decides that they will just take back the assets from the corporation and begin winding it down. A few different things might happen to those amounts distributed back to them.
Possible Dangers of S.15 S.15 states that at any time a benefit is conferred by a corporation on a shareholder, the amount or value of the benefit is included in the shareholder's income.[2] In this case, the $100,000 of assets might simply be included back into Bill’s income, as they consist of a benefit given to them. This can represent a massive tax liability on wind-up, as the assets that may have been transferred into the corporation by the founder (who may be the sole shareholder) would be transferred back to them as a shareholder benefit. Their whole value would be taxed back as regular income. Based on top rates in Alberta, that might result in an additional $48,000 in taxes to be paid.[3] Deemed Dividends on Windup per S.84(2) Luckily, s.15 makes an exception and excludes the amounts which are deemed dividends by operation of s.84.[4] However, The language in both s.15(1) and s.84 are substantially similar – both referencing distributions for the benefit of the shareholder – it must be clear where one is operating within the ITA. Subsection 84(2) applies to either the winding-up of a business or the winding-up of a corporation.[5] On a typical wind-up of a corporation’s business, the assets in a corporation are distributed back out to the shareholders by way of deemed dividend per s.84(2). A dividend paid on a winding-up will be taxable, and such an amount must be included in the shareholder’s income.[6] This differs from s.15 in that it allows for a reduction of the value of the property distributed by the amount of the paid-up capital of the shares. This can be directly contrasted with how s.15 treats these distributions. For example, if Bill originally paid $50,000 for their shares of the corporation (and took nothing back but shares) then the shares would have a paid-up capital equal to $50,000. On the operation of s.84(2), the amount of the deemed dividend would reduce by $50,000, resulting in an income inclusion of only $50,000; half of what would be included under s.15. Easing of Taxation Under s.88(2) Finally, it may be the case that s.88(2) applies. Section 88(2) only applies where the appropriate corporate procedures are followed to bring a corporation's existence to an end.[7] Specifically, S.88(2) applies where a Canadian corporation is wound up after 1978, and throughout the winding-up, all or substantially all of the property owned by the corporation immediately before that time was distributed to the shareholders of the corporation.[8] The main benefit of s.88(2) applying is that it ensures that a corporation’s “capital dividend account,” “capital gains dividend account,” and “pre-1972 capital surplus on hand” reflect the disposition of funds or property by the corporation on the winding-up.[9] By giving access to accounts like the Capital Dividend Account (CDA), a reduction in the total amount of taxable dividends (and consequently taxable liability) can be reduced. Specifically, s. S.88(2)(a) allows the inclusion of any capital gains existing before the final distribution in the CDA.[10] The amounts in the CDA can then be declared as capital dividends and are excluded from the recipient's income.[11]For example, if a property in the corporation realized a capital gain of $25,000, half of that amount could be added to the CDA and distributed as a capital dividend. This would result in $12,500 being distributed out to Bill tax-free. Conclusion Navigating the intricacies of tax law, particularly concerning sections 88(2), s.84(2) and s.15 of the Income Tax Act, requires a nuanced understanding of applicable provisions and careful strategic planning. For any wind-up to avail oneself of the benefits under s.88(2), they may wish to take care to ensure that proper formalities are observed (such as director’s resolutions with very clear minutes) to provide evidence that a wind-up is being performed. If this isn’t done, then it may be the case that s.15 shareholder benefit provision may apply, which will result in the complete inclusion of the fair market value of the assets into taxable income. Businesses can optimize their tax positions and minimize exposure to unintended tax liabilities by leveraging the benefits of s.88(2) on wind-up while implementing prudent measures to mitigate shareholder benefits under s.15. [1] Canada Revenue Agency (CRA), Interpretation Bulletin IT-126R2 – Meaning of “Winding Up” [2] Income Tax Act, RSC 1985, c 1 (5th Supp), s.15(1). [3] Canada Revenue Agency (CRA). (2024, January 23). Income tax rates for individuals. https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html [4] Income Tax Act, RSC 1985, c 1 (5th Supp), s.15(1) [5] Supra note 3. [6] Income Tax Act, RSC 1985, c 1 (5th Supp), s.84(2) [7] Canada Revenue Agency (CRA), Interpretation Bulletin IT-126R2 – Meaning of “Winding Up” [8] Income Tax Act, RSC 1985, c 1 (5th Supp), s.88(2) [9] Canada Revenue Agency (CRA), Interpretation Bulletin IT-126R2 – Meaning of “Winding Up” [10] Income Tax Act, RSC 1985, c 1 (5th Supp), 88(2)(a) [11] Income Tax Act, RSC 1985, c 1 (5th Supp), 83(2)(b) Written by Emily Zheng
JD Candidate 2024 | UCalgary Law Whether you are a partner in a partnership or a director of a corporation, there are duties that you owe to your fellow partners or directors that tend to go unspoken and unwritten during the lifetime of a business. Yet, breaching these duties can lead to a partner or a director being held liable to the other partners or the corporation respectively and subject to damages, disgorgement of profits, or other relief. Duties Owed Between Partners in a Partnership According to Section 6 of the Alberta Partnership Act,[1] partners within the same partnership are agents of each other, meaning they have given each other the power to affect their legal relationships.[2] Courts have identified two main categories of duties that an agent owes to their “principal”:[3]
Duties Owed by Directors to Corporations You can find almost identical duties listed above within the Alberta Business Corporations Act[9] in Section 122(1). However, courts have elaborated upon these duties within the context of corporations, expanding certain interpretations.
Conclusion Similar to how good business practices often go unspoken, there are also underlying legal standards that courts expect business individuals to follow regardless of whether or not they are found on paper. While these duties are often missing from documents, courts still expect these statutory requirements and expectations to be met. [1] Partnership Act, RSA 2000, c P-3 [APA]. [2] Swift v Tomecek Roney Little & Associate Ltd, 2014 ABCA 49. [3] Watson v Holyoake, [1986] OJ No 541 [Watson]. [4] Ibid. [5] Groom, Lecky, Noonan v MacFarlane, 2000 PESCTD 61 at para 15. [6] APA, supra note 1. [7] Watson, supra note 3. [8] Ibid. [9] Business Corporations Act, RSA 2000, c B-9. [10] Ibid, s 122(1)(b). [11] Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68. [12] Ibid. [13] BCE Inc v 1976 Debentureholders, 2008 SCC 69. [14] Ibid. [15] Canadian Aero Service Ltd v O’Malley et al, [1974] SCR 592. [16] Ibid. Written by Kyle Murdy
JD Candidate 2025 | UCalgary Law The decision between bringing someone into a business as an employee or an independent contractor has both benefits and consequences in terms of their exit from the business. First, the factors that differentiate an employee from an independent contractor must be considered. To do this, the factors from the Sagaz test will be considered (1). These are listed below:
instead may terminate these independent contractors when a material breach of their agreement occurs - and this breach must be substantial enough to defeat the purpose of the contract 1. 671122 Ontario Ltd v Sagaz Industries Canada Inc, 2001 SCC 59, [2001] 2 SCR 983. Written by Emily Zheng
JD Candidate 2024 | UCalgary Law Whether you are looking through a waiver, an agreement, or a policy, you will often find the same words and phrases used throughout the document, such as “material breach” and “reasonable standards.” This legal jargon – an ironic mix of vague but somewhat understandable sets of words – may be familiar to those studying and practicing law, but how are other members of the public supposed to read them? This blog post will explain a few common phrases often used in standard form agreements. “…in consideration of…” Every contract must have three elements: offer, acceptance, and consideration. “Consideration” means that something is given in exchange for something being received, and contracts often use the term in its preamble or during the first few clauses to explicitly acknowledge this exchange. “reasonable degree of care/commercially reasonable degree of care/reasonable efforts” In everyday life, what is reasonable or unreasonable is different for each individual. However, when it comes to reasonableness from a legal standpoint, the expectation that courts use to evaluate an individual or a company’s action or inaction is built on whether a person (or commercial entity) used the same degree of care that can reasonably be expected of someone with the same status or circumstance. For example, medical practitioners will be compared to other practitioners with the same experience and standing, and CEOs will be compared to other similar CEOs. The comparison spectrum will also change depending on whether the court compares two businessmen versus two individuals with no business backgrounds. Hence, some iterations of this phrase include the word “commercially.” “material breach” A contract can be broken (or “breached”) in several ways at varying degrees of severity. The use of the word “material” means that the breach is serious, substantial, or fundamental to the point where it goes to the “root” (or primary purpose) of the contract.[1] To read more about the types of clauses commonly seen in commercial agreements, click here and here. [1] Guarantee Co of North America v Gordon Capital Corp, 1999 3 SCR 423. Written by Sergio Plazas
JD Candidate 2024 | UCalgary Law Entrepreneurial ventures often seek funding to fuel their growth and innovations, leading them to consider various forms of financing. Two main types are equity financing and debt financing, each with unique pros and cons. Understanding the distinctions and implications of each type is crucial for entrepreneurs aiming to make informed decisions that align with their venture's growth strategy and financial health. Equity financing involves selling a portion of a company's equity to investors in exchange for capital. This route is useful for startups and high-growth companies with insufficient assets or cash flow to secure traditional loans[1]. The primary advantage of equity financing is the lack of a repayment obligation, which can ease cash flow pressure on the business. However, it comes at the cost of diluting the founders' ownership and potentially ceding some control over the company[2]. Equity investors, such as venture capitalists or angel investors, often seek to influence strategic decisions and may expect significant returns on their investments. Debt financing, on the other hand, involves borrowing funds that must be repaid over time with interest. Debt includes traditional bank loans, bonds, and lines of credit. One of the key benefits of debt financing is the preservation of ownership and control; since lenders typically do not receive equity in the company, the original owners retain complete control of the business operations and decision-making[3]. Moreover, interest payments on debt are tax-deductible, which can provide a financial advantage. However, debt financing requires the company to have a reliable cash flow to meet repayment schedules, which can be a significant burden for startups and businesses in volatile industries. Failure to meet these obligations can lead to financial distress and even bankruptcy[4]. Debt might seem cheaper initially because it doesn't require giving up company shares. Still, its actual cost can be more complex and potentially higher, especially when factoring in the entrepreneurial incentives it shapes. Joseph Stiglitz's work on information asymmetry introduces the concepts of moral hazard and adverse selection, highlighting how debt contracts can sometimes lead to misaligned incentives between the entrepreneur and investors[5]. This misalignment can indirectly affect company performance, underscoring the importance of considering financing options' direct and indirect costs. Debt financing, while preserving equity, introduces fixed obligations that must be met regardless of the company's financial health. This can significantly burden startups, which typically face unpredictable cash flows and high operational risks. Equity financing, on the other hand, offers more flexibility since investors do not expect immediate returns and are generally prepared to bear the risk of uncertainty inherent in startups. Moreover, equity investors often bring valuable resources, including industry expertise, network connections, and credibility, which can be crucial for a startup's success.[6] The choice between equity and debt financing is influenced by several factors, including the company's stage of development, cash flow stability, growth prospects, and the founders' willingness to share control. While equity financing is often more accessible for early-stage companies with high growth potential but limited assets, debt financing can be a more suitable option for established businesses with stable earnings and the ability to service debt. Types of Debt Funding for Ventures The pathway to securing funding for entrepreneurs is filled with diverse options, each tailored to the specific needs and risk profiles of startups versus established businesses. Traditional bank loans, commonly pursued by established small businesses, often remain elusive for startups due to their high-risk nature and lack of tangible collateral[7]. This dichotomy pushes entrepreneurs towards alternative financing methods such as venture lending, leasing, and trade credit. Venture lending offers a tailored solution for startups with promising growth potential, providing them with the capital necessary to scale operations[8]. This option is attractive for its relatively low dilution of equity. Still, it comes with higher interest rates and often requires warrants, giving lenders the right to purchase equity later. This can benefit ventures that need substantial capital without wanting to give up control too early. Leasing is another viable option, especially for ventures needing expensive equipment without the upfront capital. It allows startups to use the equipment by paying a monthly fee, with the option to purchase it eventually. The benefits are twofold: conserving cash flow and avoiding technology obsolescence[9]. However, the total cost over time can exceed the price of purchasing the equipment outright. Small business and personal loans serve as a traditional route, offering lower interest rates than venture lending but requiring solid credit histories and sometimes personal guarantees[10]. This can be risky for entrepreneurs as it blends personal and business financial risks. Credit cards, easily accessible but costly, can bridge short-term financial gaps. The ease of use and immediate access to funds make them appealing for emergency needs. Yet, the high interest rates and potential for personal credit damage if the business fails to make this option a double-edged sword. Trade credit, an often-overlooked method, allows businesses to purchase goods or services on account, paying the supplier later[11]. This can improve cash flow management but requires a good relationship with suppliers and can come with high costs if payments are delayed. Despite the prevalent view of banks as primary funding sources for small businesses, entrepreneurial ventures face hurdles in securing such financing due to unpredictable cash flows and the high-risk nature of their operations. Banks' reluctance stems from the high probability of default and the challenges in collateral liquidation, given startups' tendency to possess intangible assets[12]. Moreover, regulatory and market mechanisms complicate the relationship between banks and high-risk ventures, such as usury laws and the adverse effects of high-interest rates on lender-borrower dynamics. Personal loans and corporate loans with personal guarantees sometimes serve as exceptions within the banking realm, providing a lifeline to entrepreneurs under specific conditions[13]—lastly, government guarantee programs and non-banking debt options present alternative financing pathways. Understanding the nuances of financing options, from venture debt and leasing to credit cards and trade credit, is crucial for entrepreneurs navigating the complex landscape of startup funding. Each option carries its own benefits, risks, and requirements, underscoring the importance of a strategic approach to financial planning and the pursuit of growth. [1] Marco Da Rin & Thomas Hellmann, Fundamentals of Entrepreneurial Finance, Oxford: Oxford University Press (2020). [2] Ibid. [3] Ibid. [4] Ibid. [5] Ibid. [6] Ibid. [7] Marco Da Rin & Thomas Hellmann, Fundamentals of Entrepreneurial Finance, Oxford: Oxford University Press (2020). [8] Ibid. [9] Ibid. [10] Ibid. [11] Ibid. [12] Ibid. [13] Ibid. Written by Brody Gray
JD Candidate 2024 | UCalgary Law Intro: The modern world of entrepreneurial spirit includes more and more individuals searching for their own “side hustle” in addition to their working commitments. The term side hustle can encapsulate anything from picking up a few extra shifts at a second job to starting your own company. Many entrepreneurs may even be tied up in multiple side hustles turned early-stage companies as they go about their business careers. The formation of these companies is a key component to a healthy and growing economy. Still, entrepreneurs taking on a director or officer role in multiple companies may find themselves in a conflict of interest, which can lead to significant legal issues. Conflict of Interest Under both the Business Corporations Act (Alberta) (“ABCA”) and the Canada Business Corporations Act (“CBCA”), directors and officers owe a fiduciary duty to each corporation that they serve on the board of or are employed by, respectively. Section 122(1)(a) of the ABCA[1] and section 122(1)(a) of the CBCA[2] both impose an obligation on directors and officers to act honestly and in good faith with a view to the best interests of the corporation. The duty to act honestly and in good faith is understood at common law to include a duty to act without conflict or without a conflicting personal interest, on behalf of the corporation. A director or officer who is also working for or with another competing company could be in violation of 122(1)(a) under the applicable statute. Directors are occasionally hired specifically for their industry expertise, so it will always be a fact-specific inquiry about the details of the situation. The case of Pardy v Dobbin is centred around a possible breach of the fiduciary duty when a director acts for multiple boards.[3] In this case, it was not enough to find that Dobbin had simply worked as a director for two separate companies or that the two companies had both been golf courses. The court held that there would need to be evidence that the corporations were competing for the same opportunities, in the same market, or in some other way directly in competition with each other for a breach of the fiduciary duty to be found. A further fact-specific inquiry would be raised if a director or officer had a personal relationship with a director or officer of another corporation to determine if a self-dealing contract or conflict of interest arises.[4] A breach of a fiduciary duty may arise even when an individual isn’t personally acting for multiple boards if they act or structure deals in a manner that is self-dealing through personal connections with multiple companies. How Does this Apply? For the modern entrepreneur, any new position should be approached cautiously to ensure their new venture does not compete with any current business they are involved with. Any entrepreneur must be cautious to ensure they avoid breaching their fiduciary duty to both companies. The application of the fiduciary duty has consequences for the modern entrepreneur outside of their own obligations as well. Entrepreneurs may find themselves in contact with venture capitalists and other investment bodies in the early stages of their companies, and many of these groups will seek shares or board seats as part of investment deals. Entrepreneurs should be mindful that these parties, though they may act for the interests of a certain subset of shareholders, still hold a fiduciary duty to the corporation as a whole. What if you are in a conflict of interest? If a director or officer finds themselves in a conflict of interest, certain business deals or contracts made while in this conflict may be struck down or voidable. The applicable corporate statute provides a “safe harbour rule” in section 120 that allows disclosure by directors and officers in relation to contracts to cure a self-interested contract. Several legislative factors must be considered to determine if the safe harbour rule can save a specific contract. First, the impacted director or officer must be a party to a material transaction with the corporation and disclose this relationship in writing into the meeting minutes.[5] The disclosure must reflect the full nature and extent of the impacted director or officer’s influence. The amount of disclosure is contextualized, but fundamentally, it must make the rest of the board “fully informed of the real state of things.”[6] Second, the disclosure must be made at the first instance the contract is considered, or at the first instance in which the director became an interested party.[7] Finally, when the contract is voted on the impacted director or officer must remove themselves from the vote.[8] These requirements can be extremely difficult for smaller boards at start-up companies to meet, where directors are not entirely independent of each other, and removing one director from a particular vote may mean the removal of a significant percentage of those entitled to vote. Conclusion: Directors and officers should always be wary of their greater fiduciary duty to the corporations they work for. They should be mindful of avoiding placing themselves in a conflict-of-interest situation. When individuals accept a high role in a corporation, they take on a significant responsibility to their fellow directors, officers, and the shareholders they work for. This is a responsibility they should remain mindful of by always maintaining their focus and efforts in the best interest of the corporation [1] Alberta Business Corporations Act, RSA 2000, c B-9, 122(1)(a). [2] Canada Business Corporations Act, RSC 1985, c C-44, 122(1)(a). [3] Pardy v Dobbin, 2000 NFCA 11 (CanLII), <https://canlii.ca/t/1n1pq>, retrieved on 2024-04-05. [4] Exide Canada Inc v Hilts, 2005 CanLII 40363 (ON SC), <https://canlii.ca/t/1lx69>, retrieved on 2024-04-05. [5] ABCA/CBCA, supra note 1, s 120(1). [6] Gray v New Augarita Porcupine Mines Ltd, 1952 CanLii 322 (UK JCPC), <https://canlii.ca/t/gwcjs>, retrieved on 2024-04-05. [7] ABCA/CBCA, supra note 1, s 120(2). [8] ABCA/CBCA, ibid s 120(8). Written by Christian Rossi
JD Candidate 2024 | UCalgary Law When incorporating a business, filing the requisite documentation with the appropriate government authority and paying the associated fees is necessary. One critical document is the Articles of Incorporation (the “Articles”). Detailed requirements for the contents of the Articles have been outlined in a previous BVC blog post.[1] Share Classes Among the crucial considerations within the Articles is the corporation’s share structure. The Articles allow for one or more classes of shares. The Articles must set out the rights, privileges, restrictions and conditions for each class.[2] For start-ups, it is advisable to avoid complex share structures with too many classes. Typically, start-ups opt for two classes of shares: common and preferred. Amongst these classes, corporations grant shareholders three fundamental rights: the right to vote, the right to dividends when declared, and the right to property on wind-up or liquidation.[3] These rights do not necessarily have to be consolidated within a single class of shares; they can be spread out amongst classes, but it is a requirement that the corporation grants them. Furthermore, all shares of a particular class must have the same rights and obligations attached to them unless they were issued in different series.[4] Common shares typically come with voting rights and are essential for maintaining control over the corporation. Preferred shares, on the other hand, offer an alternative financing avenue for companies to attract investors with differing objectives. External investors may prioritize fixed dividend rates and preferential treatment in the event of liquidation over voting rights. When considering preferred shares in the Articles, consider allowing for the issuance of preferred shares in series. This enables directors to establish multiple series of preferred shares with specific terms desired by shareholders without necessitating shareholder approval to amend the articles. Equity Splits A start-up must consider the equity distribution among its founders, as improper allocation can lead to long-term complications. One approach is to assign different equity amounts to reflect different roles and contributions. While a 50/50 ownership split might seem fair for a business incorporating with two founders, it may not be the most advantageous arrangement. An even split can pose hold-up risks for the corporation in the future. For instance, where founders disagree on significant decisions, barring any provisions in the bylaws to resolve ties, the indecision may stall the business's growth and potentially strain the business relationship between the founders. By issuing equity based on different roles and contributions, the corporation mitigates hold-up risks and ensures equitable compensation for each founder’s involvement in the company. Conclusion As a corporation grows, amending and repealing governing documents like the Articles becomes more difficult. Establishing appropriate share structures at the outset can help avoid these future complications. When drafting the Articles, start-ups should carefully consider the share classes they adopt, balancing simplicity with flexibility. Common shares often provide voting rights crucial for maintaining control, while preferred shares offer attractive financing options for investors. An equitable distribution of equity among founders can also be essential to prevent future conflicts and facilitate smooth decision-making processes. By thoughtfully designing share structures and equity splits, start-ups can establish a solid framework for success and pave the way for sustainable growth. [1] Ali Abdulla , “Articles of Incorporation in Alberta – Beyond the Basics” (8 March 2024), online (blog): < http://www.businessventureclinic.ca/blog/articles-of-incorporation-in-alberta-beyond-the-basics>. [2] Government of Canada, “Share structure and shareholders” (10 May 2023), online: <https://ised-isde.canada.ca/site/corporations-canada/en/business-corporations/share-structure-and-shareholders>. [3] Ibid. [4] Ibid. Written by Bailey Quartz
and Michael Cheung JD Candidate 2024 | UCalgary Law In the world of small business, fostering a collaborative culture is a key ingredient for success. Collaboration encourages teamwork, creativity, and innovation, leading to improved productivity and growth. As women entrepreneurs, you have a unique opportunity to build a cohesive and inclusive work environment that thrives on collaboration. Today, the BLG Business Venture Clinic will explore some tips to help cultivate a collaborative culture in your small business, empowering your team to achieve their full potential. Be Smart About Setting Goals and Expectations The foundation of any collaborative culture lies in establishing clear goals and expectations. As a leader, it's crucial to articulate the objectives of collaboration and ensure that every team member understands their role in achieving them. Transparency fosters a sense of purpose and unity, aligning efforts towards common goals. Regularly communicate progress and celebrate milestones to reinforce the value of collaboration within your small business. Foster Knowledge Sharing Encourage an open and supportive environment where team members feel comfortable sharing their knowledge and expertise. Recognize and reward individuals who actively contribute to the growth and development of their colleagues. This knowledge-sharing culture enhances skills and promotes continuous learning within your organization. Implement mentorship or peer learning programs to facilitate the exchange of valuable insights and experiences. Embrace Cross-Functional Projects Break down departmental barriers and offer opportunities for team members to collaborate on cross-functional projects. Allowing employees to step outside their usual roles not only promotes personal and professional growth but also facilitates a deeper understanding of various aspects of your business. This fresh perspective can lead to more creative problem-solving and the development of innovative solutions. Prioritize Communication and Conflict Resolution Effective communication is the backbone of any successful collaboration. Provide regular training on communication techniques and conflict resolution strategies to empower your team to express their ideas and concerns constructively. Create an atmosphere where everyone feels heard and valued. By addressing conflicts promptly and constructively, you can build stronger relationships and foster a more cohesive work environment. Build Team Spirit Team-building activities play a significant role in fostering collaboration and strengthening relationships among your employees. Organize events and exercises that encourage trust, understanding, and camaraderie. Activities such as team-building workshops, off-site retreats, or fun challenges not only promote collaboration but also create a positive and enthusiastic work atmosphere. Boost Collaboration with Walking Meetings Ditch the traditional meeting room and opt for walking meetings to invigorate creativity and encourage brainstorming. A change of scenery and physical movement can stimulate fresh perspectives and active participation from team members. These walking meetings not only improve productivity but also promote a sense of equality and openness within your small business. So, if your office is in an area or a neighborhood with a good walk score (70 is considered very good), pick a nearby destination and head out for the meeting. Digitize and Store Important Documents In a collaborative work environment, quick and easy access to information is essential. Keep crucial documents digitized and stored in the cloud to ensure they are readily available to your employees. Converting files into PDF format enhances compatibility and secures valuable information for efficient teamwork. Cloud storage solutions facilitate seamless collaboration, even in remote or hybrid work settings. Cultivating a collaborative culture in your small business is an ongoing process that requires dedication and a strong commitment to teamwork. By setting clear goals, encouraging knowledge-sharing, embracing cross-functional projects, prioritizing communication, organizing team-building activities, adopting walking meetings, and utilizing digital tools, women entrepreneurs can create a thriving work environment where collaboration thrives. A collaborative culture not only enhances productivity and creativity but also empowers your team to overcome challenges and achieve remarkable success in your small business journey. The BLG Business Venture Clinic has the legal assistance you’ve been looking for. Let us know if you have any questions! Written by Ryan Morstad
JD Candidate 2024 | UCalgary Law As news cycles debate whether Canada is or remains in a labour shortage, employers and employees alike should spend the time to learn about the rights and obligations involved in their employment relationships. Canadians may not be aware that whether or not they have a formal written employment contract with their employer, the nature of their working relationship is nonetheless contractual. A lack of written agreement may create some ambiguity in the terms of this agreement. Still, boiled down to the bare minimum, all employment agreements generally include (1) that the employee will conduct work for the employer, and (2) that the employer will pay them for this work. Other terms, such as termination provisions, will be implied into the contract if the parties do not explicitly address them. As discussed in a recent BVC Blog post[1], one such implied term of an unwritten employment agreement is that employers cannot terminate employees without cause unless they provide adequate notice of termination to the Employee. Other implied terms include that the employer will not unilaterally change the employees’ job duties, hours, or location of work and that they will not make the workplace intolerable. These implied terms are generally found to be fundamental provisions of the employment agreement. If these terms are changed, employees may claim that their work has changed so much that, even though they haven’t been formally fired, they have been fired in effect. This is called “Constructive Dismissal”. Although not a formal termination of employment, Constructive Dismissal arises when an employee claims that the nature of their employment has changed to such an extent that they should be deemed legally to have been dismissed[2]. In legal language, this might be called a fundamental or substantial breach of the employment agreement. If the employee is successful in their claim that they have been constructively dismissed, the employer will be required to provide them notice or payment in lieu of notice for termination, which, depending on various factors, can be a substantial. The test for constructive dismissal is contextual and involves two steps, which are that:
To avoid costly or stressful legal claims, employers should ensure they have complete written agreements with their employees! Employment contracts are critical to ensure that employers and employees understand the terms of their working relationship. [1] Alec Colwell, “Common Law Reasonable Notice for Termination” (March 11, 2024), online (blog):BVC < http://www.businessventureclinic.ca/blog/think-twice-before-youre-taxed-twice5050080> [2] Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10 [3] Ibid at para 32 [4] Ibid [5] Tymrick v. Viking Helicopters Ltd., 1985 CarswellOnt 867 at para 11 [6] Merilees v. Sears Canada Inc., 1988 CarswellBC 93 [7] Pulak v. Algoma Publishers Ltd., 1995 CarswellOnt 277 [8] ; Chan v. Dencan Restaurants Inc., 2011 CarswellBC 2874 at para 34 [9] See Alberta Employment Standards Code, RSA 2000, c E-9 section 62. |
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