Written by Sarah Dallyn
JD Candidate 2024 | UCalgary Law
 
There is a lot of paperwork involved in getting a new business off the ground and it can be overwhelming to keep all the different documents straight. One set of documents that are essential to the formation and organization of any new corporation are the constating documents. This blog provides a brief overview of what constating documents are and why these documents are important to your start-up.
 
What are constating documents?
Constating documents, also referred to as organizational documents, are the documents that establish a corporation and set out how the internal affairs of the business are governed.[1] Under the Canada Business Corporations Act (CBCA), a corporation’s constating documents consist of articles of incorporation, bylaws, and unanimous shareholder agreement.[2]
 
Articles of Incorporation:
Every corporation incorporating under the CBCA or the Alberta Business Corporations Act (ABCA) is required to file an articles of incorporation document with the regulator appointed to administer the act.[3] The articles of incorporation are the charter or constitution that set out basic elements of the corporation and provides the framework for its formation.[4] Under the CBCA[5] and the ABCA[6], articles of incorporation must include the following information:

• the name of the corporation
• the classes and any maximum number of shares that the corporation is authorized to issue
• if the right to transfer shares of the corporation is to be restricted, a statement that the right to transfer shares is restricted
• the number of directors or, the minimum and maximum number of directors of the corporation
• any restrictions on the businesses that the corporation may carry on

 
The CBCA also requires the province in Canada where the registered office of the corporations is to be situated.[7] In addition to the required information above, articles of incorporation may also include additional provisions depending on the specific needs of the business. It is important to carefully consider your business and tailor the articles of incorporation to your business’s specific structure to help avoid shareholder disputes or taxation issues in the future.[8]
 
Bylaws:
Bylaws are the specific rules and procedures for the internal governance of the corporation.[9] In other words, the bylaws are like the internal operating manual for your business.[10] The bylaws often cover the procedures for board and shareholder meetings, the composition and election of the board of directors, and corporate record-keeping. These rules must be consistent with the articles of incorporation. [11] However, unlike the articles of incorporation, bylaws are not required by law under the CBCA or the ABCA. If a corporation chooses not to pass its own bylaws, the CBCA or the ABCA will act as the default for certain affairs of the corporation.[12] Although not legally required, bylaws are important to establish the effective governance of the corporation and may be required in the future by third parties such as potential investors or banks lending money to the corporation.[13]
 
Unanimous Shareholder Agreement:
A unanimous shareholder agreement is defined in the CBCA as a written agreement among all the shareholders of a corporation that restricts the powers of the directors to manage, or supervise the management of, the affairs of the corporation.[14] The purpose of a unanimous shareholder agreement is to transfer authority over some or all management decisions from the directors to the shareholders of the corporation.[15] It is important to note that under the ABCA, the removal of power from the directors is not required and instead represents one of several things that may be included in a unanimous shareholder agreement.[16] Furthermore, as is the case with bylaws, a unanimous shareholder agreement is not a legal requirement under the CBCA or the ABCA.[17]
 
In addition to binding current shareholders, all subsequent shareholders are also bound to the terms of the unanimous shareholder agreement. This can be problematic for growth companies as they add new shareholders as it becomes more difficult to efficiently make decisions among all shareholders.[18] Furthermore, the CBCA and ABCA provides no clear-cut procedures for governing shareholder decisions made under a unanimous shareholder agreement. Another issue is that the powers exercised by shareholders under a unanimous shareholder agreement attract the same kind of fiduciary duties that attach to the activities of directors.[19] New shareholders may not want to become bound to the fiduciary duties of the corporation, especially if they already have fiduciary duties to their own shareholders.[20] As these potential issues illustrate, it is very important to think through your business and growth plans to determine whether or not a unanimous shareholder agreement is appropriate for your specific business. If a unanimous shareholder agreement is not entered into, there are other types of shareholder agreements that do not fall within the meaning of CBCA or ABCA’s definition of unanimous shareholder agreement that can be drafted to set forth the various rights and obligations of the corporation’s shareholders.
 
If you have questions regarding the various constating documents discussed above or require assistance with the drafting of your start-up’s constating documents, please reach out to the BLG Business Venture Clinic.
 


[1] Ahlstrom Wright, Definition: Constating Documents (April 18, 2018), online: https://ahlstromwright.ca/definitions-constating-documents/

[2] Practical Law, Glossary: Constating Documents, online: https://ca.practicallaw.thomsonreuters.com/Document/I188aaba9f92311e498db8b09b4f043e0/View/FullText.html?listSource=Foldering&originationContext=MyResearchHistoryRecents&transitionType=MyResearchHistoryItem&contextData=%28oc.Default%29&VR=3.0&RS=WLCA1.0

[3] Practical Law, Glossary: Articles of Incorporation, online: https://ca.practicallaw.thomsonreuters.com/Glossary/CAPracticalLaw?docGuid=I75b15b03f95911e498db8b09b4f043e0&transitionType=DocumentItem&contextData=(oc.Default)&ppcid=66e3e985f4a0458c8fc2c0c02dbb4792

[4] Upcounsel, Bylaws vs. Articles of Incorporation, online: https://www.upcounsel.com/bylaws-vs-articles-of-incorporation

[5] CBCA R.S.C., 1985, c. C-44, s 6(1)

[6] ABCA RSA 2000, c B-9, s 6(1)

[7] CBCA, supra note 5

[8] Kahane Law Office, Understanding The Articles That Form Your Corporation, online: https://kahanelaw.com/articles-of-incorporation-corporate-lawyers-calgary/

[9] Supra note 4

[10] Lena Eisenstein, Articles of Incorporation and Bylaws: Same or Different? (September 29, 2021), online: https://www.boardeffect.com/blog/difference-between-articles-of-incorporation-and-bylaws/

[11] Ahlstrom Wright, What is A Corporate Bylaw And Why Do Corporations Need Them? (April 20, 2018), online: https://ahlstromwright.ca/what-is-a-corporate-bylaw-and-why-do-corporations-need-them/#:~:text=There%20is%20no%20legal%20requirement,although%20it%20is%20not%20recommended.

[12] Ibid

[13] Ibid

[14] Bryce Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, p. 100-101

[15] Ibid at p. 101

[16] Ibid

[17] In 1998, the Supreme Court of Canada recognized unanimous shareholder agreements as being one of the three constating documents for a corporation under the Canada Business Corporations Act in Duha Printers (Western) Ltd. v. R. [1998] 1 S.C.R. 795

[18] Ibid at p. 102

[19] Ibid at p. 104

[20] Ibid at p. 104

Authored by Shazaib Rashid, UCalgary Law, JD Candidate 2024

Patents play an important role in both promotion innovation and economic growth. In Canada, patent law is governed by the Patent Act[1], a complex series of rules and regulations which came into force in 1869. A Patent is a type of intellectual property, that provides the owner the sole and exclusive right to making, using, or selling their innovation. In Canada, the first applicant to file a patent application for an invention will be entitled to obtain patent protection for that invention. This protection lasts up to 20 years starting from the date of filing.[2] Additionally, a patent application must be filed or registered in each country where patent protection is desired.
 
The Patent Act defines an invention 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.”[3] Although the definition is broad and would cover a broad variety of different item, there are specific criteria that must be met to receive a patent. To be patentable in Canada an invention must meet three main criteria: new, novel and non-obviousness.[4] First the invention must new, to be considered novel the invention cannot have been disclosed in such a manner as to have become publicly. However, this does not mean that you need to re-invent the wheel you can patent a combination of old inventions as long results in the production of a novel invention. Second the invention must also be useful, to be useful the invention for the purpose which it was designed. An invention has utility if: (a) it gives a benefit to the public; (b) it is useful in achieving a particular purpose; (c) it makes a process better or cheaper; (d) it is advantageous under certain circumstances; and (e) it works.[5] Lastly the innovation must non-obviousness or inventive ingenuity, this requirement was added originally through case law[6] and now by statute.  The invention cannot be obvious to a hypothetical individual, someone who possesses the relevant technical experience and knowledge.
 
The typical process to obtain a patent is as follows: Applicants prepare and file the application; If you are considering a patent the typical process to obtain a patent is as follows: Applicants prepare and file the application; Applicants must then request if the invention is new by searching prior art; The examiner looks for possible defects or issues in the application and may send a report to the applicant if there are any; The applicant files a correction or response to that report. If there are still defects, the examiner can issue another report.[6] If you are considering it is also recommended that one consider hiring a patent agent and/or IP lawyer to help them.
 

[1] Patent Act, RSC 1985, c P-4

[2] Ibid, s. 44

[3] Ibid.

[4] Donald M. Cameron “Canadian Patent Law Primer” (2012) at pg. 7, online (pdf): < patweb00.pdf (jurisdiction.com)>

[5] Ibid at pg. 9

[6] Government of Canada, “Filing a patent application: the devil is in the details” (02 February, 2022). Online: Canadian Intellectual Property Office <https://ised-isde.canada.ca/site/canadian-intellectual-property-office/en/corporate-information/blog/filing-patent-application-devil-details>

Authored by Phil Vandekerkhove, UCalgary Law | JD Candidate 2023

You’re a new business looking to outsource the manufacturing of your product to another business. You have just finished negotiating the basic elements of the agreement. The supplier pulls out a memorandum of understanding (MOU), letter of intent (LOI), or term sheet for you to sign. As with any agreement, you should know what legal obligations are being created before signing.
 
What are MOUs, LOIs, and Term Sheets?
These agreements come in different forms but share the same substance. In this post, they will be referred to as term sheets. Term sheets are a useful and flexible stepping stone in coming to business agreements. They are often executed once key terms of a transaction are agreed upon. Using the above example, a term sheet may set out the price, quantity and timing expectations for a manufacturing agreement. Such a term sheet will usually be signed before drafting the final manufacturing agreement.
 
Are term sheets legally binding?
You may want to know the specifics of an agreement before committing to a price. Many believe that signing a term sheet specifying prices could create a legal obligation to ensure the final agreement integrates those prices. But this is not usually the case.
 
            Non-binding Provision
Standard term sheets contain a non-binding or “subject to definitive agreement” provision.[1] This provision makes clear that the agreement is not intended to create legal obligations.[2] It is unlikely for a court to find a legally binding intention in an agreement with a non-binding provision. Including a non-binding provision carries the lowest risk that the agreement could become legally binding.
 
            Agreements to Agree
Without a non-binding provision, a term sheet is more likely to be enforced by the court. In such a case, the court will turn to the legal principle of agreements to agree. An agreement to agree, or agreements subject to contract is an agreement that leaves out essential terms, expecting the parties to agree on those terms in the future. Using our example, the supplier and buyer may agree on a price and quantity of product and agree to negotiate delivery timelines in the future. If the parties cannot conclude on a delivery timeline, and a dispute arises, the court is unlikely to find this “agreement to agree” enforceable due to uncertainty.[3] Where a contract lacks an essential term, it becomes too uncertain to enforce. Term sheets are often too short to set out all essential elements of an agreement. This legal doctrine adds protection to term sheets, usually making them unenforceable. [4]
 
Why execute a term sheet if they are unenforceable?
There are four main reasons why term sheets are useful business tools:[5]

1. Moral commitment
   Although not legally binding, term sheets can create moral commitments. In our manufacturing example, a manufacturer is less likely to raise the price of their product at the end of negotiations if they have previously signed a term sheet recognizing their original price.
   
   
2. Guidance for Lawyers
   Once key terms have been agreed to, lawyers can use a term sheet as a skeleton around which they can start drafting the final agreement. Early drafting can reduce delays and identify important terms as negotiations continue.
   
   
3. Creating Timetables for Continued Negotiations
   Depending on the transaction, companies may wish to create timelines for due diligence or other inspections. Such inspections often occur before executing the final agreement. With our manufacturing example, the buyer may want to schedule an inspection of product quality during negotiations.
   
   
4. Preliminary binding Legal Clauses
   Although term sheets are generally unenforceable, certain obligations may still be created to benefit ongoing negotiations. If legally binding terms are included, parties should ensure a non-binding provision reflects this intention.[6] Legally binding obligations may include:[7]

• Confidentiality and Non-Disclosure: Parties disclosing confidential information during negotiations will want to bind the other party through a confidentiality provision. In our example, the buyer may be disclosing confidential product ingredients. 

 

• Exclusivity: Exclusivity provisions ensure the parties do not negotiate with a third-party while current negotiations are ongoing. Exclusivity provisions reduce the risk of losing a deal to a third-party offer.

 

• Expenses: Parties often divide expenses incurred during negotiations such as legal, financial and accounting service fees. Parties may each pay their own incurred fees, or devise a fee-splitting arrangement.

 
Conclusion
Be not afraid when a term sheet is put before you. Read the terms to ensure they represent the key provisions agreed on in principle. Ask yourself if it may become binding. A non-binding provision should always be included. Finally, consider the binding terms under the circumstances. For example, if you are receiving other offers, consider whether an exclusivity commitment is the right choice for you.
 
If you would like more information about an MOU, LOI or term sheet, please feel free to reach out to the BLG Business Venture Clinic.


[1] Standard Document: Memorandum of Understanding, Practical Law

[2] Practice Notes: Term Sheets, Practical Law

[3] Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CarsewellOnt 836, [1991] O.J. No. 495 at para 21.

[4] Practice Notes: Term Sheets, Practical Law

[5] Practice Notes: Term Sheets, Practical Law

[6] Standard Document: Memorandum of Understanding, Practical Law

[7] Practice Notes: Term Sheets, Practical Law