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Written by Charlotte Kelso
JD Candidate 2024 | UCalgary Law In early 1999, Sean Parker and Shawn Fanning were busy starting one of the world's pioneering online music platforms which later became known as Napster. Sean and Shawn were both newly minted entrepreneurs in their early 20's so when Shawn's uncle, John Fanning, volunteered to support them as a co-founder of Napster, they accepted. John incorporated Napster and gave himself a whopping 70% of the company (despite having contributed nothing and his primary future contribution being his "credibility"). John's entrepreneurial history of dubious financial practices and unpaid loans bode poorly for Napster. As a founder, John contaminated the company with poor decision-making and drove away or vetoed potential investments all while failing to make any real contribution to the company.[1] Napster's issues with respect to John are not unique. Start ups suffer at the hands of a founder all the time. The solution? Founder-proofing. Founder-proofing is a blanket term referring to the assortment of steps founders can - and should - take to protect their business from themselves. But why would a firm need protection from the very people who brought it to life? Founders can become unnecessary, unhelpful, or even hostile to a venture. Unfortunately there is no crystal ball through which to foresee such issues and therein lies the value of founder-proofing. A key characteristic of a founder-proof company is that founders are not permanent fixtures of the company. Potential investments - the lifeblood of a start up - can hinge on changes to the company's management team which sometimes makes funding contingent on ousting a founder. Founders who are not contributing or who are actively unhelpful or hostile to the company should not benefit from entrenchment. There is a variety of corporate documents that could theoretically serve to entrench a founder, including the by-laws, shareholders' agreements, and founders' agreements. These documents should be drafted carefully with legal oversight to confirm founder-proofing is in place. Some red flags that may indicate a company's documents have entrenched the founders include founder employment agreements with high severance requirements and shareholders' agreements that give the founders veto power over basic decisions of the corporation, including hiring and firing of senior directors. Conversely, a lack of appropriate documentation could also have the inadvertent effect of entrenching a founder depending on the circumstances. Another cornerstone of founder-proofing is to moderate the power given to a founder. An over-saturation of power in the hands of the founders can result in the founder's interests and ideas being prioritized over those of the company and its stakeholders. One strategy to better distribute power in a company is to establish a well-balanced board of directors who meets regularly. Ideally, the balance of power on the board will be held by independent directors with representation from the founders and the most significant outside directors.[2] A red flag that may indicate a power imbalance is a class of superior voting shares distributed only to the founders. As a founder, it may be uncomfortable to implement measures to protect the firm from yourself. However, a company's ultimate purpose is arguably to return dividends to its shareholders, not to protect the interests of its founders. For the sake of the company, implementing founder-proofing is a valuable step in setting up corporate governance. [1] Menn, Joseph. All the Rave: The Rise and Fall of Shawn Fanning’s Napster. New York, Crown Business, 2003. [2] Tingle, B. C. Start-Up and growth companies in Canada - a guide to legal and business practice (3rd ed.). LexisNexis Canada Inc.
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Written by Sarah Dallyn
JD Candidate 2024 | UCalgary Law Starting a business is an exciting venture, however, entrepreneurs face many challenges in getting their enterprise off the ground. One of the biggest challenges start-up companies face is securing financing in the initial stages of development. In Canada, there are various sources of financing available for early-stage start-up companies. This blog will provide an overview of the common types of financing available to entrepreneurs and will discuss the benefits and disadvantages associated with each funding source.
[1] Bryce C. Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 3rd ed (Toronto: LexisNexis Canada Inc., 2018) at 267 at 268. [2] Investopedia, Love money: https://www.investopedia.com/terms/l/lovemoney.asp. [3] Supra note 1 at 269. [4] Supra note 1. [5] ATB Financial, https://atbentrepreneurcentre.com/. [6] Supra note 1 at 270. [7] Supra note 1 at 272. [8] Supra note 1 at 24. [9] Government of Canada, List of designated organizations – start up visa, online: https://www.canada.ca/en/immigration-refugees-citizenship/services/immigrate-canada/start-visa/designated-organizations.html#angel. [10] Canadian Securities Administrators, https://www.securities-administrators.ca/investor-tools/understanding-your-investments/start-up-crowdfunding-faqs/. [11] Government of Canada, Canadian Small Business Financing Program, online: http://www.canada.ca/csbfp. [12] The Business Development Bank or Canada, https://www.bdc.ca/en/financing. [13] Government of Alberta, https://www.alberta.ca/small-business-resources.aspx. [14] Supra note 1 at 313. [15] Supra note 1 at 333. [16] Canadian Venture Capital & Private Equity Association, https://www.cvca.ca/. Written by Phil Vanderkhoke
JD Candidate 2023 | UCalgary Law When moving provinces with a corporation, you should first ask if your corporation was incorporated federally under the Canada Business Corporations Act (“CBCA”) or provincial legislation. Although a federally incorporated company can operate anywhere in Canada, there are additional steps to take.[1] In this post, we take the example of an Ontario resident moving their federally incorporated business to Alberta. A federal corporation is authorized to carry on business in all provinces and territories in Canada. This authorization includes the right of a federal corporation to use its corporate name in each province of Canada. Yet, a federal corporation is not exempt from the extra-provincial registration laws and regulations enacted by each province and territory in Canada.[2] A Federal corporation must complete an extra-provincial registration in each province or territory where it carries on business. When you first incorporate federally, you must also register your business in any province where it carries on business. This provincial registration requirement depends on the province where the corporation is located. In our example, Ontario does not require federal corporations to register provincially. This exception is specific to Ontario. On the other hand, a corporation not incorporated in Alberta must register as an extra-provincial corporation in Alberta within 30 days of carrying on business in Alberta. In our example, the company would be carrying on business in Alberta as soon as one of the following were met:
Applying for Extra-Provincial Registration in Alberta Extra-provincial registration in Alberta requires you to submit an application package consisting of:
Once the application package is reviewed, the registrar will issue a certificate of registration allowing the corporation to carry on business in Alberta. Once registered, a corporation must file an annual return with the registrar. When moving, you must also file a change of registered office address with the federal government. Employment standards, taxes and other important regulations also differ between provinces. These considerations should be taken into account before the move. For further information regarding moving your company to a new province, please contact the BLG Business Venture Clinic. [1] Canada Business Corporations Act, RSC 1985, c C-44 at 15(2). [2] R. v. Thomas Equipment Ltd., 1979 CarswellAlta 1 (S.C.C.). [3] Business Corporations Act, RSA 2000, c B-9 at s.277(1). [4] Ibid., at 280 Written by Chiara Lasquety
JD Candidate 2023 | UCalgary Law The overarching principle in company law is that the corporation is a separate legal entity and is therefore distinct from its members.[1] However, this principle does not exist in a legal vacuum. Practically speaking, the company is a legal fiction, and the directors and officers are the agents – i.e., the ones who exercise the will of the company and control the company’s affairs.[2] This has led to numerous legislative provisions in Canadian law that allow directors to be held personally liable for a number of matters.[3] This blog post provides a non-exhaustive list of some of the potential sources of liabilities that directors may face. Potential Sources of Director Liability
Conclusion While lawsuits against directors are relatively rare, this blog post is illustrative of the various sources of director liability should such liability arise in exceptional circumstances. For further information regarding any of the foregoing, or how to protect directors generally, please contact the BLG Business Venture Clinic. [1] Stephanie Ben-Ishai & Thomas G.W. Telfer, Bankruptcy and Insolvency Law in Canada: Cases, Materials, and Problems, (Toronto: Irvin Law, 2019) at 343. [2] Ibid. [3] Ibid. [4] Environmental Protection and Enhancement Act, RSA 2000, c E-12, s 227. Written by Derek Hetherington
UCalgary Law | JD Candidate 2023 Non-profit institutions are a significant component of the Canadian economy. In 2020, community non-profit institutions generated $29.9 billion in economic activity, and business non-profit institutions added $16.4 billion.[i] Given the scale and continued growth of non-profit activity in Canada, non-profit law is an important, if often overlooked aspect of the Canadian legal landscape. There are a variety of benefits to operating as a non-profit rather than a business corporation. Non-profits can apply for charitable organization status, allowing them to solicit donations and issue tax receipts. They may also be eligible for government and private funding that is unavailable to profit-seeking enterprises. While there may be advantages, a prospective non-profit venture founder may rightly ask whether they will be allowed to pay themselves for their work. Indeed, we cannot survive on goodwill, and even those of us with the noblest and most selfless intentions have bills to pay. The answer to this question is simple: it depends.[ii] The issue of director compensation is treated differently from province to province. Some allow fair and reasonable compensation for services rendered, while others impose more onerous limitations. One should consult the governing statute in their province to ensure any compensation drawn from the organization is allowable. The requirements for charitable organizations in Ontario, to use one example, are set out in the Charities Accounting Act[iii] as amended by Regulation 4/01. In that province, directors may not receive a salary or fees simply for occupying the position of director,[iv] but they can be compensated for goods, services, and facilities provided to the charity. Other requirements include:
These requirements also apply to persons connected to a director, which includes, but is not limited to, a director's family, any employers of the director's family, and corporations of which the director owns or controls more than 5% of the shares or more than 20% of the voting membership interests. To ensure that the process is fair, a director cannot be present at any discussion, or vote on any matter, related to his or her own compensation, or the compensation of any connected persons.[ix] Moreover, the total number of directors receiving payment under the amended regulations cannot exceed 20% of the number of voting directors,[x] meaning that if one director is being compensated, there must be at least four other unrelated and uncompensated voting directors.[xi] In practical terms, this means that to compensate a second director, the organization must expand its board to 10 members. One workaround to these requirements may be to rotate the director that is compensated. For example, if the board decides that it is in the best interest of the organization to compensate both Director A and Director B, they would first pass a resolution to compensate Director A for a certain term between board meetings. At the next meeting, the board would pass another resolution to end Director A’s compensation and hold a new vote to compensate Director B. Director A would not participate in the discussion or vote related to Director A’s compensation, nor would Director B participate in the discussion or vote related to Director B’s compensation. Assuming the board meets every 3 months, such an arrangement would allow an Ontario non-profit or charity to compensate up to four directors in any given year. Should a charity or non-profit wish to provide compensation outside of the rules provided in Regulation 01/04, this may be possible by obtaining a court order under section 13 of the Charities Accounting Act.[xii] Non-profits that are also charitable organizations are subject to additional Canada Revenue Agency requirements. Directors of these organizations should also consider that their charitable status may be revoked if director compensation, whether direct or indirect, appears excessive. Thus any renumeration should be commensurate with the time and resources a director contributes to the organization. In conclusion, directors of non-profits may receive compensation, but there are certain rules that must be followed that vary by province. Whether a non-profit is also a charitable organization will raise additional considerations. In general, where compensation is possible, it must be reasonable and directly linked to actual goods or services rendered to the organization. [i] Statistic Canada, “An overview of the Non-Profit Sector in Canada, 2010 to 2020” (last accessed 19 November 2022), online: <https://www150.statcan.gc.ca/n1/pub/13-605-x/2022001/article/00002-eng.htm>. [ii] Three years of law school has taught me that “it depends” is the answer to almost all legal questions. [iii] Charities Accounting Act, R.S.O. 1990, c. C.10 (last accessed 20 March 2023) online: Government of Ontario <https://www.ontario.ca/laws/statute/90c10>. [iv] O. Reg. 4/01: Approved Acts of Executors and Trustees s. 2(4)1 (last accessed 20 March 2023) online: Government of Ontario <https://www.ontario.ca/laws/regulation/010004>. [v] Supra note 3 at s. 2(5)a. [vi] Ibid at s. 2(5)b. [vii] Ibid at s. 2(5)c. [viii] Ibid at s. 2(6)a. [ix] Ibid at s. 2(8). [x] Ibid at s. 2(9). [xi] Ibid at s. 2(7). [xii] Supra note 4 at s. 13. |
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