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.