Everything Else Flashcards
Why do business lawyers worry about Org Structure?
Liability, taxation, ease of compensation, ease of setup/dissolution, flexibility and growth potential
Why do other lawyers worry about Org. Structure?
Family law (Marital breakdown), wills and estate planning, tax law and planning, civil litigation (who and how to sue) and criminal litigation and regulatory laws
Business Structure Options
Sole proprietorships, partnerships, joint ventures, trusts, business corporations
Sole proprietorships
- No legal distinction between business and owner
- No formal legal process to start up
- Unlimited personal liability for all tort and contract
- Dissolves upon owner’s death
Partnerships
- Persons carrying business with common view of profit
- Exist when statutory definition is satisfied (Can arise automatically)
- Profits split by agreement
- Fiduciary, agent for other partners and joint liability
- Can draw on resources of all partners and survives death
Limited Partnerships
Governed by statute (hybrid of partnership and corp)
General partner and “silent” limited partners
Limited Liability Partnerships (LLPs)
Allowed for certain professions only
No liability for torts of partners and joint liability for firm torts
Trusts
Tax vehicles, trustee acts on behalf of beneficiaries
Joint Ventures
Entirely contractual, No legislation and project specific
- Certain fiduciary duties (non-compete and non-disclosure)
Advantages of Corporation
- Seperate legal entity
- Limited liability for owners
- Distinct tax advantage
- Best growth potential
Disadvantages of Corporation
- More expensive/complicated to set up
- Separate legal entity (Needs more admin, filings)
- More complicated to dissolve
- Separate taxpayer (Possible disadvantages)
- Potential loss of control for founder
Corporation Creation Steps
- Articles of incorporation
- Evidence of uniqueness of name
- Payment of incorporation fee
Pre-Incorporation Decisions
- Who will own the corporation?
- Who will run it?
- Jurisdiction
- Corp and Business name
- Where will registered office be?
- Share structure?
Canadian v. Foreign Jurisdiction (Corp)
- Potential tax issues
- Potential ownership/director rules for non-resident
- Most Canadian corps can operate abroad
Corporate Name
- Can operate as numbered company
- NOT the same as business name
- Must include inc., ltd. or Corp.
Articles of Incorporation Components
- Corporate Name
- Prov to register office
- SH structure
- Min/Max Directors
- Restrictions on business the corp may carry on
- Other provisions
- Signatures
Corporate Governance
- How the corporate entity runs itself, particularly relative to shareholders
EX: Incorporating statute, articles of incorp, by-laws passed by directors and SH
Articles (Corporate)
Powers of corporation, share structure, first directors
By laws (Corporate)
Corporate admin matters, officers’ roles, dividend policy and meeting procedure
Corporation Hierarchy
SH Elect, DIRECTORS Appoint, OFFICERS hire and Employees work
Shareholder Rights
(STATUTORY) Right to: - Vote - Receive dividend - Receive share of corp assets on dissolution - Receive info on corporation (ADDITIONAL) - Right to first refusal - Anti-dilution clause - Dispute resolution (Shotgun clauses)
Common Shares
Voting rights, Maybe DE< suboridate to PS and LOWEST priority on dissolution
Preferred Shares
Typically NON-voting, dividend right, rank ahead of CS on dissolution
Equity Financing
Issuing and selling MORE shares
Debt Financing
Borrowing more money
Who can be a director?
18 years old, sound mind and no status of bankruptcy
Directors do NOT
Need to be paid remuneration, own any shares, be officers or employees of company
Director’s Job
manage and supervise business and affairs, appoint officers, issue shares, declare dividends, approve financial statements, approve executive compensation, approve significant business transactions, admin articles and by-laws
Minimum directors for Corp
Need no fewer than 3, at LEAST 2 need to be not officers or EEs of corp or affiliates
Officers Authority
- Delegated authority (Cannot exceed directors)
- Appointed by directors and accountable to them
- NOT directly accountable to shareholders
- Typically have EXPRESS authority to bind corp
Officers Responsibilities and Liabilities
- Same statutory duties as Directors (fiduciary duty, skill, diligence, care)
- Liability as AGENT of corp
- Personal liability under specific statutes
Employees Classification
- Paid Salary
- Agents of Corp
- Not elected (Security of tenure)
BCE Case (2009)
- •Public company BCE enters agreement to “go private” – investor syndicate led by Teachers’ Private Capital (Teachers’ Pension) to purchase outstanding shares
- •Resulting transaction will create new layer of debt; existing bondholders (of BCE subsidiary Bell) argue transaction is oppressive (or unfair) to them
- •ISSUE: Should BCE directors have considered the interests of the Bell bondholders, or simply those of the BCE shareholders?
Decision
•SCC allows transaction to proceed –BUT confirms that the BCE directors had a legal duty to consider interests of the bondholders as well as the equity holders
•In fact, court holds that even if BHs’ interests considered, they had no legitimate right to expect any more from directors
•Bondholders Lose, But Law Altered: “The corporation and shareholders are entitled to maximize profit and share value, to be sure, not by treating individual stakeholders unfairly.”
Duty of Competence
Duty to exercise “care, diligence and skill” that a reasonably prudent person would exercise in comparable circumstances (OBJECTIVE)
Fiduciary Duty
Duty to act honestly, and in good faith with a view to the best interests of the corporation
NFP directors
- Held to same legal standard as corp directors
- Charities held to highest standard given public benefit
Right to first refusal
Given opportunity to enter into business transaction before it is offered to a 3rd party
Anti-Dilution
Option to keep ownership stake relatively the same before it is offered to another party
Shotgun Clauses
Buy/Sell agreements that allow for certain price per share offerings to other SH
Shareholder Ordinary Resolutions
Need 50+1% (electing directors, appointing auditors)
Shareholder Special Resolutions
2/3 approval
- Fundamental change in corp
- sometimes non-voting shares are allowed to vote
- Anything that would change articles of incorp or share rights or dissolution of corp
Information given to shareholders
Annual financial statements, notice of shareholder meetings, proxy information to management discussion of financial results, quarterly financials and material changes
Shareholder tradeoff
Limited liability (Only lose investment), Do not have direct access to corp assets and decisions
Shareholder is “Frozen Out”
Inability to affect change due to insufficient voting power
Shareholder is “Locked in”
Inability to sell shares because minority shares are illiquid
Non-Litiguous Shareholder Responses
- Sell shares (Vote with your feet)
- Shareholder proposals
- Dispute resolution in SH agreement (Shotgun, conversion and management rights)
Shareholder Remedies
Appraisal remedy (Right to have corp buy SH shares at FMV) Derivative Action (Where directors have breach duties for benefit of corp NOT individuals).. sue wrongdoer NOT corp Oppression Action (Personal remedy for SH where director has been oppressive) EX: discrimination, lack of disclosure and constructive elimination of share classes
Why have Ownership Contracts?
- Don’t like default laws
- No specific law for rules or business deal wanted
- Avoid disputes
Why SH Agreement?
- Management structure
- Address contingencies (Death, marriage, retirement(
- Provide “Exit Strategies”
- Enhance minority SH rights
- Avoid stalemate (Resolve disputes)
Issues if No SH agreement
Share rights restricted to BCAs and articles of incorp
No dispute resolution mechanism
- Minority SH frozen out or locked in
SH Agreement Parts
Anti-Dilution and right to first refusal
- Shotguns, puts and calls
- Share transfer terms and mechanics
- Loans and guarantees
- Right to transfer shares
- Non- compete
- Legal boilerplate (Termination, entire agreement, successors)
Partnership Agreements Issues to Address
- What is partnership property?
- Voting rights (Vetoes)
- Managerial Roles
- % Share of Profits
- % Share of asset distribution (On dissolution or retirement)
- What causes partnership to end? (What does NOT)
- Retirement (Does it end P’Ship?, how to pay out retiring member?)
- Scope and Nature of Business
- Death and Divorce
What can NOT be changed in partnership agreement?
Joint liability to 3rd parties
Fiduciary obligations among partners
What do agreements do?
- Create Expectations e.g. NDA
- Protect expectations (I can sue)
- Confirm obligations (What do i need to do on day 30)
- Set out roadmap
- Simply to CLARIFY details
Non-Competition Clause
Keeps vendor from competing with purchaser and defeating purchaser’s intent
Non-Disclosure Agreement
- Gives rights not otherwise given by law
- Protects valuable ideas (Basis of business or integral to success such as client list or invention)
When NDA are useful
- Often IP laws won’t apply
- Creates contractual right where no legal right pre-existed
- Define proprietary information however you like
- Provide REMEDY for theft
NDA limitiations
- Just piece of paper (Cannot stop a thief)
- Creates tension due to lack of trust
- Venture capitalists HATE them
- The breadth of agreement (False sense of security?)
Why include lawyers in commercial contracts?
Rely on experience
Complexity
Background laws to incorporate
Effective contracts
- Accomplish goal for both sides
- Clearly govern behaviour and expectations
- Written and signed
Condition of Contract
A statement part of ESSENTIAL consideration
Warranty of contract
Less significant detail, independant issue
Representation of Contract
Statement made to INDUCE contract
Terms of Contract
Promises made within the contract (Subject to action of breach of contract)
Intro of Contract
Proper names, recitals, consideration, effective date
- parties title agreements for ease, NO legal basis to title
Definitions in Contract
- Define key terms, “closing date”, use terms consistently
- Capital word throughout means it is defined
- Helps shorten agreement
Tips for drafting contracts
- Clarifies deal
- Minimizes potential dispute
- Eliminate evidentiary problems
- Clear and precise
- Make obligations clear
- Write in plain english
Plain Meaning Interpretation
Look at dictionary meaning (A rotten apple is still an apple)
Liberal Interpretative Approach
Look at evidence extraneous to actual words used to determine reasonable intentions and expectations
(A rotten apple is NOT an apple if it must be resold)
Parol Evidence Rule
Put term in contract or you won’t be able to use it in court
Why raise capital?
- Investors wish to invest (corp veil)
- Company wants to expand operations (Buy equipment, hire more EEs)
- Company wishes to reward those who have built it
2 ways to raise capital
- Issuing shares (equity)
- borrowing (taking on debt)
Private Corporation Equity Financing
- Private corp enters into a subscription agreement with investor
- Directors approve share issuance
- Shares issued and investor’s name included on SH register
Steps of Going Public
- Articles of Incorp: REMOVE private company restrictions
- Need SH and Director approval (2/3)
- Corp needs minimum of 3 directors
- May require SH resolution to ADD directors
Principal Obligations of Securities Legislation
Registration of securities and participants
- Disclosure by issuers of securities
Prospectus
- Registration of security
- Any distribution of security is pursuant to prospectus
- Gain reporting issue status (triggers obligations)
- SELLING DOCUMENT (Advertises securities to be sold)
- Must disclose material facts about issues and issue on basis of “full, true and plain disclosure”
- Expensive and time consuming
Prospectus Issues
- Lengthy
- Time consuming
- Expensive ($$)
Exemptions to Prospectus
- Does NOT need protection of full disclosure
- Sophisticated purchaser (EE or private comp)
Good of Exemptions to Prospectus
- Allows for issuance of securities faster, quicker and privately
- Private placement (Large accredited investor)
Bad of Exemptions to Prospectus
- Not freely traded securities due to private placement
- Usually required to be held and not sold right away
3 Broad Additional Corp Governance from Going Public
- Continuous Disclosure Obligations
- Takeover and Issuer Bid Rules
- Insider Trading
Continuous Disclosure Obligations
Requires further continuous disclosure:
- Fully audited annual reports
- Distribution of quarterly financials
- Material change reports
- Insider obligations
- Expanded proxy and shareholder meeting requirements
Take Over Bids
Whenever an investor wishes to bid (offer) to purchase voting securities of an issue, the result in which would get at least 20% of issued and outstanding shares
Specific Rules of Take Over Bids
- Directors of “target company” must respond
- Issuers bid (To cancel shares) and “going-private” bids
- Compulsory acquisition and “Squeeze-Outs”
Insiders to Company
Every director, senior officers or 10%-shareholder of an issuer
Insider Obligations
- Disclose monthly basis of trading and disclosed holding in annual reports and prospectuses
- Subject to criminal and civil liability when engaging in wrongful trading
Going Private Bid
A going private transaction is typically proposed for one of two reasons:
(i) the management of the target company or one or more shareholders of the target
company wants to buyout the other public shareholders and take the company
private; or
(ii) a third party proposes to acquire the target company either with or without the
support of management or a group of shareholders.
Squeeze outs
The forced sale of stock owned by minority shareholders in a joint-stock company, usually in the context of an acquisition
Debt Financing (Investor)
Income = interest payment
- Priority over SH (Receive income and claim against assets)
- More to lose than equity investor and NO voting rights
Debt Financing (Borrower)
- No dilution of ownership to investor
- No loss of corporate control and direction
- Interest payments are tax-deductible
- Creditors paid FIRSR (before founders)
Commercial Loan
Loan from single creditor. Debt-based financing agreement usually from a financial institution.
Example of Term Project Loan
Car Loan (LT loan for specified period of time)
Example of Revolving Credit
Credit card (Revolving time period loan)
Important Aspects of Loan Agreement
- Covenant (promise)
- Acceleration Clause (Demand money due immediately if payments default)
- Default (How and punishment)
- Collateral (Security to ensure repayment)
Security Interests
- Lender takes legal interest in certain of debtor’s property (ownership or close to)
- Assist lender in ENFORCEMENT and RECOVERY of debt
- Only effective when Attached
Under the UCC, a security interest generally does not attach unless three basic requirements are met. In simplest form, the requirements are that: - value be given for the security interest
- the debtor has rights in the collateral (or power to transfer the collateral to a secured party); and
- the debtor “authenticates” a security agreement.
AND - Perfected (no one else can hold claim to the same asset)
Secured Loan
2 agreements, loan agreement and security agreement
Types of Assets
CHATTELS: Specific items like equipment or inventory
INTANGIBLES: A/R, insurance, bank accounts
LAND: Mortgages
Types of Security Interests
FIXED: Security interest in specific property or existing (Land or chattel)
FLOATING: Security interest in variable property or future property
Chattel Mortgage
- Lender takes contingent interest in specific chattels of debtor (Car loan)
- Borrower remains in possession of chattel, but often use is restricted
- If debtor defaults, lender can seize and sell mortgaged chattel to satisfy debt
Types of Creditors
- Secured Creditor (Lender with collateral)
- Unsecured Creditor (Lender without collateral)
- Judgment Creditor (Unsecured creditor owed money after winning lawsuit)
- Preferred Creditor (Category created by BIA)
Creditor Rights
- Sue on covenant (breach of contract)
- Enforce security interest
- Insolvency and bankruptcy rights
Insolvency
- Debtor is insolvent when it is not bankrupt BUT:
o Unable to meet obligations as they come due
o Ceased paying current obligations
o Debts which in aggregate exceed realizable value of assets - NOT declared or ORDERED it is a statutory status
2 Types of Insolvent
- Consumer debtors – any debtor whose debts $250,000
Insolvents seek relief from debts by making PROPOSAL
Bankruptcy Proposals
- Way out for the debtors (More debt than assets at this point)
- More time to reorganize finances
- Forestall petitioning it into bankruptcy
2 Types
1. Consumer proposals
2. Commercial proposals
Bankruptcy (And 2 types)
- Defines legal person as:
o Made voluntary assignment in bankruptcy (You put yourself in)
o Against whom a receiving order has been made (Creditors force you) - Bankruptcy is a judicially sanctioned status – requires action
Bankruptcy by Voluntary Assignment
- Debtor files an assignment with “official receiver”
- The O/R appoints a trustee in bankruptcy and trustee is assigned all debtor’s property
- Debtor no longer has any right to deal with his property
Bankruptcy by Receiving Orders
- Put into bankruptcy by creditors
- Debtor need only have committed an act of bankruptcy – petitioning creditors must prove that the debtor has committed such an act (Insolvency is only 1 SUCH ACT)
- Only receiving order is made by court, a trustee is appointed and property is assigned to trustee
Role of Bankruptcy Trustee
- Usually accountant, licensed under BIA and appointed by court
- Main duty is to recover ALL property forming part of debtor’s estate
o Preference or reviewable transactions (Undue what done during insolvent)
Discharge of Bankruptcy
- Ultimate goal of the debtor and only real remedy from bankruptcy
- Debtor will be discharged from bankruptcy by court upon satisfaction (not necessarily COMPLETE satisfaction) of the creditors’ claims
Ideas as Property
Intangible property often the basis for a business plan
Why is Intangible property harder to protect than tangible property?
- Highly movable (Anyone could exploit your idea anywhere)
- Often difficult to define – which part of a project do I own? (Extent of idea)
- Ideas are easily replicated
Why protect ideas?
- Many e-businesses (and many businesses generally) have no tangible value or distinguishing feature - apart from an idea, a process, a design, etc.
- Consider the value of a brand. (Nike Swoosh)
- Race to the swiftest. (2 people can do it at same time, first to protect it)
- Innocent conversations lead to competitive ideas (Eavesdroppers)
How do you protect your ideas?
- Non-Disclosure Agreements (NDAs).
- Employee confidentiality clauses and restrictive agreements.
- Restrictive covenants in supplier agreements
- Tell the whole world exactly what your idea is
- Use your idea.
- Register your idea.
• There is no real substitute to actual and substantiated use or registration.
• By creating legally enforceable intellectual property rights, you are replicating as closely
as possible “ownership” rights in an idea – tantamount to a monopoly: the law of
intellectual property!
What is Intellectual Property?
- Property is anything that can be owned (and the right to exclude others from property)
- Property = Real Property (land) and Personal Property (everything else)
- Personal Property = chattels and intangibles (Chattels are things you can pick up, touch)
- Intangibles are contractual rights and IP
- IP = the legal (property) rights in ideas
Types of Intellectual Property
- Trade-marks
- Copyright
- Patents
- Industrial Design (Very specific, beyond scope of this course)
Types of Business Names
o Corporate names (corporations only)
o Business names (SPs, partnerships, corps)
o Trade-marks
o Domain names
Of these, only trade-marks at law give “property rights”
What are trademarks?
• TMs (rights) can arise through the Trade-marks Act or at common law.
• Trade-marks Act: A “sign or combination of signs used by a person for the purpose of distinguishing goods
or services…”
• Formerly: “A mark used….”
Trademarks can be:
o Words
o Designs (with or without words)
o Distinguishing guises (Coke bottle)
o Sounds (Intel chimes)
Trademarks CANNOT be:
- Be merely descriptive (“The Green Machine”).
- Reference any association with a government in Canada.
- Be confusingly similar to any other trade-mark.
Statutory and Common Law TM Rights
Statutory Trade-mark Rights:
• TMA, s. 19: where you have a TM registered with the federal government, every other person in Canada is deemed to have notice of your trade-mark.
• Anyone purporting to use a mark confusingly similar to a registered mark can be sued by the registered mark’s owner in “trade-mark infringement”.
Common Law Trade-mark Rights:
• TM rights can arise @ common law without statutory registration:
o through consistent use (like a “brand”, or even goodwill associated with your business more broadly)
Why Apply for TM?
• Statutory rights are stronger and easier to prove than common law rights
o trade-mark infringement v. passing-off
o Deemed knowledge of your TM; no need to prove actual confusion
• Relatively easy and inexpensive
Process of Obtaining Trademark
- Search the TM Register Database (CIPO site – http://cipo.gc.ca);
- It is also useful to engage in a common law search – i.e. Google - File a written application with TMO (see sample);
- TM Examiner (CIPO) ensures there is no other similar mark on register
- TM advertised by CIPO in Trade-marks Journal
- potential opponents to launch opposition proceedings (We OPPOSE to that TM) - If no opposition, or once settled, mark approved for registration
- Pay final fee for to have added to register (15 years)
Note: If you file intent to use and have not yet used the TM. Must be able to demonstrate (or be able to prove) use of mark to Trade-marks Office
LONG AND TEDIOUS PROCESS, must be patient
What is a Copyright?
copyright is the legal right to exploit
original literary (Books and manuscripts, also lawyer’s opinion, business plans),
dramatic (movie, show, short film, screenplay and script),
musical (recording of music, jingles which are shorter, unique sounds and identifications, transcription of music)
artistic works (Industrial Designs, art, etc.).
• What about computer programs? PROTECTED AS LITERARY WORKS
• Do you have copyright in the clip you post on You Tube? Yes, as dramatic. BUT once you post on public domain you lose some strictness in enforcement. Must follow YouTube rules
Moral Rights (Copyright)
- protection of integrity of work, to have your name associated with work, etc.
- Cannot change it without author’s consent
Neighbouring Rights (Copyright)
- the right to exploit the work in ways not traditionally afforded copyright protection - like the right to perform your musical work (and right that performance not be recorded)
How is Copyright Governed?
Only by statutory law NOT common law.
Protected country by country, although there are treaties (Harmonize laws to enforce between countries)
• Truth is that copyright laws do vary country to country – some are more pro-consumer;
some more pro-producer
Copyright Creation and Timeline
Copyright only arises because of statute
• Copyright arises automatically in the author
- The author has the right to “assign” his or her copyright, but rights for any owner flow from the author.
• Generally, copyrights in a work extend for 50 years after the author’s death – even if
assigned (70 years in U.S.)… Regardless of WHO owns it
• Joint authors?
o Yes, both entitled to copyright – protection lasts 50 years after later to die
- Tries to attribute to PEOPLE not corporation
• After 50 years? Public Domain (EX: Romeo and Julliet, Classic Composers)
What must be proven for copyright?
- Originality
o Work originates from author
o Work involves some intellectual effort (Quite low…EX: Drawing a stickman on whiteboard) - Fixation (or publication)
O In “fixed” (printed/printable/reproducible) form
Limits of Copyright
- If it is SLIGHTLY different or different WORDS, copyright does not protect
• Fair use (permitted use) exceptions
o Research/study (EX: Using paper in an essay)
o Satire and critique (EX: Use clips and critique it)
o A private communication (EX: Send part of book in personal email)
• Copyrights are enforced nationally and are only as strong as the enforcement by the holder - Need to go to other country if copyright infringed in another country
- Only civil suit, NOT criminal
What is a patent?
• Entirely creatures of statute – in Canada created and governed by (federal) Patent Act
• A patent is:
o a document granted by a government (in Canada by the Canadian Patent Office – part of CIPO)
o to an inventor (EXCLUSIVE RIGHT, PROMOTE CREATION, pay off R+D)
o whereby the inventor has the exclusive right for (generally) 20 years to make, construct, use and sell the invention (or allow it to be made, constructed, used or sold).
What is an invention?
s. 2 of the (Canadian) Patent Act:
“ any new and useful art, process, machine, manufacture or composition of matter, or any new or useful improvement in any art, process, machine, manufacture or composition of matter.”
What you need to prove for Patent rights
- Originality The pivotal aspect – the patent must relate to an invention – i.e. it must be an original, never before created patentable idea. (CAN ALSO BE IMPROVEMENT)
- Usefulness – the invention must be useful for humanity, and that use must be apparent at the time of the patent filing
- Not obvious (to a person “skilled in the art”). (EX: Company created open factory to build components for House… tried to convert shopping center to convert to shopping center)
- Is the subject matter patentable at all?
– Harvard Mouse case (Genetically modified to get mouse cancer easier, wanted patent for genetic modification… Got it in USA, NOT Canada. Cannot have patent for higher level organism. Can get patent for natural resources, not animals)
Limits of IP law
• Trademarks – words and logos
• Patents – protect new and useful inventions (new art, machine, process or
manufacture)
• Copyrights – protects against copying of original literary, musical dramatic or artistic
works
• Cautionary Story: the online dating service (NIGHT BEFORE BETA TEST HE FOUND OUT SOMEONE USING SAME ALGORIHIM AND DID SAME THING… Couldn’t do anything No patent or copyright)
What is Near IP?
• It’s an idea (therefore has economic or social merit)
• It’s original (it’s in your business plan)
• You’d like to exploit it to exclusion of others
• BUT it’s not patentable AND it’s not effectively copyrightable!
VALUABLE AN IDEA AND YOU’D LIKE THE RIGHT TO EXPLOIT
How do the laws protect rights?
- Creates government imposed regulatory or criminal laws
- Creates a property right (right to exclude) – e.g. IP statutes
- Enforces (respects) contractual rights:
- NDAs
- Employment agreements
- Restrictive Covenants
Who are the most common thiefs of ideas?
- General rule is that “IP” created during the course of employment duties is automatically assigned to the employer
- Employers try to protect IP with non-competition and confidentiality clauses in employment contracts
- But…right to carry on a livelihood trumps no-competes.
What are examples of restrictive covenants
o Confidentiality (NDA) obligations;
o Non-solicitation clauses
o General non-competition clauses
What you need to prove for restrictive covenants
o Must be a real need and reasonable restriction
o Can’t be over broad geographically and temporally
o Can’t impede an employee’s right to earn livelihood
