Entrepreneurship 101: The Role of Boards, Advisory Panels, and Service Providers

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This presentation by lawyers from Heenan Blaikie LLP looks at the start-up and administration of a business through a corporation with a focus on the efficient use of professional service providers, …

This presentation by lawyers from Heenan Blaikie LLP looks at the start-up and administration of a business through a corporation with a focus on the efficient use of professional service providers, the management of the corporation through a board of directors and the relationships among shareholders of the corporation.

Speakers: James McDermott and Andrea Safer, Heenan Blaikie

You can download an audio presentation by going to:
http://www.marsdd.com/portals/mars/events/videoarchive
http://www.marsdd.com/ent101

Click on the March 27, 2007 event.

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  • 1. MaRS Entrepreneur Series The Role of Boards, Advisory Panels And Service Providers Life Sciences & Emerging Technologies Photo: © Tourism Toronto, 2003 Presented by Heenan Blaikie LLP Jim McDermott / Andrea Safer March 27, 2007
  • 2. HEENAN BLAIKIE LLP 1973 – inception of the firm γ Today the firm has grown to over 400 lawyers γ One of the leading law firms in Canada γ η With our offices in Montreal, Quebec City, Ottawa, Calgary, Vancouver, Sherbrooke, Trois-Rivières and Kelowna HB has within its ranks a number of prominent individuals who have γ made their mark on the nation and international stage, such as: η The Right Honourable Jean Chrétien, P.C., Q.C., former Prime Minister of Canada η The Honourable John W. Morden, former Associate Chief Justice of Ontario η Pierre Marc Johnson, FRSC, former Premier of the Province of Quebec and η André Bureau, O.C., former Chair of the Canadian Radio-Television and Telecommunications Commission and current Chair of Astral media
  • 3. Heenan Blaikie LLP Outstanding track record in: γ η Business Law η Labour & Employment η Litigation η Taxation η Entertainment Law η Intellectual Property η Life Sciences & Emerging Technologies
  • 4. Heenan Blaikie MaRS Office Launched the firm’s satellite office at the MaRS Centre in γ Toronto on September 19, 2005 which coincided with the official opening of the MaRS Centre Heenan Blaikie MaRS Centre Office is part of the continuing γ expansion of our life sciences and emerging technologies groups expansion into these progressive fields of innovation and business, ensuring Heenan Blaikie’s reputation as a prominent service provider to research organizations, start-ups, venture-backed firms, venture capital firms, universities, hospitals, governments and global pharmaceutical companies
  • 5. Professional Service Providers: FIT γ COST γ RETAINER ARRANGEMENTS γ COMMUNICATIONS γ RECORDS γ
  • 6. Professional Service Providers Cont’d. . . . FIT γ η the right professional for the work being requested; η connecting and chemistry; η ask for recommendations; η meet face to face; η shop around.
  • 7. Professional Service Providers Cont’d. . . . COST γ η Consultants, particularly, lawyers and accountants are expensive; use their services judiciously; η professionals who charge bargain basement rates usually cut corners on service; η lawyers usually charge on an hourly basis; try to get an “upset” price for the work being requested; η try to do some of the leg work yourself; η most professional firms have checklists of matters for clients to consider; ask for them.
  • 8. Professional Service Providers Cont’d. . . . Retainer Arrangements γ η insist on a retainer letter outlining the scope of the service provider’s mandate and how the matter is to billed; η two components of cost; fees and disbursements (out- of-pocket expenses); service providers will usually want their estimated disbursements paid up-front; a portion of the estimated fees is also usually required; η a solid retainer against fees is a good incentive for prompt service.
  • 9. Professional Service Providers Cont’d. . . . Communications γ η be proactive in communicating with your service providers; η be aware of time sensitivity and ensure that service provider is following up on a timely basis; η require the service provider to advise you of each relevant communication that they have with third parties and to provide you with a copy of every written communication sent or received in connection with the matter being handled; η if you are concerned with the manner in which your work is being handled or if you feel that you are being billed too much, voice your concern immediately because the strength of your obligations will diminish the longer you ignore the problem.
  • 10. Professional Service Providers Cont’d. . . . Records γ η keep a record of all communications you have with your service providers; η if oral advice is given, ask that it be confirmed in writing; η ensure that you receive original signed documents in relation to the matter being handled; η ensure that you receive a report from your service provider once the matter has been completed; η know what records, if any, are being retained by the service provider and confirm on-going retention arrangements in writing.
  • 11. Function and liabilities of corporate directors Presented by James McDermott Photo: © Tourism Toronto, 2003 MaRS Centre March 27, 2007
  • 12. PREFACE This presentation is intended to provide a very brief overview of the function of directors and the principal areas of liability of directors of Ontario and Canadian corporations and is not intended to be a comprehensive analysis of the subject matter. This handout is not intended to constitute legal advice, but rather to provide a brief summary of the current law relating to this subject.
  • 13. THE CORPORATION AS AN ENTITY There are various ways of carrying on a business – γ one way is through a corporation The corporation is a separate legal entity: it has γ rights and obligations equivalent to a natural person Shareholders (the owners of the corporation) have γ certain rights in the corporation but they do not own the assets of the corporation
  • 14. MANAGEMENT OF THE CORPORATION The corporation can only operate and do business γ through human activity The persons who guide, operate and control the γ corporation are: 4 Shareholders 4 Directors 4 Officers
  • 15. MANAGEMENT OF THE CORPORATION The shareholders will select directors who will have γ the power and responsibility to manage the corporation Directors will delegate the power and responsibilities γ needed in the day-to-day management of the corporation to the officers
  • 16. BOARD OF DIRECTORS Directors are required to manage and supervise the γ management and affairs of the corporation Directors exercise their power collectively as a Board γ of Directors The term of directors’ tenure is usually specified in γ the corporation’s by-laws (ex. directors must be elected annually)
  • 17. BOARD OF DIRECTORS A corporation need not have more than one director γ The number of directors of the corporation will γ depend on the corporation’s founding documents: η They may specify a set number (ex. 10) or a minimum and maximum number (ex. min. 1, max. 10) A minimum number of directors (“quorum”) must be γ present at meetings or no business can be carried on (usually a majority of directors)
  • 18. BOARD OF DIRECTORS The federal and certain provincial corporate statutes impose γ Canadian residency requirements on boards of directors Vacancies on the board of directors may be filled by γ shareholders (if no quorum of directors) or by directors (if quorum of directors) as specified in the By-Laws Decisions of the board – called “resolutions” – must be γ approved by the majority of directors present at the meeting As an alternative to holding meetings, directors may act by a γ written resolution signed by all directors
  • 19. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors can set-up committees to γ which it delegates certain powers The Board of Directors can have various committees γ such as: η Audit committee η Compensation committee η Finance committee
  • 20. DUTIES OF DIRECTORS Directors have certain duties toward the γ corporation and its shareholders These duties are imposed by the common law γ and federal and provincial legislation Directors can be held personally liable for a γ breach of these duties
  • 21. COMMON LAW DUTIES OF DIRECTORS Two basic duties at common law: 1) Fiduciary Duty (Duty of Loyalty) η 2) Duty of Skill and Care (Duty of Care) η
  • 22. COMMON LAW DUTIES OF DIRECTORS Fiduciary Duty: Directors have a duty to act honestly and in good faith γ with a view to the best interests of the corporation Directors and officers cannot: γ η take advantage of a business opportunity which the corporation is seeking η approve a corporate contract if they have a material interest that conflicts with the best interests of the corporation η use insider information for personal gain in a securities transactions
  • 23. COMMON LAW DUTIES OF DIRECTORS Duty of Skill and Care: Directors must exercise the level of skill and γ care that a reasonable prudent person would exercise in comparable circumstances Business Judgement Rule 4
  • 24. LEGISLATIVE DUTIES OF DIRECTORS CORPORATE LAW Both common law duties have been enacted in γ legislation governing corporations The federal and Ontario legislation governing γ corporations impose a: η fiduciary duty η duty of care
  • 25. LEGISLATIVE DUTIES OF DIRECTORS CORPORATE LAW Directors must act honestly and in good faith with a γ view to the best interests of the corporation Directors must exercise the care diligence and skill γ that a reasonably prudent person would exercise in comparable circumstances The corporation or the shareholders could take γ action against directors if they breach these duties
  • 26. LEGISLATIVE DUTIES OF DIRECTORS CORPORATE LAW Directors could be liable if they do not comply with: γ Corporate legislation and regulations η η Articles and by-laws of the corporation η Unanimous shareholder agreement A Director must disclose any “material interest” they γ may have in a contract with he/she: (i) a party to the contract or transaction η η (ii) is a director of a party to the contract or transaction; η (iii) has a material interest in a party to the contract or transaction
  • 27. LEGISLATIVE DUTIES OF DIRECTORS CORPORATE LAW Directors must ensure that certain “liquidity and solvency” tests γ are met before authorizing certain transactions such as: η Payment of a dividend η Redemption of shares If the liquidity and solvency tests are not met, directors could be γ liable to pay any amounts distributed Directors could be liable if the minority shareholders use the γ “oppression remedy” to claim relief from unfair or prejudicial behaviour of the directors
  • 28. LEGISLATIVE DUTIES OF DIRECTORS Directors could be liable for offences committed by γ the corporation even if corporation is not prosecuted or convicted: In matters relating to the insolvency and bankruptcy of η corporation Engaging in anti-competitive behaviour η Filing false or misleading information η
  • 29. OTHER DUTIES OF DIRECTORS SECURITIES LAW Applies to publicly held corporations γ Directors are “insiders” of the corporation because γ they have knowledge of confidential information (“insider information”) about the corporation’s business Directors are subject to “insider trading” rules γ
  • 30. OTHER DUTIES OF DIRECTORS SECURITIES LAW Directors are prohibited from passing on insider information γ (“insider tipping”) Insider trading or tipping gives rise to quasi-criminal (fine and/or γ imprisonment), administrative and civil sanctions Directors can be liable and/or receive severe penalties for γ misrepresentations contained in documents filed on behalf of the corporation Directors must ensure that the corporation makes continuous γ and timely disclosure which could have an impact on the market price or value of the corporation’s securities
  • 31. OTHER DUTIES OF DIRECTORS EMPLOYEE RELATIONS Directors can be liable for unpaid wages or for breaches of γ employment and workplace related legislation: Unpaid Wages: directors are responsible for unpaid wages up to η specified amounts Labour Relations: directors have a duty to ensure the corporation η complies with labour relations legislation
  • 32. OTHER DUTIES OF DIRECTORS EMPLOYEE RELATIONS Occupational Health and Safety: directors have a duty to ensure η that the corporation complies with the legislation Pay Equity: the corporation cannot discriminate against a person η that participated in pay equity process or otherwise obstruct or interfere with this process Pension Plans: directors owe a fiduciary duty to the pension plan η beneficiaries and could be liable for a breach of this duty
  • 33. OTHER DUTIES OF DIRECTORS ENVIRONMENTAL LAW Directors may be subject to various obligations under γ environmental laws and can be prosecuted under both federal and provincial environmental laws Federal: can be required to take all reasonable emergency γ measures to prevent the release of a toxic substance or to remedy any danger to the environment resulting from discharge Ontario: power to order remedial action and collect costs γ incurred by the government when parties fail to act
  • 34. OTHER DUTIES OF DIRECTORS TAXES AND SOURCE DEDUCTIONS Directors may be liable for taxes and source deductions γ which the corporation is required to deduct and/or remit: Federal and Ontario income tax deductions η Goods and Services Tax η Contributions to Canada Pension Plan η Employment Insurance premiums η Ontario Corporate Tax η Ontario Retail Sales Tax η Ontario Employer Health Tax η
  • 35. DIRECTORS’ INDEMNITIES & INSURANCE Corporations possess the right, and in some cases the γ obligation, to indemnify directors Insurance will not protect directors from liability in all γ cases Discretionary Indemnification: provided a director has γ acted honestly and in good faith with a view to the best interests of the corporation, a corporation may indemnify a director against all costs and other amounts paid to settle an action or to satisfy a judgment
  • 36. DIRECTORS’ INDEMNITIES & INSURANCE Mandatory Indemnification: a director has the right to the be γ indemnified by the corporation for any costs or other expenses relating to the director’s defence of any proceeding to which he or she is made a party if substantially successful on the merits of the case provided a director has acted honestly and in good faith with a view to the best interests of the corporation Both the federal and Ontario legislation governing γ corporations also permits a corporation to obtain insurance for a director, or former director, with respect to liabilities incurred as a director, except where such liability arises out of the director’s failure to act in good faith, with a view of the best interest of the corporation
  • 37. MaRS ENTREPRENEUR SERIES THE ROLE OF BOARDS, ADVISORY PANELS AND SERVICE PROVIDERS Photo: © Tourism Toronto, 2003 MARCH 27, 2007 SHAREHOLDERS AGREEMENTS
  • 38. What is a shareholders agreement? Usually, an agreement among all of the γ shareholders of a corporation, dealing some or all of the following: How the corporation will be managed; 1. How the corporation will be financed; 2. How shares of the corporation may be issued and 3. transferred; and What happens when the shareholders no longer 4. wish to continue with the corporation’s business (aka “exit strategies”).
  • 39. Why enter into a shareholders agreement? Avoid disputes between the shareholders in the γ future: η People will disagree about what the deal was; η Businesses change over time; and η People change over time. Protect minority shareholders. γ
  • 40. When to Sign Ideally, before or concurrently with the issuance of γ the shares. Once the shares are issued you cannot later compel a γ shareholder to sign.
  • 41. What to include in the Agreement Management of the Corporation 1. How major decisions are made 2. Financing 3. Issuing and transferring shares 4. Consequences of certain types of events 5. Exit Strategies 6.
  • 42. Management of the Corporation Directors: γ η Who will they be and how many η How will decisions be made Officers: γ η Who will hold which offices η What duties will they have η Authority to sign agreements and banking documents
  • 43. How major decisions are made When will unanimous or special approval of the directors or γ shareholder be required: η Changes to the articles or by-laws or to the business to be carried on; η Sale, lease or pledge of assets; η Issuance of new shares; η Declaration of dividends; η Significant capital expenditures; η Borrowing; η Agreements with related parties.
  • 44. Financing Initial financial contribution required from each γ shareholder. Mechanisms by which corporation may raise γ additional funds η Borrowing from institutional lender η Borrowing from shareholders η Obtaining additional share capital Distribution of profits γ
  • 45. Issuing and transferring shares Issuing shares γ η Required consent η Pre-emptive Rights Transferring shares γ η General prohibition on transfer η Permitted transfers η Right of First Refusal η Buy-sell clauses
  • 46. Exit Strategies Right of first refusal γ Drag-along rights γ Buy-sell procedure: γ η Put right η Call right η Shot-gun Piggy-back rights γ Winding up of the company γ
  • 47. Consequences of certain types of events Termination of employment γ Death of a shareholder γ Marital breakdown γ Bankruptcy γ Default under agreement γ
  • 48. Other Issues to Consider Method of Valuing shares γ Employment Contracts γ Non-competition clauses γ Insurance Policies γ Independent legal advice γ
  • 49. Final Recommendations Think about the need for a shareholders agreement γ early Try to think about where you think/hope the company γ will be in 5, 10 or more years Try to anticipate specific issues that may arise and γ deal with them Try to anticipate what an outside investor will require γ Make sure everyone is on board and understands the γ agreement