legal fundamentals for bc business
TRANSCRIPT
LEGAL FUNDAMENTALSMarius AdomnicaSegev Homenick LLP
February 21, 2015
Segev Homenick LLP
Segev Homenick LLP
What We’ll Cover
1. Business operating structures
2. Corporations
3. Fundamentals of employment law
4. Fundamentals of intellectual
property
5. Regulatory compliance
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Operating StructuresThree Main Types:• Sole Proprietorships• Partnerships• Corporations
Each has its advantages and disadvantages in terms of cost to set up, upkeep requirements, and legal benefits
Important to know features of each
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Sole Proprietorships
You as an individual operating a business
Simplest possible business structureEssentially no start-up costsNot a separate legal identity personal
liability (your sole proprietorship getting sued = you get sued)
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Sole ProprietorshipsAdvantages• Cheap to set up (no expensive
documents to draft)• Low upkeep costs• Simplicity
Disadvantages• Personal Liability
Suitable for doing light contract work or very small businesses
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Partnerships
Need partnership agreement – can be as complex or simple as required
Generally unlimited liability, with some exceptions
Three Main Types:• General Partnerships (unlimited liability)• Limited Partnerships (partially unlimited liability)• Limited Liability Partnerships (limited liability)
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PartnershipsAdvantages• Fewer registration and upkeep requirements
than corporations• Flexibility
Disadvantages• (Generally) unlimited liability• Investors prefer dealing with corporations• Harder to provide equity to employees• Cannot qualify for some government programs
(IRAP)Generally suitable for smaller businesses in
specialized fields that require flexibility, don’t plan to scale
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Corporations
Separate legal entity from owners, which means:• Limited liability• Carries on independently of
founders
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Corporations Advantages• Limited liability• Easy to provide equity and change
ownership• Investors comfortable with them • Some government assistance programs
(IRAP) require you to be incorporatedDisadvantages• Require more upkeep and expense to
operate than partnerships and sole proprietorships
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IncorporationNeed to reserve name file relevant
documents with Corporate Registry • Articles of Incorporation:
Essentially constitution of corporation, sets the ground rules for how the corporation will function,
Sets out the classes of shares and rights attaching to each
Determine who will act as directorsDetermine share structure of the companyWhen? Generally the sooner the betterGood time to sit down with your co-founders
and figure out next steps
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Shareholder AgreementsImportant(!)Articles of incorporation often not enough to
give protections to shareholders. Problems that can arise:• Shareholders diluted• Founders can’t agree on direction of the company• One founder wants to sell interest to other party the
remaining founders don’t want to be in business withSets out rights relevant to such situations and
offers shareholders far more protection than the articles
Best to get it done when starting company, when everyone on same page
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Common Shareholder Agreement Clauses
Pre-emptive rights – company can’t issue shares without giving each SH the opportunity to maintain his % interest in companyRight of first refusal – if shareholder wants to sell other shareholders get first option to buy their sharesRight to appoint directors – shareholder must vote their shares to appoint directors nominated by partiesDrag along rights – If majority of shareholders want to sell their shares, minority shareholders must sell as wellTag-Along or “Piggyback” rights – If majority shareholders want to sell their shares, minority shareholders can sell on same terms“Shotgun” clause – Shareholder A offers to buy all of Shareholder B’s shares. Shareholder B must either sell, or buy all of Shareholder A’s shares for the same price
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Corporate Upkeep Requirements
Need registered and records offices (will be publicly available)
File Annual Report with corporate registry to keep corporation in good standing
Pass resolutions for most major steps such as opening a bank account, take minutes of meetings
Maintain records such as Central Securities Register, minutes of meetings, resolutions (minute book)
Hold annual shareholder meeting Appoint auditor and provide financial statements
(unless waived) In practice these requirements become more onerous
as the corporation grows
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Corporate GovernanceThree main groups:• Shareholders – owners of the corporation,
ultimately everything is run for their benefit• Directors – Elected by shareholders,
ultimately responsible for running corporation• Officers – President, CEO, CFO, etc.,
appointed by directors, responsible for day to day operations of the corporation
Same person can hold multiple positions shareholders can be directors/officers
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Director and Officer Liability
s. 142 of BC’s Business Corporations Act:
A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must:
(a) act honestly and in good faith with a view to the best interests of the company,
(b) exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances,
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SharesShares are a “bundle of rights”
including right to:• Vote at shareholder meetings• Share in company profits (receive dividends)• Share in company assets on winding up• Receive information about the company• Various others (as set out by Articles)
No ownership interest in company assets
Different classes of shares can have different rights (as set out by Articles)
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AdviceIncorporate early (get it over with)Enter into a shareholder agreement
when incorporating (not necessary but strongly recommended)
Be aware of upkeep requirementsBe aware of governing structure :• Role and duties of directors, officers,
shareholders etc.• Potential for liability as director
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Employees vs ContractorsContractors:• Not entitled to severance pay• No income tax/EI/CPP deductions or related
employer contributions, generally less expenses• Subject to fewer legislative requirements• More flexibility
Simply calling employee contractor does not make it so, courts/regulators will look at totality of relationship including factors like:• Degree of autonomy/integration• Chance of profit/risk of loss • Whether contractor provides own equipment
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Employment/Consulting Agreement
Oral/casual agreements don’t work:• Difficult to enforce• Misunderstandings• Usually don’t cover everything• Don’t protect company’s IP/confidential info
Key provisions• Salary and benefits• Severance• IP Assignment/confidentiality• Stock options• Mediation/Arbitration
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Employee Stock OptionsDirectors/SH can allocate set
amount of shares to Employee Stock Option Plan (ESOP)
Ensure shares vest over a period of time
Common structure:• 4-6 year vesting period• “cliff” until the end of first year• Regular vesting every month after
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Vesting Schedule
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Severance PayCan generally let go employees for any (non-
discriminatory) reason but must pay severanceMinimum: Employment Standards Act• 1 week notice after 3 months of employment• 2 week notice after 12 months of employment• 3 week notice after 3 years employment + 1 week per
additional year, to max of 8 weeksGenerally common law more generous (old rule
of thumb: 1 month’s salary per year of employment)
More senior positions -> higher severance obligations
Employment agreement – can set out severance rights ahead of time (can’t conflict with ESA)
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BC Employment Standards Act Main statute dealing with working conditions Minimum wage• $10.25/h • No unpaid internships
Overtime • X 1 ½ After 8h/day or 40h/week • X 2 after 12h/day
Meal Breaks• Cannot work more than 5h without ½ hour break
Vacation• After 12 consecutive months of employment 2 weeks/year
Pregnancy/Parental Leave• Unpaid leave of up to 52 weeks total (or more in some
circumstances)
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Employment Standards Act - Exemptions
Overtime and hours of work provisions do not apply to managers or “high technology professionals” “high technology professionals” includes:• Workers “applying specialized knowledge…to
investigate design or develop an information system that is based on computer and related technologies”• Employee primarily tasked with carrying out
scientific research• Sales or marketing professional for tech
products
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BC Human Rights Code13 (1) A person must not
(a) refuse to employ or refuse to continue to employ a person, or
(b) discriminate against a person regarding employment or any term or condition of employmentbecause of the race, colour, ancestry, place of origin, political belief, religion, marital status, family status, physical or mental disability, sex, sexual orientation or age of that person or because that person has been convicted of a criminal or summary conviction offence that is unrelated to the employment or to the intended employment of that person. Must accommodate employees with above
characteristics to the point of undue hardship
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AdviceBe aware of employee/contractor
distinction and duties and benefits associated with each
Get a written employment/consulting agreement with everyone working for you
Be aware of your obligations under applicable legislative requirements (Employment Standards Act, Human Rights Code)
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Intellectual Property Three main types of intellectual property
we will cover:• Trademarks• Copyrights• Patents
Useful tip: if you want to know if something is protected ask yourself if it fits into one of these categories
Important to have strategy about protecting IP
Investors like to see “clean” ownership of company’s IP
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TrademarksPurpose is to identify your company’s
goods/services in the marketplaceWords, designs, sounds, or a combination of these
used to distinguish your goods and services from others
Needs distinctive elementRestrictions on what you can trademark: confusing
with existing trademarks, geographical locations, personal names, clearly descriptive
Associated with a specific category of goods --> two companies can use same trademark for different products
Protect it or lose it: must police potential infringement
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Trademarks - RegistrationUse of a trademark sufficient to own it, but
registration strongly recommendedProves you own the mark, don’t have to
establish this in court (expensive)Grants protection for 15 years, can be renewed
indefinitelyBefore registering search Canadian trademarks
database at (www.ic.gc.ca) and Google Registering your business name with corporate
registry NOT the same as registering your trademark
Major changes to system on the way, if thinking about registering may be best to do it now
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CopyrightProtects a wide range of works evidencing a
minimum level of creativity: literary materials, computer programs, images, videos
Protects right to copy, publish or otherwise distribute the copyrighted material
Does not protect ideas or conceptsProtection is automatic, takes effect
immediately upon creation of the work (registration still recommended to prove ownership )
Duration: life of the author + 50 years (generally)
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PatentsCan prevent others from making, using or selling
your invention for up to 20 years from filing your patent application
Invention must be:• novel • useful and • non-obvious
Patents granted to first inventor to file, regardless of whether first to invent
Must apply for patent protection within 1 year of invention becoming known to the public (but if NDA in place no public disclosure)
Obtaining a patent a significant financial commitment
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Intellectual Property AssignmentTrademarks, copyrights and patents can
all be assigned or licensedGenerally IP created in the course of
employment belongs to company – but not always, safest to get it in writing
Intellectual Property Assignment Agreement – get signed from the beginning for all your employees (consider making part of your employment agreement)
“Clean” ownership of company IP important for investors
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Trade Secrets/Confidential Information
Essentially any information in any form, that provides an economic benefit to your company that your company takes steps to keep secret
Common law duty to maintain such information confidential, if someone has notice the info is confidential and discloses then can sue them
Sounds great in theory but can be difficult (and expensive) to prove in practice
Notice matters (mark docs “confidential”)Rather than rely on lawsuits should have
other parties sign an NDA
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AdviceBe alive to potential infringement
of others’ IP rights (work belonging to past employers)
Police infringement of own IP Register trademarks and
copyrights whenever possibleProtect own IP through NDA and
IP Assignment Agreements and ensure “clean” ownership of company IP
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ComplianceKnow the requirements in your industryRegulatory burden depends on the
industry, some industries heavier than others
Legislative requirements often not specific (“reasonable efforts,” “necessary steps”)
Generally Canadian regulators try to modify behaviour before going to penalties
Important to make good faith effort to comply
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Privacy LegislationPersonal Information Protection and
Electronic Documents Act (Federal) and Personal Information Protection Act (BC)
Limits on what information may be collected and for what purpose
Can only collect information if purpose disclosed to the public (usually through Privacy Policy) and for purpose “a reasonable person would consider appropriate”
Essentially need business justification for collecting information
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Privacy Legislation (continued)
Generally consent required before any personal information can be collected
Consent may be express or implied, depends on the circumstances
More sensitive information may require more steps to show consent
Must appoint privacy officer and have policies in place to meet obligations under legislation
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Canada Anti-Spam Law Cannot send commercial electronic messages
without first obtaining consent Messages must:• Identify individual on whose behalf is sent and provide
their contact information• Set out an unsubscribe mechanism from future messages
Some exceptions (family members, product safety information, charities, etc.)
Express consent – user must take action to express consent (no pre-checked boxes)
Implied consent• Existing business relationship (good for two years)• Person receiving message has disclosed contact info
AND message is relevant to person’s role, functions or duties
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Canada’s Anti-Spam LawNeed express consent for installing
computer program on user’s computer. If user trying to install program A,
cannot also install program B without obtaining their consent
Persons presumed to consent to installation of: Cookies, HTML code, java script, as long as “it is reasonable to believe they consent to their installation”
