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

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Photo: © Tourism Toronto, 2003 MaRS Entrepreneur Series The Role of Boards, Advisory Panels And Service Providers Life Sciences & Emerging Technologies Presented by Heenan Blaikie LLP Jim McDermott / Andrea Safer March 27, 2007

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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, 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.

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

Page 1: Entrepreneurship 101: The Role of Boards, Advisory Panels, and Service Providers

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MaRS Entrepreneur SeriesThe Role of Boards, Advisory Panels And

Service ProvidersLife Sciences & Emerging Technologies

Presented by Heenan Blaikie LLPJim McDermott / Andrea SaferMarch 27, 2007

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HEENAN BLAIKIE LLP

γ 1973 – inception of the firm

γ Today the firm has grown to over 400 lawyers

γ One of the leading law firms in Canadaη With our offices in Montreal, Quebec City, Ottawa, Calgary, Vancouver,

Sherbrooke, Trois-Rivières and Kelowna

γ HB has within its ranks a number of prominent individuals who havemade their mark on the nation and international stage, such as:η The Right Honourable Jean Chrétien, P.C., Q.C., former Prime Minister

of Canadaη The Honourable John W. Morden, former Associate Chief Justice of

Ontarioη Pierre Marc Johnson, FRSC, former Premier of the Province of Quebec

andη André Bureau, O.C., former Chair of the Canadian Radio-Television and

Telecommunications Commission and current Chair of Astral media

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Heenan Blaikie LLP

γ Outstanding track record in:

η Business Law

η Labour & Employment

η Litigation

η Taxation

η Entertainment Law

η Intellectual Property

η Life Sciences & Emerging Technologies

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Heenan Blaikie MaRS Office

γ Launched the firm’s satellite office at the MaRS Centre inToronto on September 19, 2005 which coincided with the officialopening of the MaRS Centre

γ Heenan Blaikie MaRS Centre Office is part of the continuingexpansion of our life sciences and emerging technologiesgroups expansion into these progressive fields of innovationand business, ensuring Heenan Blaikie’s reputation as aprominent service provider to research organizations, start-ups,venture-backed firms, venture capital firms, universities,hospitals, governments and global pharmaceutical companies

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Professional Service Providers:

γ FIT

γ COST

γ RETAINER ARRANGEMENTS

γ COMMUNICATIONS

γ RECORDS

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Professional Service ProvidersCont’d. . . .γ FIT

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.

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Professional Service ProvidersCont’d. . . .γ COST

η Consultants, particularly, lawyers and accountants areexpensive; use their services judiciously;

η professionals who charge bargain basement ratesusually cut corners on service;

η lawyers usually charge on an hourly basis; try to getan “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 forclients to consider; ask for them.

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Professional Service ProvidersCont’d. . . .γ Retainer Arrangements

η insist on a retainer letter outlining the scope of theservice provider’s mandate and how the matter is tobilled;

η two components of cost; fees and disbursements (out-of-pocket expenses); service providers will usuallywant their estimated disbursements paid up-front; aportion of the estimated fees is also usually required;

η a solid retainer against fees is a good incentive forprompt service.

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Professional Service ProvidersCont’d. . . .γ Communications

η be proactive in communicating with your service providers;

η be aware of time sensitivity and ensure that service provider isfollowing up on a timely basis;

η require the service provider to advise you of each relevantcommunication that they have with third parties and to provideyou with a copy of every written communication sent or receivedin connection with the matter being handled;

η if you are concerned with the manner in which your work is beinghandled or if you feel that you are being billed too much, voiceyour concern immediately because the strength of yourobligations will diminish the longer you ignore the problem.

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Professional Service ProvidersCont’d. . . .γ Records

η keep a record of all communications you have withyour service providers;

η if oral advice is given, ask that it be confirmed inwriting;

η ensure that you receive original signed documents inrelation to the matter being handled;

η ensure that you receive a report from your serviceprovider once the matter has been completed;

η know what records, if any, are being retained by theservice provider and confirm on-going retentionarrangements in writing.

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Function and liabilities ofcorporate directors

Presented by James McDermottMaRS CentreMarch 27, 2007

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PREFACE

This presentation is intended to provide a very brief overview ofthe function of directors and the principal areas of liability ofdirectors of Ontario and Canadian corporations and is notintended 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.

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THE CORPORATION AS AN ENTITY

γ There are various ways of carrying on a business –one way is through a corporation

γ The corporation is a separate legal entity: it hasrights and obligations equivalent to a natural person

γ Shareholders (the owners of the corporation) havecertain rights in the corporation but they do not ownthe assets of the corporation

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γ The corporation can only operate and do businessthrough human activity

γ The persons who guide, operate and control thecorporation are:

4 Shareholders

4 Directors

4 Officers

MANAGEMENT OF THE CORPORATION

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MANAGEMENT OF THE CORPORATION

γ The shareholders will select directors who will havethe power and responsibility to manage thecorporation

γ Directors will delegate the power and responsibilitiesneeded in the day-to-day management of thecorporation to the officers

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γ Directors are required to manage and supervise themanagement and affairs of the corporation

γ Directors exercise their power collectively as a Boardof Directors

γ The term of directors’ tenure is usually specified inthe corporation’s by-laws (ex. directors must beelected annually)

BOARD OF DIRECTORS

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BOARD OF DIRECTORS

γ A corporation need not have more than one director

γ The number of directors of the corporation willdepend on the corporation’s founding documents:

η They may specify a set number (ex. 10) or a minimumand maximum number (ex. min. 1, max. 10)

γ A minimum number of directors (“quorum”) must bepresent at meetings or no business can be carried on(usually a majority of directors)

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γ The federal and certain provincial corporate statutes imposeCanadian residency requirements on boards of directors

γ Vacancies on the board of directors may be filled byshareholders (if no quorum of directors) or by directors (ifquorum of directors) as specified in the By-Laws

γ Decisions of the board – called “resolutions” – must beapproved by the majority of directors present at the meeting

γ As an alternative to holding meetings, directors may act by awritten resolution signed by all directors

BOARD OF DIRECTORS

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COMMITTEES OF THE BOARD OFDIRECTORS

γ The Board of Directors can set-up committees towhich it delegates certain powers

γ The Board of Directors can have various committeessuch as:

η Audit committee

η Compensation committee

η Finance committee

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DUTIES OF DIRECTORS

γ Directors have certain duties toward thecorporation and its shareholders

γ These duties are imposed by the common lawand federal and provincial legislation

γ Directors can be held personally liable for abreach of these duties

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COMMON LAW DUTIES OF DIRECTORS

Two basic duties at common law:

η 1) Fiduciary Duty (Duty of Loyalty)

η 2) Duty of Skill and Care (Duty of Care)

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Fiduciary Duty:

γ Directors have a duty to act honestly and in good faithwith a view to the best interests of the corporation

γ Directors and officers cannot:

η take advantage of a business opportunity which thecorporation is seeking

η approve a corporate contract if they have a material interestthat conflicts with the best interests of the corporation

η use insider information for personal gain in a securitiestransactions

COMMON LAW DUTIES OF DIRECTORS

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Duty of Skill and Care:

γ Directors must exercise the level of skill andcare that a reasonable prudent person wouldexercise in comparable circumstances

4 Business Judgement Rule

COMMON LAW DUTIES OF DIRECTORS

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LEGISLATIVE DUTIES OF DIRECTORS

CORPORATE LAWγ Both common law duties have been enacted in

legislation governing corporations

γ The federal and Ontario legislation governingcorporations impose a:

η fiduciary duty

η duty of care

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LEGISLATIVE DUTIES OF DIRECTORS

CORPORATE LAWγ Directors must act honestly and in good faith with a

view to the best interests of the corporation

γ Directors must exercise the care diligence and skillthat a reasonably prudent person would exercise incomparable circumstances

γ The corporation or the shareholders could takeaction against directors if they breach these duties

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CORPORATE LAWγ Directors could be liable if they do not comply with:

η Corporate legislation and regulationsη Articles and by-laws of the corporationη Unanimous shareholder agreement

γ A Director must disclose any “material interest” theymay have in a contract with he/she:η (i) a party to the contract or transactionη (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

LEGISLATIVE DUTIES OF DIRECTORS

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CORPORATE LAWγ Directors must ensure that certain “liquidity and solvency” tests

are met before authorizing certain transactions such as:

η Payment of a dividend

η Redemption of shares

γ If the liquidity and solvency tests are not met, directors could beliable to pay any amounts distributed

γ Directors could be liable if the minority shareholders use the“oppression remedy” to claim relief from unfair or prejudicialbehaviour of the directors

LEGISLATIVE DUTIES OF DIRECTORS

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LEGISLATIVE DUTIES OF DIRECTORS

γ Directors could be liable for offences committed bythe corporation even if corporation is not prosecutedor convicted:

η In matters relating to the insolvency and bankruptcy ofcorporation

η Engaging in anti-competitive behaviour

η Filing false or misleading information

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OTHER DUTIES OF DIRECTORS

SECURITIES LAWγ Applies to publicly held corporations

γ Directors are “insiders” of the corporation becausethey have knowledge of confidential information(“insider information”) about the corporation’sbusiness

γ Directors are subject to “insider trading” rules

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OTHER DUTIES OF DIRECTORS

SECURITIES LAWγ Directors are prohibited from passing on insider information

(“insider tipping”)

γ Insider trading or tipping gives rise to quasi-criminal (fine and/orimprisonment), administrative and civil sanctions

γ Directors can be liable and/or receive severe penalties formisrepresentations contained in documents filed on behalf ofthe corporation

γ Directors must ensure that the corporation makes continuousand timely disclosure which could have an impact on the marketprice or value of the corporation’s securities

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OTHER DUTIES OF DIRECTORS

EMPLOYEE RELATIONS

γ Directors can be liable for unpaid wages or for breaches ofemployment and workplace related legislation:

η Unpaid Wages: directors are responsible for unpaid wages up tospecified amounts

η Labour Relations: directors have a duty to ensure the corporationcomplies with labour relations legislation

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OTHER DUTIES OF DIRECTORS

EMPLOYEE RELATIONS

η Occupational Health and Safety: directors have a duty to ensurethat the corporation complies with the legislation

η Pay Equity: the corporation cannot discriminate against a personthat participated in pay equity process or otherwise obstruct orinterfere with this process

η Pension Plans: directors owe a fiduciary duty to the pension planbeneficiaries and could be liable for a breach of this duty

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OTHER DUTIES OF DIRECTORS

ENVIRONMENTAL LAWγ Directors may be subject to various obligations under

environmental laws and can be prosecuted under both federaland provincial environmental laws

γ Federal: can be required to take all reasonable emergencymeasures to prevent the release of a toxic substance or toremedy any danger to the environment resulting from discharge

γ Ontario: power to order remedial action and collect costsincurred by the government when parties fail to act

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OTHER DUTIES OF DIRECTORS

TAXES AND SOURCE DEDUCTIONSγ Directors may be liable for taxes and source deductions

which the corporation is required to deduct and/or remit:

η 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

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DIRECTORS’ INDEMNITIES &INSURANCEγ Corporations possess the right, and in some cases the

obligation, to indemnify directors

γ Insurance will not protect directors from liability in allcases

γ Discretionary Indemnification: provided a director hasacted honestly and in good faith with a view to the bestinterests of the corporation, a corporation may indemnifya director against all costs and other amounts paid tosettle an action or to satisfy a judgment

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DIRECTORS’ INDEMNITIES & INSURANCE

γ Mandatory Indemnification: a director has the right to the beindemnified by the corporation for any costs or otherexpenses relating to the director’s defence of any proceedingto which he or she is made a party if substantially successfulon the merits of the case provided a director has actedhonestly and in good faith with a view to the best interests ofthe corporation

γ Both the federal and Ontario legislation governingcorporations also permits a corporation to obtain insurancefor a director, or former director, with respect to liabilitiesincurred as a director, except where such liability arises outof the director’s failure to act in good faith, with a view of thebest interest of the corporation

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MaRS ENTREPRENEUR SERIES

THE ROLE OF BOARDS, ADVISORY PANELS AND SERVICEPROVIDERS

MARCH 27, 2007

SHAREHOLDERS AGREEMENTS

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What is a shareholders agreement?

γ Usually, an agreement among all of theshareholders of a corporation, dealing some or allof the following:

1. How the corporation will be managed;

2. How the corporation will be financed;

3. How shares of the corporation may be issued andtransferred; and

4. What happens when the shareholders no longerwish to continue with the corporation’s business(aka “exit strategies”).

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Why enter into a shareholdersagreement?

γ Avoid disputes between the shareholders in thefuture:

η People will disagree about what the deal was;

η Businesses change over time; and

η People change over time.

γ Protect minority shareholders.

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When to Sign

γ Ideally, before or concurrently with the issuance ofthe shares.

γ Once the shares are issued you cannot later compel ashareholder to sign.

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What to include in the Agreement

1. Management of the Corporation

2. How major decisions are made

3. Financing

4. Issuing and transferring shares

5. Consequences of certain types of events

6. Exit Strategies

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Management of the Corporation

γ Directors:

η Who will they be and how many

η How will decisions be made

γ Officers:

η Who will hold which offices

η What duties will they have

η Authority to sign agreements and banking documents

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How major decisions are made

γ When will unanimous or special approval of the directors orshareholder be required:

η Changes to the articles or by-laws or to the business to be carriedon;

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.

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Financing

γ Initial financial contribution required from eachshareholder.

γ Mechanisms by which corporation may raiseadditional funds

η Borrowing from institutional lender

η Borrowing from shareholders

η Obtaining additional share capital

γ Distribution of profits

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Issuing and transferring shares

γ Issuing shares

η Required consent

η Pre-emptive Rights

γ Transferring shares

η General prohibition on transfer

η Permitted transfers

η Right of First Refusal

η Buy-sell clauses

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Exit Strategies

γ Right of first refusal

γ Drag-along rights

γ Buy-sell procedure:

η Put right

η Call right

η Shot-gun

γ Piggy-back rights

γ Winding up of the company

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Consequences of certain typesof events

γ Termination of employment

γ Death of a shareholder

γ Marital breakdown

γ Bankruptcy

γ Default under agreement

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Other Issues to Consider

γ Method of Valuing shares

γ Employment Contracts

γ Non-competition clauses

γ Insurance Policies

γ Independent legal advice

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Final Recommendations

γ Think about the need for a shareholders agreementearly

γ Try to think about where you think/hope the companywill be in 5, 10 or more years

γ Try to anticipate specific issues that may arise anddeal with them

γ Try to anticipate what an outside investor will require

γ Make sure everyone is on board and understands theagreement