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

  • 1.MaRS Entrepreneur SeriesThe Role of Boards, Advisory Panels AndService 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 Today the firm has grown to over 400 lawyers One of the leading law firms in Canada With our offices in Montreal, Quebec City, Ottawa, Calgary, Vancouver,Sherbrooke, Trois-Rivires and Kelowna HB has within its ranks a number of prominent individuals who have made their mark on the nation and international stage, such as: The Right Honourable Jean Chrtien, P.C., Q.C., former Prime Ministerof Canada The Honourable John W. Morden, former Associate Chief Justice ofOntario Pierre Marc Johnson, FRSC, former Premier of the Province of Quebecand Andr Bureau, O.C., former Chair of the Canadian Radio-Television andTelecommunications Commission and current Chair of Astral media 3. Heenan Blaikie LLP Outstanding track record in: Business Law Labour & Employment Litigation Taxation Entertainment Law Intellectual Property Life Sciences & Emerging Technologies 4. Heenan Blaikie MaRS Office Launched the firms satellite office at the MaRS Centre in 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 expansion of our life sciences and emerging technologies groups expansion into these progressive fields of innovation and business, ensuring Heenan Blaikies 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 COST RETAINER ARRANGEMENTS COMMUNICATIONS RECORDS 6. Professional Service Providers Contd. . . . FIT the right professional for the work being requested; connecting and chemistry; ask for recommendations; meet face to face; shop around. 7. Professional Service Providers Contd. . . . COST Consultants, particularly, lawyers and accountants areexpensive; use their services judiciously; professionals who charge bargain basement ratesusually cut corners on service; lawyers usually charge on an hourly basis; try to getan upset price for the work being requested; try to do some of the leg work yourself; most professional firms have checklists of matters forclients to consider; ask for them. 8. Professional Service Providers Contd. . . . Retainer Arrangements insist on a retainer letter outlining the scope of theservice providers mandate and how the matter is tobilled; 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; a solid retainer against fees is a good incentive forprompt service. 9. Professional Service Providers Contd. . . . Communications be proactive in communicating with your service providers; be aware of time sensitivity and ensure that service provider isfollowing up on a timely basis; 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; 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. 10. Professional Service Providers Contd. . . . Records keep a record of all communications you have withyour service providers; if oral advice is given, ask that it be confirmed inwriting; ensure that you receive original signed documents inrelation to the matter being handled; ensure that you receive a report from your serviceprovider once the matter has been completed; know what records, if any, are being retained by theservice provider and confirm on-going retentionarrangements in writing. 11. Function and liabilities ofcorporate directorsPresented by James McDermott Photo: Tourism Toronto, 2003MaRS CentreMarch 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 ENTITYThere are various ways of carrying on a business one way is through a corporation The corporation is a separate legal entity: it has rights and obligations equivalent to a natural person Shareholders (the owners of the corporation) have 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 through human activity The persons who guide, operate and control the corporation are: 4 Shareholders 4 Directors 4 Officers 15. MANAGEMENT OF THE CORPORATION The shareholders will select directors who will have the power and responsibility to manage the corporation Directors will delegate the power and responsibilities needed in the day-to-day management of the corporation to the officers 16. BOARD OF DIRECTORSDirectors are required to manage and supervise the management and affairs of the corporation Directors exercise their power collectively as a Board of Directors The term of directors tenure is usually specified in the corporations by-laws (ex. directors must be elected annually) 17. BOARD OF DIRECTORSA corporation need not have more than one director The number of directors of the corporation will depend on the corporations founding documents: They may specify a set number (ex. 10) or a minimumand maximum number (ex. min. 1, max. 10) A minimum number of directors (quorum) must be 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 Canadian residency requirements on boards of directors Vacancies on the board of directors may be filled by 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 approved by the majority of directors present at the meeting As an alternative to holding meetings, directors may act by a written resolution signed by all directors 19. COMMITTEES OF THE BOARD OF DIRECTORSThe Board of Directors can set-up committees to which it delegates certain powers The Board of Directors can have various committees such as: Audit committee Compensation committee Finance committee 20. DUTIES OF DIRECTORSDirectors have certain duties toward the corporation and its shareholders These duties are imposed by the common law and federal and provincial legislation Directors can be held personally liable for a breach of these duties 21. COMMON LAW DUTIES OF DIRECTORS Two basic duties at common law:1) Fiduciary Duty (Duty of Loyalty)2) Duty of Skill and Care (Duty of Care) 22. COMMON LAW DUTIES OF DIRECTORS Fiduciary Duty: Directors have a duty to act honestly and in good faith with a view to the best interests of the corporation Directors and officers cannot: take advantage of a business opportunity which thecorporation is seeking approve a corporate contract if they have a material interestthat conflicts with the best interests of the corporation use insider information for personal gain in a securitiestransactions 23. COMMON LAW DUTIES OF DIRECTORS Duty of Skill and Care: Directors must exercise the level of skill and care that a reasonable prudent person would exercise in comparable circumstancesBusiness Judgement Rule4 24. LEGISLATIVE DUTIES OF DIRECTORSCORPORATE LAW Both common law duties have been enacted in legislation governing corporations The federal and Ontario legislation governing corporations impose a: fiduciary duty duty of care 25. LEGISLATIVE DUTIES OF DIRECTORSCORPORATE LAW Directors must act honestly and in good faith with a view to the best interests of the corporation Directors must exercise the care diligence and skill that a reasonably prudent person would exercise in comparable circumstances The corporation or the shareholders could take action against directors if they breach these duties 26. LEGISLATIVE DUTIES OF DIRECTORSCORPORATE LAW Directors could be liable if they do not comply with: Corporate legislation and regulations Articles and by-laws of the corporation Unanimous shareholder agreement A Director must disclose any material interest they may have in a contract with he/she: (i) a party to the contract or transaction (ii) is a director of a party to the contract or transaction; (iii) has a material interest in a party to the contract or transaction 27. LEGISLATIVE DUTIES OF DIRECTORSCORPORATE LAW Directors must ensure that certain liquidity and solvency tests are met before authorizing certain transactions such as: Payment of a dividend Redemption of shares If the liquidity and solvency tests are not met, directors could be liable to pay any amounts distributed Directors could be liable if the minority shareholders use the oppression remedy to claim relief from unfair or prejudicial behaviour of the directors 28. LEGISLATIVE DUTIES OF DIRECTORSDirectors could be liable for offences committed by the corporation even if corporation is not prosecuted or convicted:In matters relating to the insolvency and bankruptcy of corporationEngaging in anti-competitive behaviour Filing false or misleading information 29. OTHER DUTIES OF DIRECTORSSECURITIES LAW Applies to publicly held corporations Directors are insiders of the corporation because they have knowledge of confidential information (insider information) about the corporations business Directors are subject to insider trading rules 30. OTHER DUTIES OF DIRECTORSSECURITIES LAW Directors are prohibited from passing on insider information (insider tipping)Insider trading or tipping gives rise to quasi-criminal (fine and/or imprisonment), administrative and civil sanctionsDirectors can be liable and/or receive severe penalties for misrepresentations contained in documents filed on behalf of the corporationDirectors must ensure that the corporation makes continuous and timely disclosure which could have an impact on the market price or value of the corporations securities 31. OTHER DUTIES OF DIRECTORSEMPLOYEE RELATIONSDirectors can be liable for unpaid wages or for breaches of employment and workplace related legislation:Unpaid Wages: directors are responsible for unpaid wages up to specified amountsLabour Relations: directors have a duty to ensure the corporation complies with labour relations legislation 32. OTHER DUTIES OF DIRECTORSEMPLOYEE RELATIONS Occupational Health and Safety: directors have a duty to ensurethat the corporation complies with the legislation Pay Equity: the corporation cannot discriminate against a personthat participated in pay equity process or otherwise obstruct orinterfere with this process Pension Plans: directors owe a fiduciary duty to the pension planbeneficiaries and could be liable for a breach of this duty 33. OTHER DUTIES OF DIRECTORSENVIRONMENTAL LAW Directors may be subject to various obligations under environmental laws and can be prosecuted under both federal and provincial environmental laws Federal: can be required to take all reasonable emergency 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 incurred by the government when parties fail to act 34. OTHER DUTIES OF DIRECTORSTAXES AND SOURCE DEDUCTIONS Directors may be liable for taxes and source deductions which the corporation is required to deduct and/or remit:Federal and Ontario income tax deductions Goods and Services Tax Contributions to Canada Pension Plan Employment Insurance premiums Ontario Corporate Tax Ontario Retail Sales Tax Ontario Employer Health Tax 35. DIRECTORS INDEMNITIES & INSURANCE Corporations possess the right, and in some cases the obligation, to indemnify directors Insurance will not protect directors from liability in all cases Discretionary Indemnification: provided a director has 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 indemnified by the corporation for any costs or other expenses relating to the directors 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 corporationBoth the federal and Ontario legislation governing 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 directors 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 SERVICEPROVIDERS Photo: Tourism Toronto, 2003MARCH 27, 2007SHAREHOLDERS AGREEMENTS 38. What is a shareholders agreement?Usually, an agreement among all of the shareholders of a corporation, dealing some or allof 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; andWhat happens when the shareholders no longer 4.wish to continue with the corporations business(aka exit strategies). 39. Why enter into a shareholders agreement?Avoid disputes between the shareholders in the future: People will disagree about what the deal was; Businesses change over time; and People change over time. Protect minority shareholders. 40. When to Sign Ideally, before or concurrently with the issuance of the shares. Once the shares are issued you cannot later compel a 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 CorporationDirectors: Who will they be and how many How will decisions be made Officers: Who will hold which offices What duties will they have Authority to sign agreements and banking documents 43. How major decisions are made When will unanimous or special approval of the directors or shareholder be required: Changes to the articles or by-laws or to the business to be carriedon; Sale, lease or pledge of assets; Issuance of new shares; Declaration of dividends; Significant capital expenditures; Borrowing; Agreements with related parties. 44. Financing Initial financial contribution required from each shareholder. Mechanisms by which corporation may raise additional funds Borrowing from institutional lender Borrowing from shareholders Obtaining additional share capital Distribution of profits 45. Issuing and transferring shares Issuing shares Required consent Pre-emptive Rights Transferring shares General prohibition on transfer Permitted transfers Right of First Refusal Buy-sell clauses 46. Exit Strategies Right of first refusal Drag-along rights Buy-sell procedure: Put right Call right Shot-gun Piggy-back rights Winding up of the company 47. Consequences of certain types of eventsTermination of employment Death of a shareholder Marital breakdown Bankruptcy Default under agreement 48. Other Issues to Consider Method of Valuing shares Employment Contracts Non-competition clauses Insurance Policies Independent legal advice 49. Final Recommendations Think about the need for a shareholders agreement early Try to think about where you think/hope the company will be in 5, 10 or more years Try to anticipate specific issues that may arise and deal with them Try to anticipate what an outside investor will require Make sure everyone is on board and understands the agreement