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Breitbart vs. Kellogg’s: When business gets politicized, terms get forgotten

Breakfast is the most important meal of the day, but you’ve probably never heard of your morning bowl of cereal “serving up bigotry at your breakfast table.” That’s what conservative news source Breitbart said about Kellogg’s just this past week.

Kellogg’s was scrutinized on social media for advertising with Breitbart, and as a result pulled its ads from the website citing the website’s values “aren’t aligned with the values of the company.” In quick succession, many other companies pulled their advertisements from Breitbart, including names like Allstate and Warby Parker.

Source

Breitbart has responded with swift and uncalculated retaliation, calling for people to #DumpKelloggs by boycotting the food company’s products. The news website has also been publishing a series of articles that stir up old negative publicity about Kellogg’s, including headlines like SHOCK: Amnesty International Blasts Kellogg’s for Using Child Labor-Produced Ingredients” and “Criminal Investigation Opened After Man Appears to Urinate on Kellogg’s Cereal Assembly Line.”

First things first, none of these companies had any idea who they were advertising with—they all work through third-party agencies that target and make deals for them. As a result, Breitbart isn’t exactly justified in saying Kellogg’s is a hypocrite for backing out when they never directly committed to them anyways.

The politicization of this point is what has left the issue much more complex than the business of it. Breitbart is a right-wing news source—some might even say alt-right. The public pressure companies face is often more left, making the waters of corporate social responsibility murky.

It is useful to look at the situation objectively. Breitbart did not have a contract with Kellogg’s, and Kellogg’s did not have one with Breitbart. Instead, their dealings were mediated by a third party marketing or advertising agreement. Inside of this agreement, the contractual language related to termination is key.

The agreement would have, ideally, well-constructed and fair termination clauses. Termination for Convenience allows a party to, unilaterally, end an agreement upon notifying the other party, with reason or not. More restrictive would be Termination for Cause, where a reason is required and often comes from a predetermined list of reasons.

Keeping that in mind, and whatever termination language is in the Breitbart-Kellogg’s contract, there probably isn’t any sort of breach of contract. Breitbart isn’t pursuing action for them leaving the agreement for any contractual reason. They’re just sore about it, and that’s where real action could be taken—by Kellogg’s.

libel

Source: NY Photographic

Kellogg’s may choose to bring a  libel claim against Breitbart.

Libel is defined as “a written or oral defamatory statement or representation that conveys an unjustly unfavorable impression.” This is where more specific termination language related to defamation, non-disparagement, and libel and slander would have been useful for Kellogg’s to push for inclusion in their contracts. It would give them the footing to hold Breitbart to civil liability and make up for losses caused by this whole controversy. However, at this time Kellogg’s doesn’t look like it’s going to diverge from its aim to disengage, even as Breitbart continues to instigate.

Libel can be difficult to prove, but it is not impossible. For example, in Leenen v. Canadian Broadcasting Corp. (2001) (ONCA), the CBC aired a television special on the questionable use of potentially harmful heart medication by cardiologists that was found to have been defamatory. To prove the cardiologist’s claim of libel, the statement had to be made to a third party, be identifiably about the cardiologist, and considered defamatory by the judge.

In deciding if what a party has done is libelous or not, the courts often have to consider if what was said can be considered a fair commentary on the situation, or if it was justified as per public interest. Of course, the politics of the issue would become relevant at this point. However, it can be difficult for the law to offer an opinion, because the question here would essentially be who is speaking the truth, the right or the left? That’s a scary question to have the law decide upon, so perhaps it’s for the best that that question isn’t being brought up.

To see a standard software development agreement, visit our Small Business Law Library!

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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MR. BREXIT, and Making Political Sense of the Implications of Brexit for Canadian Businesses.

Donald Trump posted this tweet at 5:11 A.M. and mystified the internet. In flowed the jokes and memes, but the underlying political commentary is perhaps the best of all. If you think about it, Brexit is a lot like Donald Trump—loud, fearful, anti-immigration, and perhaps more bark than bite.

That last one might be a new one to think about, at least in the case of Brexit. After all, when on the morning of June 24 it was announced that not-so-Great Britain had voted to leave the European Union, all hell broke loose. It was emotional and economic turmoil. The British pound dropped, the markets dipped hard, and financial analysts started to sound the bells of disaster and recession.

But in the months since, it has become apparent that while Brexit is bad, it isn’t a destructive force. It’s more of a growth-stunting one, especially for any other country besides Britain, like Canada.

 

So maybe it’s a good thing Canada stepped back a bit from Mother Britain a while ago, because with only 2.5% of its trade tied up in the country, Brexit is expected to land a much softer blow than expected to our economy and business. The United States might feel good about itself for running away from home, with various Brexit projections pointing to chances for the dollar to strengthen and the economy to benefit from people fleeing risky British financial prospects for the safety and security of American ones.

The worst of what Canada can expect globally from Brexit is major structural shifts to how Canadians conduct business with and export to Europe. Many Canadian businesses use Britain as an entry point into the European market, so the country’s withdrawal from the European Union will complicate market penetration. Businesses will have to overhaul their business plans and expansion methods, move, or possibly even downsize. While Brexit itself will be a long and drawn out process filled with legislative and legal drafting, Canadian businesses will face some of the same while trying to accommodate these changes.

Hitting closer to home, Brexit can have troubling implications for Canadian housing markets.

The pressure of economic instability will push financial institutions to keep interest rates low not only in Britain, but also the United States and Canada. This might sound like a good thing, but considering the critically-inflated state of the Toronto and Vancouver housing markets, low interest rates might just agitate prices further and make it even harder for people to buy houses than it already is.

However, beyond foreign business and housing, the consequences of Brexit are minimal at best, and even considered temporary. Canada’s GDP fell a little, as did the Canadian dollar, and Canadian economy growth projects shrank. There is worry that Brexit will make it harder for Canadians to obtain work visas and to immigrate, but when Britain is done losing workers to Brexit, candidates from other countries will grow to be increasingly attractive options.

In response to concerns about losses and lower returns on investments, RBC’s chief economist, Eric Lascelles, said, “We continue to operate on the assumption that markets will first overreact, and then reclaim some of their losses.” While it is a deeply disturbing idea with troubling potential consequences, the numbers say otherwise. Maybe Brexit is something the markets have to clear their heads about and get out of their system, just like the United States has to with Donald Trump.

To see standard corporate and employment agreements, visit our Small Business Law Library!

This article was co-authored by: Alina Butt

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Corporate Transactions Part II: CEO’s and Founders as Board Members

 

Links from this article:
here
click here!

A shareholder who is a founder and/or CEO may wish to entrench their decision-making powers as a company takes on more capital and dilutes the ownership. Whether such an entrenchment should be allowed will depend on the perspective.  The desire for a locked-in vote is natural from the perspective of the founder/CEO who puts in blood, sweat and tears to try to make their company survive, often at personal sacrifice.  

In Part I, we discussed the obligations around confirming your company’s board of directors. In Part II, we discuss how a company’s CEO and/or founders can maintain a seat on the board of directors. We will first consider the mechanism by which such “entrenchment” occurs.  Then let’s dig into this a little more deeply to understand the various perspectives for a locked in board nomination.

Directors and Replacement of Directors

In the absence of specific shareholders’ agreement rules on who is permitted to make decisions, a company’s decisions are made by the board of directors on a simple majority rule (in most cases), and the voting requirements are set out in the corporate statute.  This is often modified by the company who will create special rules for special shareholders.  Such rules can become quite convoluted in a shareholders’ agreement, with certain decisions that may be voted on by some shareholders, and certain decisions requiring the vote of a minimum number of directors.  Deciding on what the rules should be can be case-specific but as a general rule, the simpler the better, with a view to addressing the needs of the various perspectives set out below.  Setting the rules is a good idea in advance, as these rules are closely scrutinized in the event of inter-shareholder disputes.

A helpful resource to consider the various permutations of management voting rights is the Clausehound Small Business Law Library for shareholder management rights and the appointment of board members found here.  By reading through the variety of clauses offered, you will get a sense for the levers and considerations that stakeholders will have when negotiating this provision.

For example, you can include language that states:

The Board of Directors will be comprised of a maximum of five (5) directors including the CEO, two Founder representatives, and two independent directors to be nominated at all times by a majority of the Shareholders. The Board of Directors shall initially consist of the following persons: [Insert name 1]; and [Insert name 2], or their replacement nominees as appointed from time to time.  If a Director resigns or is removed by a majority of the shareholders, such vacancy may be filled by the election of a new Director nominated by the remaining Directors and elected by majority of the shareholders, pursuant to the nomination rules of this provision, within fourteen (14) days of such vacancy.

Perspective of the CEO:   Considering the suggested clause above, above, the current CEO will have a voice in company decisions, but no right of nomination.

 

Perspective of Founders:  From the perspective of the Founders, the suggested clause above entrenches the CEO and two board members nominated by the founder into decision-making seats, which ensures that, so long as the founders and CEO are aligned, a ⅗ majority vote on all decisions.   A rogue CEO could cause issues for the founders by voting with the independent board members.

Perspective of Investors:  In the suggested clause above the remaining board seats are held by independent board members, which could be defined as a non-shareholder who is possibly an industry expert or a professional board member, and is someone who understands that the role of the board is to protect the shareholders.  The right to appoint independent board members is the approach that might be taken by a passive investor who is investing in many companies.  This approach gives the company room to move, or possibly swing vote with the CEO.  A more active investor would likely require one or more board seats to be held by that investor rather than by an independent party.

Three or five board seats, or more

Limiting the number of board seats to three creates risk for the legacy shareholders because new investors will want to hold one or more seats.  To make sure that the voices at a board meeting have a fair chance of being heard, the founders, CEO and/or early investors will want to increase the size of the board, and may also propose adding “board observer” (non-voting) seats to give even more voices an opportunity to be heard.

While one-size does not fit all, either in board size or voting rules, stakeholders will need to consider what rules, arrangements make the most sense for the dynamics of their owners, investors and management.

To read Part I of our series, click here!

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Corporate Transactions Part I: Confirming the Current Composition of Board Members

 

Links from this article:
here

As our entrepreneur clients grow and enter into commercial transactions and take on financing, frequent questions often asked include how to manage the composition of the potentially growing board. This includes:

  • determining/confirming who is a board member;
  • locking in one or more board nominations (seats) for the founder(s) or officer(s); and
  • locking in one or more board nominations for the officer(s) or investor(s) who are non-founder(s).  

This article will deal with the first point.

How does one go about determining/confirming who is a board member?

One would think that this is an easy answer – but in a transactional setting, lawyers are often digging back through the corporate documents to determine who has been appointed to the board of a corporation.  The reason for this is that board members may be coming and going and the minute book and/or the government register may or may not be properly updated.  For a large company this is less of an issue because a law firm and/or accounting firm will take on this responsibility to keep the documents properly organized.  However, for a small company with a limited legal budget this information tracking can easily fall into disarray.

A director resignation does not have a strict legal form, and can be effected by email or otherwise. You can find a sample director resignation by linking here.  

The acceptance of the resignation is also not strictly required, as a director cannot be locked into holding their role.  However, it is important to note that the corporation cannot operate without the required minimum number of directors.  This is an especially tricky situation in the event that the company is operating poorly, as directors may decide to “jump ship” to avoid potential liability such as the liability for unpaid wages owed to employees, for example. Please also note that if the resigning director is holding an officer role within the company, that such officer role is not automatically resigned.

 

Once the resignations are received, the Founder/Administrator/CFO/Corporate Secretary/Lawyer – whoever is in charge of updating the minute book – should be notified.  The registers should reflect that the director (and possibly an officer – if the director also resigned an officer position) has resigned.  

It is important to keep these registers updated. When corporate decisions need to be made, unless the proper signatories have approved documents in accordance with the signing rules set out in the company’s articles, by-laws or shareholders’ agreement, or as required by law (yes – all four of those company governance rules will need to be checked to see who is required to sign a particular instrument), a corporate, commercial, financing, acquisition or really any transaction or decision made by the company might not be properly authorized. And in many of these agreements there is a clause that requires that the company is properly authorized.

The work of the Administrator/Corporate Secretary/Lawyer is still not completed at this point.  The lawyer will need to file an update to the government register to indicate that a director has resigned and that a new director has replaced that director.  This formality is required by law within a certain number of days after a board vacancy.  The government register is a useful reference point for a contracting counter-party to determine whether an agreement they are entering into with a company has been properly approved.

Stay tuned for Part II of our Corporate Transactions Series!

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Role of the Board of Directors: To Protect the Investors

Many early stage companies are directed by a unanimous shareholder agreement, under which the shareholders take control away from the board and make all decisions by requiring a unanimous vote of the shareholders.  This is sensible when there are a small number of shareholders who have self-financed a business.

Reasonably, as a company starts to grow and take on silent or passive investors who are far removed from the business, decision making will start to occur not by shareholder decision but instead, more formally, at a meeting of the board of directors.

The value of a board is its review of company performance against business plan, standards of governance, and forum for debate.   The board is elected by the shareholders at the annual meeting, or at other times when vacancies occur.  Often a shareholders’ agreement will set rules as to which of the shareholders or groups of shareholders have the right to nominate board members.  For example, a company’s founders may require that one or more board seats are filled by company founders or their nominees (by reserving the right to nominate a replacement director should there ever be a vacancy in those seats).  Major investors will often reserve one or more seats, and “minority” investors may also require a seat.

A company will sometimes also leave room for “independent directors” who are not shareholders or stakeholders.  Recently and famously, eBay has appointed an independent director to its board in response to a claim from investors that the company is poorly governed.  Claims from eBay’s billionaire and activist investor Carl Icahn were leading to a potential proxy battle to spin PayPal out of eBay, for reasons of lack of confidence in the governance of eBay.

 This matter was resolved last week when eBay announced the appointment of David Dorman, formerly of (among other appointments) Motorola Solutions, an “independent member” of the board, with the anticipation that shareholder concerns will be brought forward by such independent member of the board.  As business decisions can be complicated and multi-faceted, debate and discussion is a cornerstone feature of a board of directors, along with diversity of experience and context, amongst the members of a board.

It is clear that, whether a company is growing with a handful of investors, or a public company with thousands of investors, once a company’s investors increase in numbers and are far-removed from the day-to-day operations of the business, they will rely on the voice of the board at regularly scheduled meetings to protect their investment.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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When Should a Company Declare Dividends?

When declaring dividends it is important to be aware that your company may be susceptible to a reassessment by the Canada Revenue Agency (“CRA”). This is something you want to avoid, therefore knowing when reassessment can be triggered can be important to your business.   I’ve provided a surface-level analysis of the relevant issues, below but be careful to consult your accountant or a tax lawyer for further clarification.

The CRA will opt for a reassessment if they disagree with a taxpayer’s filing.   In general, the CRA can order a reassessment when they have some suspicion or reason to believe that a tax filing is inaccurate.

This can be triggered in several circumstances, such as (among others):

  1. a corporation declaring dividends in a manner contrary to the company’s articles and regulations or other constating document;
  2. a corporation that has not paid income tax decides to declare a dividend;
  3. if the principal purpose of a transaction can be inferred as an attempt to avoid, reduce or defer the payment of tax or if the dividend is part of a larger set of transactions, which involves other activities such as tax deference, the CRA may reference the General Anti-Avoidance Rule (“GAAR”) of the ITA, or other similar provincial anti-avoidance rules, and order a reassessment. For example, a reassessment can occur when a company has committed a series of transactions, which created the suspicion of an elaborate tax avoidance scheme, based on the following criteria:
    1. the transaction results in a tax benefit;
    2. the transaction is an avoidance transaction;
    3. the transaction may reasonably be considered to result in a misuse or abuse of taxing legislation;
  4. when a corporation pays dividends directly before its shares are sold (called a “Capital Gains Strip”) for the purpose of converting a taxable capital gain from the disposition of shares into a tax-free intercorporate dividend; and
  5. if shareholders receive stock dividends that should have been included in the calculation of income, but were excluded.

The purposes of a reassessment are usually motivated by the intention to assess tax avoidance actions by a company or an individual, where the CRA has concluded that certain transactions are not performed for bona fide reasons.

While it is not possible to predict when a reassessment will occur, to avoid reassessment, seek expert advice on matters relating to tax, and act in good faith and based on advice of counsel.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Fundraising: Finding and Managing “Retail” and “Accredited” Investors

I performed some searches yesterday to identify recent publicly-listed technology companies via TMX Money and I found that technology companies and biotechnology companies are starting to take a major share of new listings on the venture exchange.   For a growing company in this space, this is good news.   The types of companies that are publicly listing provides a barometer of investor sentiment around what’s hot for retail investors.  In the digital technology space the types of companies that are listing include advertising technology companies, 3D printing companies, customer engagement companies (via online chat), gaming companies, online meetings companies, and search fund companies (among others) that are looking to invest in one or more technology businesses.

Public company information provides access to strategic and financial information that can help to guide non-public growth companies.  Companies in fast growing industry sectors as those noted above are often struggling to find competitive industry information, and public disclosure materials provide reference cases, industry valuation comparables, and access to company strategic plans and financial information, for those that are willing to search through the public disclosure databases.  (Companies to search for include Keek Inc., 3TL Technologies Corp, Frankly Inc., NYX Gaming Group Ltd., EQ Inc. to name a few recent examples).

Publicly listing a company may come with many rewards and issues.  Publicly listing is an expensive, time consuming process, and accessing the public markets requires the proper preparation and securities commission approval of a prospectus or other comprehensive disclosure document (depending on the method of listing).  Companies that have recently listed are for the most part priced at less than $1 per share and are therefore in the category termed as “penny stocks” according to public sentiment.  Although this could lead to a fairly large return on investment since a minor increase in price per share can lead to double digit increases in share value, the opposite is also true in terms of potential losses that can be incurred, and ultimately, thin capitalization and trading might make it difficult to find a buyer when stock speculators are looking to sell.  The real payoff for companies in this category is finding real economic growth coupled with coverage by institutional research analysts with the result of active trading and liquidity.

Investors who are “accredited” can also invest in high growth companies without the need for a public listing or a prospectus. These investors are often high net-worth individuals, but may also be individuals who satisfy other criteria necessary to qualify them as “accredited investors”, as described in a previous article that I had written on this category of investors.  The remainder of this article will discuss fundraising through investors in this investor category.

Accredited investors can be accessed via Exempt Market Dealers (EMDs) or Investment dealers (IDs).  A list of EMDs is found here and a list of regulated ID’s is found here.  As an investor seeking access to companies that are looking for capital, it is advisable to make sure that the EMD or ID is properly registered as such and/or properly regulated by a governing body such as the Investment Industry Regulatory Organization of Canada (IIROC).  Of course, it’s always better to seek a warm introduction (so contact your current investors and advisors to see if there is a warm or trusted referral that can be made into this group of investment professionals).   A careful EMD/ID will usually spend some time performing due diligence on a company seeking capital in order to determine if that company is suitable for their portfolio of potential investors.

Factors such as a strong management team and good software product are among a long list of qualities that may considered before an EMD/ID will represent a company. If an EMD/ID is willing to represent a company, it is not without cost – there will be a commission payable usually in both cash and company shares, there is typically a monthly fee plus expenses for acting as an agent for the company.  I will discuss structuring this agency agreement in a future article.

In light of investor sentiment in favour of technology company investors, access to such capital is becoming more readily available than in recent years, the result of which is that companies have access to much-needed working capital.  The downside for companies is the need for securities lawyers to navigate the reporting and disclosure requirements, transactional lawyers to negotiate the corporate financing transaction or series of transactions, and corporate lawyers to ensure proper governance and to make sure that books and records are in proper order, along with accountants, auditors, filing deadlines and other administrative requirements that need to be fulfilled, all of which can be quite expensive and time consuming.

The company will likely need to appoint a dedicated investor relations officer (which could be the CEO) since managing the investor expectations in order to raise future rounds of financing is a time consuming process as well.  The types of investors that discover a company via EMD/ID are often speculative investors, and a common concern in these scenarios is that there is a misalignment between the goals of such investors to obtain fast returns and the goals of the company board and founders seeking incremental, manageable growth.  A company can quickly lose control of their project mandates without good advice as the bargaining power shifts and pressure builds to perform and satisfy the demands of the investors and agent.

Investor sentiment towards technology companies has been hot at all levels, which is encouraging for companies that are at a fundraising stage.  A word of warning:  a lot of hard work can go up in smoke due to the pressures of satisfying investors, and, to this end, I have three recommendations:  try to build a company with good fundamentals that can survive on cash flows and where fundraising can enhance already existing growth, surround yourself with good advisors who want to succeed on the fundamentals, and do not charge into an investment scenario where the new investor goals are potentially misaligned with the founding principals.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Choosing a Board of Directors or Board of Advisors For Your Business

Selecting a board of directors or a board of advisors is an important decision and should be given careful consideration. An early decision that company stakeholders will often make, to achieve their collective goals, is to recruit directors or advisors with a strong and complementary skill set (to fill operational or experiential gaps within the company). Canadian business laws pertaining to director liability makes this offer to join a board of directors less enticing than you might think as this article will point out, so instead, many potential directors will instead agree to join a board of advisors instead.  A board of advisors is fairly straightforward to set up and consists of a group of key people who will advise and counsel the company’s executives on business decisions.

Advisors and directors are treated differently for liability purposes

Generally, under corporate law, directors have legal liability and a fiduciary duty to the corporation and advisors do not.

For example, directors may be responsible for employee lost wages in the event of bankruptcy, and other potential liabilities exist, such as, environmental liabilities (mostly, from toxic spills).

 Directors must protect the corporation by law

Under Canadian business law, the board of directors is required to supervise and manage the affairs of the corporation. The directors must conduct their supervisory and managerial roles in good faith. Directors have a duty of care, duty of loyalty, duty of obedience and fiduciary duties. Breach of any of these duties may result in a finding of liability for an act or omission.

Compensation may vary for directors/advisors  

Whether a company has a board of directors or a board of advisors, compensation is flexible. A company may choose to compensate either a director or an advisor in cash, with options, a combination of cash and options, cash only, or the company may even choose not to compensate such directors. This is not a critical factor for choosing a board of advisors over a board of directors or vice versa.

Directors make decisions for the business

Unless restricted by a unanimous shareholders’ agreement, the directors have powers given to them under the Company’s articles of incorporation, applicable corporate statute (such as the Ontario Business Corporation Act or the Canada Business Corporation Act), and the company’s by-laws, as applicable.

  For example, Directors may have the power to approve share issuances, indebtedness, create a security interest in any of the property of the corporation among other decisions. Because directors have significant decision-making powers, appointing directors of a corporation should not be considered lightly.

As noted above, a company may restrict a director’s decision-making power via a unanimous shareholders’ agreement, and under this arrangement, the shareholders play a more active role in managing the company’s affairs. This is a common arrangement in a small private company (for example, in a start-up company).  Because of the greater accountability given to shareholders in these circumstances, there is some distance created between the board of directors and the company, and risk of liability begins to shift away from directors and towards shareholders.

Director and Officer Liability Insurance

Directors (and officers, especially in a company in which shareholders are taking an active management role) may be exposed to risks as noted above, and because of this, many directors will purchase directors and officers insurance to protect from liability that may arise should some legal action be brought against them in their capacity to act as directors of the company.

In conclusion, there are many factors which must be carefully weighed when structuring and selecting directors or advisers to guide the growth of a company.

 

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