As lawyers we are often guiding our clients on defining the “business of the company”, so I thought I’d write a post on this topic.   “Business of the company” is formally declared in several circumstances and for several reasons.  Three main reasons are suggested below:

First, as part of a non-competition provision.

The business of the company will be stated in a Shareholders Agreement, Non Disclosure Agreement, Employment, Consulting or Advisory agreement as part of a non-competition mechanism.  Once the “business” is defined, then the person agreeing to the non-competition provision is agreeing to restrict himself/herself or itself (in the case of a corporate person) from actions that are competitive to that business.  As an example, I have provided a sample non-competition clause (emphasis added):


Each Shareholder agrees that, while the Shareholder is a Shareholder, Director, Officer, employee, consultant, or independent contractor of the Corporation:

(a) any business opportunity that comes to the attention of the Shareholder that is similar to, or that relates to, the Business of the Corporation, or that arises out the Shareholder’s connection with the Corporation, is to be pursued exclusively by the Corporation; and

(b) for a period of [twelve (12)] months after ceasing to be a Shareholder, Director, Officer, employee, consultant or independent contractor of the Corporation, the Shareholder will not, solely or jointly with others be directly or indirectly involved with a business that is in direct competition with the Business of the Corporation in any jurisdiction in which the Corporation carries out the Business of the Corporation.

 

It’s important to note that a non-competition clause coupled with an overly-broad definition of business of the corporation may make it difficult for the clause to be enforceable. If the definition of the business clause promotes an “unreasonable restraint of trade”, or in other words, should employees find it difficult to take any other job because they would potentially be offending the non-competition clause, it may be overbroad.

Second, as part of a trademark.

One of the requirements of a trademark registration is to exhaustively list the nature of the “wares” and “services” that are associated with a business “mark”.  If the mark in question is synonymous with the business name of a corporation, then the “wares” and “services” will match the business activities of the corporation.  For an example, please consider the registered “wares” and registered “services” of Nike directly below, from which you can presume that Nike is in the business of selling:

Bags, namely all-purpose sports bags, backpacks, duffel bags, shoulder bags, waistpacks, fannypacks, computer bags, binders, student planners, zippered pouches, pocket calendars; computer software in the field of health and fitness used to manage digital music, store and organize digital music, create custom CDs, download digital music from the Internet, build, manage and transfer play lists, categorize music by tempo, log fitness data, namely, times, paces, heart rate and injuries, create workout schedules and goals, download data from a watch to a computer; digital audio equipment, namely portable digital music players, radio link watches, and heart monitors.

Over time it may be the case that the original definition of wares and services supplied to the trademark registrar does not include certain products or services sold by the business.  If that is the case, an overly-narrow definition of the business of the company may require the company to re-apply for a trademark.

Third, as part of the registered articles of incorporation

In our recent article entitled Authorizing vs. Allocating vs. Issuing Shares in your Company  I discussed that a careful investor will sometimes require that a limit is placed upon the issuance of new shares in any and all share classes.  Such a restriction ensures that the number of shares available for issue are a matter of public record, and therefore any changes to the number of shares available for issue would require a formal amendment of the articles.  The same principal applies to the nature of the business of the corporation.  A careful investor may desire to place  a restriction on the nature of the business of the corporation.  

For investor/shareholder protection reasons, a similar restriction, i.e. a requirement of board or shareholder approval for a change in the business conducted by the corporation, is often included in a shareholders’ agreement, and this is typically found within the management rights provisions in a shareholders’ agreement.  But to be extra-careful, an investor may require that this restriction (both the definition of the nature of the business conducted by the corporation, and the approval requirements) be publicly published in order to prevent any deviations from occurring without a formal amendment to the articles of incorporation.  Although “restrictions on the business” is one of the few elements on an Ontario and Canadian incorporation form, I might mention that it is not a common practice to complete this section by new private companies that are forming, but is certainly possible to include such a restriction.

Takeaways

  • It is useful to think about the boundaries around which your business will operate in order to establish both restrictions and protections.
  • An overly broad definition of business may be detrimental to a non-competition clause.
  • An overly narrow definition of business may be detrimental to a trademark clause.
  • Although not commonly included in a fresh incorporation, incoming investors may require that the business of the corporation be stated as a matter of public record.

 

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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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