Information on legal and business topics from Canadian business lawyer Shane McLean

Archive for the ‘Law’ Category

A case to watch for lawyers who serve on boards

Posted by Shane McLean on January 6, 2010

The Law Times has a good article (here) about a recently certified Canadian class action suit which has, as a side issue, the question of whether a law firm can be responsible  for the director related liabilities of a member of the firm who serves on the board of directors of a client.    The outcome of this case will  be important to watch for Canadian lawyers who serve or would consider serving on the board of directors of their clients and may make it prudent for firms to review their policy re:  firm partners and associates accepting board positions with clients.


Posted in Law, Misc. | Leave a Comment »

MaRS Launches Entrepreneurs Toolkit

Posted by Shane McLean on December 7, 2009

MaRS has recently launched a great new website which includes a  section called the Entrepreneurs Toolkit.  It’s a collection of articles, videos and other tools all aimed at educating and helping entrepreneurs understand the practical and legal aspects of startup life.   At launch the Toolkit boasts 10 workbooks, over 250 articles and over 150 videos live on the site.  The site even includes form documents and agreements that you can download and edit for your own use.

I was lucky enough to be able to assist and contribute to a number of the articles you will find on the MaRS site.  It is a great resource for budding entrepreneurs.

Posted in Business Structure, LaBarge Weinstein, Law, MARS, Misc., Startup | Leave a Comment »

CSA Report on Review of Executive Compensation Disclosure

Posted by Shane McLean on November 30, 2009

On November 20, 2009 the Canadian Securities Administrators (the “CSA”) released their report on their recent review of executive compensation disclosure.  The review conducted by the CSA follows the adoption of a new form for executive compensation disclosure by Canadian public companies which came into effect on December 31, 2008.  The new form requirements added additional areas of disclosure and more detail in some of the areas previously covered.

The CSA began their review in spring of 2009 in order to assess the implementation of the new disclosure requirements.  70 public companies were reviewed and of that number, the CSA reports that 62 “generally met the [new] requirements”.  However, “most” of the issuers reviewed were asked to improve their disclosure in future filings and 8 of the companies reviewed were required to file supplemental materials because their disclosure did not meet minimum acceptable standards.

The two key areas where most issuers failed to meet the standards expected by the CSA were the discussion and analysis of (i) performance goals and (i) benchmarking.  The CSA believes that companies should be more specific and detailed with respect to the performance goals that are tied to executive compensation.  In addition, the CSA felt that companies that use benchmarking to assess executive compensation as against companies in their peer group did not, among other things, clearly explain the methodologies and many did not disclose the peer group against which executive compensation was benchmarked.

Issuers and their advisors should take note not just of the findings of the CSA review but also of the areas on which the review concentrated in an effort to ensure that future executive compensation disclosure is carefully crafted so as to  avoid the shortcomings described in the report.   In this era of closer scrutiny on executive compensation levels, transparency and attention to detail are crucial.

Posted in Law, Misc., TSX, TSX Venture Exchange | Leave a Comment »

Rights offerings — an old new way to raise money

Posted by Shane McLean on November 12, 2009

In the past 6 months or so I have had a number of clients ask about the possibility of raising funds by way of  a rights offering.  In late October we even filed a preliminary prospectus for one of our TSX Venture Exchange listed clients in connection with a proposed rights offering.  Public markets have seen a bit of a resurgence lately but we all know how abysmal things have been over the last while and so I think more companies are  looking at creative ways to raise funds and have been looking to the rights offering as one alternative.

In a “rights offering” a corporation issues “rights” to its existing shareholders. The rights entitle those existing shareholders to acquire additional shares (or some other form of security) from the corporation for a fixed exercise price over a fixed period of time (called the rights offering period).  When issued by a public company, the rights will typically trade  as separate securities on the same exchange as the company’s shares for the duration of the rights offering period.

Companies often look at rights offerings as a way to provide a presumably willing audience — i.e. those who have already bought the company’s shares — with an ability to buy additional shares directly from the company.  To sweeten the deal and encourage exercise of the rights, the rights are often issued with an exercise price at a discount to the market price of the common shares and may also entitle the exerciser to receive a warrant, preferred share or some other security in addition to the common share on exercise of the right. The “sweeter” the deal, the more likely  the rights will have some trading value, thereby enriching your shareholders just by issuing them, and the more likely they will ultimately be exercised prior to the end of the rights offering period.

Rights offerings of smaller sizes can often be done without prospectus under applicable Canadian securities laws but larger offerings will usually require a prospectus.

Rights offerings seem to have had a mixed reputation in the past with some viewing them as a fund raising method of last resort.  For example, I was told by someone at the TSX Venture Exchange that for many years they have only seen one or two a year on the exchange.  Recently, however, there seems to be a renewed interest in this fund raising vehicle and it’s worth a second look for any company looking to raise funds.

Posted in Financing, Law, Misc., TSX, TSX Venture Exchange | Leave a Comment »

Contractor or Employee?

Posted by Shane McLean on October 19, 2009

Here’s a variation on  a common question that I get asked:  “I have [name] working for me as a [position].  Is he/she a contractor or an employee?”

Without knowing any further information I can say that, odds are, legally speaking the person is probably an employee.   I would, of course, ask for more information before providing the appropriate advice, but the fact that I am being asked the question in the first place tells me a lot.

At a basic level, whether they can articulate it or not, people generally understand when someone is a contractor or an employee.  For instance, nobody ever asks me if the plumber they had in the office for an afternoon last week to fix the lunchroom sink is an employee.  That’s because everyone understands that to be a  true contractor relationship.  The plumber provides their own tools and expertise,  takes direction from you on what to do but probably not how to do it and  works for multiple clients in a given day or week.    That’s a contractor.

Now, if you have someone who works 9 to 5 for you every day in a cubicle at your office and doesn’t perform services for others, that’s probably not a contractor for the  purposes of tax and employment law.    Most people understand this intuitively.

The question I quoted above is usually asked when someone who sounds more like a 9 to 5 employee approaches the company and asks to be treated as a contractor, usually because they want to take tax deductions that an employee cannot take.  It also comes up when trying to end a relationship with a contractor.   At the point of termination, contractors are  traditionally  at a disadvantage when compared to employees because they haven’t had the same level of legal protection in terms of notice and severance rights.  For that reason, it is not uncommon for “contractors” to have a change of heart at the point of termination and claim that they have in fact been “employees” for the entire time.    In the past couple years courts in Canada have been  moving toward eliminating the historical distinction between contractors and employees when it comes to “reasonable notice” of termination.  That will be the topic of a future post.

By the way, it doesn’t matter what you call yourselves.  You can have an agreement called a “Contractor Agreement” in which the parties scream loud and clear that they are not forming an employment relationship, but that won’t stop the  people who want to collect taxes or enforce employment laws from calling it an employer-employee relationship.

Posted in Law, Misc. | 1 Comment »

Update on the Ontario Emerging Technologies Fund

Posted by Shane McLean on October 13, 2009

This is a reprint of a note from the LaBarge Weinstein Emerging Issues Series: Update on the Ontario Emerging Technologies Fund

Over the past summer, our partner Debbie Weinstein has been closely involved in the industry outreach conducted by Ministry of Research and Innovation’s John Marshall relating to the launch of the Ontario Emerging Technologies Fund (OETF), which was originally announced by the McGuinty government in winter 2009. The Fund represents an exciting opportunity for our cash- or syndicate partner-starved clients (startups, venture investors and angels alike) to access government funding in a reasonable and timely way.

If you would like any additional information regarding the OETF, including how to become a “Qualified Investor” or submit an investment for consideration, we would be happy to assist. Please feel free to contact any of our partners via our website at and we’ll try and help you assess whether the program complements your future financing strategies.

What You´ve Likely Heard Already

OETF is a $250 million direct investment fund administered by the Ontario Capital Growth Corporation (OCGC), announced in February 2009. OETF has been designed as a matching fund for investments in Ontario-based companies, providing syndicate support for qualified investors that have sourced, diligenced and led financings. The Fund will invest $50 million per year during the term of the program, and $100 million will be available for funding over the next 18 months.

OETF will piggybacking on the diligence and pricing efforts of “qualified” investors that participate in an fund-sponsored approval process, and lead syndicated venture capital transactions.

OETF can invest in private companies, the majority of whose: (i) payroll is paid to Ontario employees and contractors, (ii) workforce is working in Ontario, and (iii) senior officers maintain their permanent residence in Ontario. Targets must carry on business in one of the OETF’s recognized industry categories, including clean tech, life sciences, digital media or communications.

The minimum initial investment requires target firms to be raising at least $1 million (including the matching money from the Fund), and will be made on the same deal structure terms as those made available to the qualified investor. The Fund will match the largest qualified investor up to $5 million per round. The OETF has adopted some stylized deal structure requirements for financing rounds where the syndicate relationships are more complex, or where the transaction contemplates a material follow-on investment by the qualified investor, and we would be happy to discuss those at your convenience.

OETF can do follow-on financings, which is terrific, provided that the maximum amount invested in any single target cannot exceed $25 million.

What You Need to Know and Do Now

Get Your Investors Qualified: Any investor, regardless of residence or location and whether an institutional venture capital firm or angel, can become a “Qualified Investor”. In order to seek approval, investors are required to submit an application to the Fund and submit to certain background and other diligence checks regarding the investor and its principals. OETF has engaged Toronto’s Northbridge Capital Management Inc. to administer and support granting these approvals. We have been advised that, once OGCG and Northbridge settle upon the set of administrative and diligence procedures to make these determinations, an application to become a qualified investor will take no longer than 15 days to process. Unfortunately, non-institutional investors (angels) are required to reapply for qualified status for each investment that they make.

Get Your Term Sheet Qualified: In order to submit a proposed transaction for approval, qualified investors are required to submit an application to the Fund. OETF has engaged Toronto’s Covington Capital Corporation in order to administer and support the approval and funding of qualified investments. We strongly suggest that interested parties submit applications for investor qualification at the same time as they pursue investment approval. Since accommodating applications this past July, we understand that the Fund has received more than 200 proposals for investment. We also understand that the Fund has every intent of distributing these Funds as soon as possible. It may very well be that the qualified investors who are first to the post will be the first to reap the rewards of their efforts.

Consolidate Your Angels: The most important limitation of the Fund is that it will only match the investment amount of the qualified investor. This is a real challenge for angel syndicates, but Mr. Marshall’s team has indicated a strong appetite and willingness to consider strategies to consolidate angel investments under a corporate, partnership or trust entity. This should streamline the investor approval process for the affected angels, and by consolidating the Funds to be invested will maximize the OETF’s matching investment in the target.

If You Have A Cross-Border Structure, You’re Still Eligible: Please keep in mind that targets do not themselves need to be Ontario or Canadian companies. If your corporate structure includes a Delaware parent or sister, as with many of our clients’ corporate structures, your qualified investors can still try and access the Fund.

If You are in the IAF Pipeline, Be Mindful of OETF Limitations: There are funding limitations where the target has received substantial concurrent Ontario government contributions, including OCE or IAF (Investment Accelerator Fund) funding. Targets should seek advice regarding these restrictions and how they might the affect the target’s status and eligibility for matching funding pursuant to the OETF.

The Fine Print: What You Should Consider Before Engaging the Fund

The intent is that OETF will act as a passive investor, but like any government-sponsored funding program, there are some traps and challenges to engaging the program.

There are some specific minimum deal terms to be reviewed and incorporated into your investment proposals before they are submitted for approval. More important, OETF investments will be subject to call rights in favour of the Fund should the target lose its Ontario footprint after the date of the investment. This should not affect conventional investment exits, which OETF will review and approve in the ordinary course in its capacity as a shareholder. However, if your firm anticipates near-term growth in its workforce and C-class management in the near term, you should get some advice on how those call rights work. It is similarly unclear as to how such rights will mesh with our venture and bridge loan contracting patterns over the last few years.

Overall, our team remains very bullish on the Fund’s potential for stimulating syndicate formation in Ontario, and we would be happy to assist you in engaging the Fund, and working through its eligibility and approval requirements. Again, please feel free to contact any of our partners via our website at and we would be happy to assist.

Posted in Financing, Government Funding, LaBarge Weinstein, Law, Misc., Newsletter, Startup, Venture Capital | 1 Comment »

TSX To Require Shareholder Approval of Public Company Acquisitions

Posted by Shane McLean on September 28, 2009

The TSX manual, applicable to companies listed on the Toronto Stock Exchange, currently requires that a listed company obtain approval from its shareholders if it intends to complete an acquisition of another company and, in the course of that acquisition, intends to issue shares representing more than 25% of its currently outstanding shares.  Since 2005 there has been an exemption to that shareholder approval requirement when a TSX listed company was acquiring another public company.   On September 25, 2009 the TSX announced that this exemption will be removed effective as of November 24, 2009.

After November 24, 2009 all acquisitions which involve the issuance of shares representing more than 25% of a TSX listed company’s currently outstanding shares will require shareholder approval.

The amendment follows a public consultation process initiated in October of 2007, which at one point saw the TSX propose a new 50% threshold for public company acquisitions.  According to the TSX, a majority of the submissions received were in favour of eliminating the exemption and in favour of applying the same 25% threshold to both private and public company acquisitions.

Posted in Law, Mergers and Acquisitions, Misc., TSX | Leave a Comment »

Unanimous Shareholder Agreements

Posted by Shane McLean on September 22, 2009

A unanimous shareholder agreement is, as the name describes, an agreement among all of the shareholders of a corporation.   The term could be used to describe any agreement among all of the shareholders of a corporation but if you hear someone refer to a unanimous shareholder agreement they are probably referring to an agreement in which the shareholders (and possibly other third parties) agree on certain matters relating to the governance of the corporation and the relationship among shareholders.   Although terms can vary widely, there are typically some common themes you will find in a properly drafted unanimous shareholder agreement:

  • Affairs of the corporation — This can include agreement on high level matters such as who the officers and directors will be down to the minutia such as which bank to use and who may sign cheques.
  • Special Approvals — There may be agreement on certain matters or corporate actions that require approval of a certain directors, shareholders or even third parties.  You see this in  small companies — e.g. with two or three equal shareholders — when the shareholders want to make sure that certain major actions aren’t taken without everyone being in agreement.  You also see it in venture capital backed companies where the venture capitalist seeks to protect their investment by attaching a laundry list of corporate actions that cannot be taken without the investor’s consent (even where the investor may not otherwise control the corporation through ownership)
  • Pre Emptive Right — A pre-emptive right is a right held by all shareholders, or sometimes a subset of shareholders, entitling them to participate in future issuances of securities of the corporation so as to allow each to maintain its ownership of the corporation on a percentage basis.  This is a safety mechanism for shareholders to ensure that the corporation cannot issue a pile of free shares diluting ownership without offering each shareholder the right to buy in on the same terms.
  • Restrictions on Transfer— Typically a unanimous shareholder agreement will contain some restriction on transfer of shares.  This provides other shareholders with some control over who their fellow shareholders are and will be.    These restrictions often include a right of first refusal or right of first offer, both of which essentially provide other shareholders with a first chance to buy shares before a shareholder can go out and sell them to a third party.
  • Drag Along / Tag Along — A drag along right (sometimes called a carry along right) entitles a certain number or percentage of shareholders to force the other shareholders into selling the company.   A tag along right (sometimes called a come along right or piggy back right) is the inverse, allowing shareholders to tag along if other shareholders sell their shares to a third party — i.e. the first shareholder cannot sell unless the third party will buy shares from the other shareholders too.
  • Incapacity/Death/Bankruptcy/Divorce — Unanimous shareholder agreements often include terms dealing the rights of the parties under  these kinds of eventualities.
  • Dispute Resolution — Parties often set out arbitration or mediation requirements in the event a dispute arises.  Some unanimous shareholder agreements include clauses with such ominous names as a  “shot-gun” clause in an attempt to provide shareholders with a way to get out or force their fellow shareholders out of the company.  These clauses should be considered with caution as they can be tricky to prepare and can become  almost unworkable when dealing with more than a couple shareholders.

Interestingly, under many corporate statutes the unanimous shareholder agreement has a special place in that shareholders can use it to restrict the powers of corporate directors and vest those powers in the shareholders, a group of shareholders, a single shareholder or someone else.  The corporate statutes typically go on to say that if a director’s powers are restricted and/or removed by a unanimous shareholder agreement he/she is absolved of any duty in respect of such powers.  However, the party (or parties) named in the unanimous shareholder agreement as having those powers will pick up the duties and liabilities normally assigned to directors.

A unanimous shareholders agreement requires careful drafting to ensure that it meets the needs of a corporation, covers off any special circumstances relating to the corporation or its shareholders and to ensure that it can adequately handle or adapt to different scenarios that may arise in the life of that corporation.

Posted in Law, Misc., Startup, Venture Capital | 1 Comment »

CPC Combinations Part 2

Posted by Shane McLean on September 16, 2009

In early August I posted about CPC Combinations (here).  In that post I discussed the concept of combining a public shell company listed under the TSX Venture Exchange’s Capital Pool Company (“CPC”) Program with another existing public company (instead of the typical acquisition of a private entity).

With most CPC shell companies raising only the minimum of $200,000 on their initial public offering (which, when taken with the $100,000 in seed money, would leave the company with $300,000 less expenses after the IPO), many are finding that they do not have much purchasing power, either in terms of cash in the bank or overall valuation, to go after the really interesting target companies.  In order to help alleviate this problem, there is another type of CPC “combination” available in which two or more CPC shell companies combine together in order to pool their resources.

When the shell companies combine, each can only be given a value equal to its cash in the bank and the funds available to the combined company cannot exceed $2,000,000.   Most CPC shells are likely to combine in this way only if they have a target company lined up already since the combined entity has only 12 months post-combination to complete its “qualifying transaction”.

At a time when the list of CPC shell companies that have not announced a qualifying transaction is approaching 150 names, combining a few of them may help the prospects for finding attractive targets and also help the whole program by reducing the glut of shell companies out there.

Posted in Capital Pool Company Program, Financing, Law, Mergers and Acquisitions, Misc., TSX Venture Exchange | 2 Comments »

LaBarge Weinstein Summer 2009 Quarterly

Posted by Shane McLean on September 10, 2009

See below for LaBarge Weinstein’s quarterly newsletter published this week:

Summer 2009 Quarterly

With the school recess ending, and some evidence that our recession is history, our team looks back on a very busy summer of M&A and investment activity. Highlighting our M&A dealflow: Exar´s acquisition of Ottawa startup veteran Galazar Networks, and the acquisition of two Waterloo-based clients by industry leaders, EA´s acquisition of social media gaming company J2Play, and Intel´s recent acquisition of multicore development tool firm RapidMind. Of course, we love acting on the other side of the acquisition table, and we congratulate EION and its CEO, Dr. Kalai Kalaichelvan, on its footprint expanding acquisition of Calgary´s Layer 10 earlier this summer.

This trend of balance-sheet strong companies looking north for technology and strategic market development hasn´t been lost on the investment community. Our team has fielded more introductory Canadian outreach efforts from US-based funds (Boston-based Sigma Partners and Valley-based Altos Ventures among them) in the past quarter than in the previous several years. This will hopefully complement investors such as Panaroma Capital and Bridgescale Partners that have, and remain, committed to supporting our tech communities and serving as syndicate partners to the remaining homegrown active funds. Many new US-based institutions have structured their funds to include workarounds to some of our Canadian tax withholding and reporting challenges formerly cited as barriers to local investment. Others, like Bridgescale, have actually opened local offices, in its case in Toronto.

On the whole, very healthy opportunities, especially for experienced management teams emerging from acquisition activities during the previous five or so years. If you and your team are working on the next big thing, we would love to assist, and please reach out to any of our partners to make a connection and get a better sense of how we can support and build momentum behind your new venture.

Back to the VC Future…

The summer has witnessed a raft of VC nostalgia for the industry’s halcyon pre-bubble days (new VC investments in the US, for example, have dipped to pre-1997 levels). One would expect a flurry of hand-wringing laments, but this hasn’t been the case.

A recent New York Times article, for example, cites venture-icon Alan Patricof’s admonition that it is time for true venture investors to “think smaller”. Patricof, the founder of the APAX group of funds which formerly managed billions of dollars in private equity earmarked funds (some of which he invested in former Gatineau-based LaBarge client CML Emergency Services, acquired by Plant Equipment in 2007), now runs a modest $75M fund seeking to avoid the industry “force-feeding” that experts suggest have diminished industry returns. Angel-boosters such as Basil Peters have developed this perspective over the course of the decade, and his book “Early Exits” is a must-read for startup founders seeking to develop business plans that properly account for an exit landscape where the IPO is a less and less viable liquidity outcome.

So what does this mean for Canadian startups? Smaller might very well be better for us, and the industry’s “back to its roots” approach seems to align with the strategies to which our best performing local funds, including Celtic House Venture Partners and Tech Capital, have recommitted themselves over the last year.  Fund managers have refocused their efforts on cultivating long-term relationships with quality management teams, and getting involved early. And while the sales cycle remains a long one (and founders should get started as early as possible in building these relationships), our view is that this focus on more intimate partnering with opportunities can only help build bridges between funders and the amazing pockets of talent that our tech communities hold.

Cleantech Diamonds in Ottawa…

If you are a founder or investor taking a look at big picture trends in the cleantech space, our team has continually been impressed with the work of Bill St. Arnaud and his team at CANARIE on the development of clean data centres and the opportunities that they present for Canada. Canada’s leadership in changing its energy mix makes it a great candidate for satisfying what is estimated to be a $600B global market by 2013. In June, CANARIE announced a $3M call for proposals in its so-called “Green ICT” space, and in particular for major zero-carbon data center pilot projects. Bill is a terrific speaker and tireless advocate for Canada’s opportunities in the industry, and we encourage anyone interested to seek him out and get his valuable perspectives.  Looking for some locally based potential winners in the field? Two stand out: Kingston-based Axiopower and Ottawa-based Menova, each of whom have focused on small-project renewable energy as a source of future significant industry growth. If you would like to discuss our firm’s experience in the industry, and our perspectives on financing and other challenges, please feel free to contact any of our partners and we would be happy to do so.

Have Digital Content, Will Travel…

One of our partners, James Smith, was fortunate enough to attend the Stratford Institute’s inaugural conference in June focused on wedding digital media content creation and distribution innovations in a single, dynamic educational setting (James’ views on the conference). The initiative feeds a vibrant trend we’ve seen recently with Canadian-based startups focusing on web- and mobile-based distribution technologies. This includes industry heavy-hitter QuickPlay Media as well as emerging technologies and platforms being proposed by startups such as Spreed, Personal Web Systems, Metranome, DEQQ, LiveHive Systems,, and Calgary’s MoboVivo. There certainly seems to be enough talent and interest to support a vibrant local digital media distribution community, and we’d be happy to share our thoughts and perspectives with you on this budding industry.

Blogs & Other

For expense-conscious startups, one of our clients Eseri, has generously made available a free trial and a 50% discount on software everyone needs, a complete IT company-in-a-box for small, medium, and growing businesses. Eseri offers a secure, virtual desktop incorporating a range of open-source tools for small businesses, and we would encourage you to take them up on their offer. And while we’re at it, we would encourage you all to check out some tools that our lawyers have been trying out lately, including Mercury Grove’s Network Hippo, Tungle’s scheduling solution, and Eighty Twenty’s desktop sharing applications.

It was disappointing to hear of Rick Segal’s departure from the Canadian VC scene this past July, and we’ll certainly miss his straight talk on the industry and its contributors. For some of his past blog highlights, click the following links, well worth the read.

The fall is venture fair season in Canada, and look for our partners and lawyers at the upcoming Ottawa Technology and Venture Showcase and the Banff Venture Forum , each being held during the week of September 28-October 2nd.

Finally, we enclose a great article passed on to us by Guelph-based startup founder and semantic web guru Greg Boutin describing how angel investors seek to de-risk investment opportunities. Finally, we remind our clients of our firm’s “Angel Connect” initiative, whereby we provide thumbnail descriptions of investment opportunities to our cross-Canada network of angels, and facilitate introductions where appropriate. If you would like to participate as an angel or you have a potential investment opportunity, please feel free to contact our partner Michael Dunleavy at and he would be happy to assist.

Dealflow Report

Here is a sample of the publicly announced transactions that our team worked in the past few months:

Events and Calendars

Copyright © 2009 LaBarge Weinstein Professional Corporation,
A Business Law Firm. All Rights Reserved.

Posted in Cleantech, Events, Financing, LaBarge Weinstein, Law, MARS, Mergers and Acquisitions, Misc., Newsletter, OCRI, Startup, Venture Capital | Leave a Comment »