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Archive for the ‘Venture Capital’ Category

My Top 5 Books For 2014

Posted by Shane McLean on December 15, 2014

This is the time of year when we see annual lists start popping up.  I use annual book lists as a way to find new books to read so I thought I would share the top books I have read (or listened to in my car) in 2014.  Some of these books might not be new this year, but I finally managed to get around to them this year so I have included them.  In no particular order, I liked:

1.   Abundance: The Future Is Better Than You Think by Steven Kotler and Peter H Diamonds

A more positive look ahead based on the theory that, as it has in the past, new technology will rise to meet the problems facing humanity and the Earth going forward.   The book is not without its warnings for the future, but overall it presents a relatively optimistic (and usually believable) view of tomorrow.

2.  Enchanted Objects: Design, Human Desire, and the Internet of Things by David Rose

I found this to be a great discussion of different ways in which the “Internet of things” and connected objects might evolve.  It covers some of the design concepts and thinking necessary to make connected objects useful and easy to use.   Good backgrounder.

3.  Do More Faster: Techstars Lessons to Accelerate your Startup  by Brad Feld and David Cohen

This book, from the founders of Techstars, is a collection of essays about various aspects of startup life and building a business.  Very good practical information for any startup founder or anyone who works with startups (like me!).

4.  The Maker Movement Manifesto: Rules for Innovation in the New World of Crafters, Hackers, and Tinkerers by Mark Hatch

Mark Hatch is a co-founder of TechShop, a chain of membership based maker spaces in the US, and he offers up this discussion of the maker movement.  Mark provides a series of discussions based on makers he has met, including the inspirations, challenges and successes faced by makers as many of them turn their hobby or passion into a business.   At times it reads like a bit of commercial for TechShop (naturally) but it is worthwhile if you are at all interested in the maker movement.

5.  Hatching Twitter: A True Story of Money, Power, Friendship, and Betrayal by Nick Bilton

This book had a bit of controversy around the time of its release with a bunch of the folks involved condemning the way the author presented the history of Twitter.    I found it to be a well written book.  The author takes pains to describe his sources and methods for researching the history of Twitter and I suspect some of the people who object to the book are objecting due to the fact that it hangs some part of the blame for Twitter’s early dysfunction on virtually every one of main players.

Honourable Mentions:

Killing Lincoln by Bill O’Reilly and Martin Dugard

The Clockwork Universe: Isaac Newton, The Royal Society, and the Birth of the Modern World by Edward Dolnick

The Story of Earth: The First 4.5 Billion Years, from Stardust to Living Planet by Robert M Hazen

Flash Boys, by Michael Lewis

Posted in Business Structure, Financing, Misc., Social Media, Startup, Venture Capital | Leave a Comment »

Saskatchewan Proposes Its Own Crowdfunding Prospectus Exemption

Posted by Shane McLean on October 23, 2013

The Saskatchewan Financial and Consumer Affairs Authority (FACC) has announced a detailed equity crowdfunding proposal.  This follows an update by the Ontario Securities Commission (OSC) in August about its own progress on coming up with a new crowdfunding exemption from prospectus requirements (Read more here).

The FACC put out a backgrounder for discussion purposes back in July.  As a follow up to that discussion piece, this month the FACC released a draft order for comment purposes which contained far more detail on what an equity crowdfunding exemption may look like in Saskatchewan.  As with the OSC proposal, the FACC will require that equity crowdfunding be raised through an online portal but the Saskatchewan proposal appears focused on smaller financings than the OSC’s proposal ($150,000 per offering no more than twice a year vs the OSC’s $1.5 Million per year).  On the other hand, the Saskatchewan process seems to be simpler for the issuer, investor and portal than what we expect to see coming out of the OSC.

The high level details of the FACC’s proposed process are as follows:

  • The exemption will be available to private companies only and both the issuer and the investor must have addresses in Saskatchewan (i.e. this is a Saskatchewan only exemption).
  • The issuer must file an issuer information form and each promoter, director, officer and control person of the issuer must file a personal information form ten business days prior to beginning to trade.
  • The issuer must use a defined form of offering document which must be filed ten business days prior to beginning to trade and made available through the portal to investors.  The offering document must disclose how the funds raised will be used and set a minimum offering amount to close the offering, which must be equal to the amount needed to carry out the purpose for which the funds are sought as set out in the offering document.
  • The offering size must be $150,000 or less, no investor may invest more than $1,500 in any offering and the offering period must not be longer than 6 months.
  • There can be no concurrent offering by the issuer or other issuer for the same project.
  • The securities being offered must not be derivatives.
  • The issuer and its promoters, directors, officers and control persons must not use this exemption more than two times in a calendar year.
  • No commission or other amounts are paid to the issuer or its promoters, directors, officers, control persons, employees or agents with respect to the trade.
  • The issuer must file a report of trade within 30 days after the offering closes.
  • Unless another exemption is available, the securities purchased under this exemption will be subject to a hold period until the date that is 4 months and a day after the later of (i) the distribution date; and (ii) the date the issuer becomes a reporting issuer in any province or territory of Canada.

The FACC has clearly set out the requirements it proposes for portals as follows:

  • A portal must file an information form and each promoter, director, officer and control person of the owner of the portal must file a personal information form thirty days prior to beginning to facilitate crowdfunding trades.
  • The portal must not provide advice.
  • The portal must:
  1. Make the offering document of the issuer and certain risk warnings separately available to investors electronically online;
  2. Not allow an investment until the investor confirms online they have read and understood the offering document and risk warnings;
  3. Not release funds to the issuer until the minimum amount to close the offering has been reached and until that time ensure that all the funds received for the offering are held in trust for the investors;
  4. When the offering is closed, provide the issuer with the details of the investors (name, address, telephone number, email address, details of purchase) within 15 days of closing of the offering; and
  5. Ensure issuers and investors have an address in Saskatchewan.

The FACC’s portal requirements are not as demanding as we expect the OSC’s requirements to be (based on the material put out by the OSC to date).  It is interesting to note that under the FACC’s proposals a portal is not required to be registered as a broker or dealer and there is apparently no vetting of the issuer or investor required except to ensure that the investor has read and understood the risks and that the issuer and investor have Saskatchewan addresses.

One potential barrier to the use of equity crowdfunding in Saskatchewan is the small size of the projects permitted.   The maximum amount that can be raised is $150,000, the amount raised must be “the amount needed to carry out the purpose” and no concurrent fundraising for the same project is allowed.  Issuers will have to be creative and careful about how they define the purpose of their fundraising to ensure that they can complete it using not more than $150,000 in financing.

Technically, this is still a request for comment by the FACC, but it is interesting to see another Canadian jurisdiction put out a detailed (but different) set of proposed rules for an equity crowdfunding exemption.   We will be watching to see which jurisdiction is first to actually implement a new rule and then to see how the different rules are eventually harmonized, if at all.

Posted in Crowdfunding, Financing, Law, Misc., Startup, Venture Capital | Leave a Comment »

Crowd funding in Ontario’s future

Posted by Shane McLean on September 5, 2013

In December 2012 the Ontario Securities Commission published a Staff Consultation Paper seeking comments on a number of potential new prospectus exemptions.  One of the potential exemptions that created a bit of excitement in the startup community was an exemption which would allow Canadian companies to raise equity financing through crowd funding, which is essentially a process of raising financing from a large number of small investors through an online portal.

Borrowing heavily from the concepts established by the US regulators in the JOBS Act approved in early 2012 (most of which has yet to be implemented in practice), the OSC described the following possible crowd funding structure:

  • The funding would have to be raised through a registered funding portal that meets certain qualifications.
  • A company would not be able to raise more than $1.5 Million in a 12 month period using the crowd funding exemption.
  • An investor’s investment in any one company would be limited to $2,500 and the investor’s aggregate investments in a calendar year using the crowd funding exemption would be limited to $10,000.
  • Investors would have to sign a form of risk acknowledgement.
  • Investors would have a 2 day cooling off period during which they could withdraw.
  • The company would be required to provide a pre-defined level of disclosure about the company, the financing and the funding portal.
  • The company would have certain ongoing disclosure obligations to investors that came in through the crowd funding exemption.

On August 28, 2013 the OSC released a progress report.  The good news for crowd funding fans is that the feedback received by the OSC on the crowd funding proposal has been positive.  As a result, the OSC will continue its work to come up with a definitive framework based on the proposed structure.  The key area where further deliberation and focus may be required seems to be on the role of the funding portal including the qualifications needed and the processes to be followed by such intermediaries.

The bottom line is that it sounds like Ontario companies and investors can expect to be able to someday take advantage of a crowd funding prospectus exemption for equity financings along the lines described above.   Regulators in other Canadian provinces are looking into this issue too and we would hope that any structure ultimately settled on will be rolled out as a harmonized policy across the country.

Posted in Crowdfunding, Financing, Law, Misc., Social Media, Startup, Venture Capital | Leave a Comment »

Roundup of Most Read CBLB Posts

Posted by Shane McLean on January 22, 2013

I was reviewing the stats for this blog recently and thought it would be neat to list the top 10 most popular posts to date:

10.  Update on the Ontario Emerging Technologies Fund (October 13, 2009)

9.     CPC Combinations Part 2 (September 16, 2009)

8.     From Wellington Financial -5 Pre Deal Questions to ask Your Venture Debt Lender (October 28, 2009)

7.    Ontario Small Claims Court Limit Raised to $25,000 (January 13, 2010)

6.    CPC Combinations Part 1 (August 9, 2009)

5.    What are Preferred Shares? (July 2, 2009)

4.    What is a Special Purpose Acquisition Corporation?  (June 7, 2009)

3.    Unanimous Shareholder Agreements  (September 22, 2009)

2.    Financing Term Sheet Basics (June 21,2009)

1.    What is the Capital Pool Company Program?  (May 28, 2009)

Since these posts continue to draw a lot of attention, my plan over the next several months is to review and update each one.  Most of these date back 3 years and things change so they could use a refresh.  Thanks for reading everyone.

Posted in Business Structure, Capital Pool Company Program, Financing, Law, Misc., Special Purpose Acquisition Corporations, Startup, TSX Venture Exchange, Venture Capital | Leave a Comment »

More Movement on Canadian Venture Capital Front

Posted by Shane McLean on February 9, 2010

Last week it was announced that the Canada Pension Plan Investment Board would invest  $400 Million in a “fund of funds” concept.  That is, it looks like they are proposing to deploy $400 Million to existing private equity and venture capital firms so that they may, in turn, deploy that money as part of their own investing activities.  The Montreal Gazette has a good write up about the announcement.

The fund of funds model is similar to the model employed by the Ontario Government and its co investors in the Ontario Venture Capital Fund which I blogged about last April (both the new CPP funds and the OVCF funds are both  managed by Northleaf Capital Partners).  The funding of the OVCF closed in June of 2008 and, as I understand it, it has yet to actually invest much money.   Unfortunately, very little of that money has been put to work so far.

Let’s hope that the CPP’s fund of funds is able to deploy funds a bit faster.  Without much needed capital, Canada’s knowledge based startups can’t get off the ground.  Mark McQueen recently lamented on the Wellington Financial Blog that the wicket is open for tech IPOs but there  isn’t enough “product”  — i.e. quality tech companies of the right size and trajectory.  Fund announcements like this may be too late to help launch companies that could take advantage of the IPO climate we face at the moment, but without a steady flow of funds to support generation after generation of knowledge based companies we will have a very hard time maintaining any kind of  robust public (or private) market for  tech companies in Canada.

Posted in Financing, Government Funding, Misc., Startup, Uncategorized, Venture Capital | Leave a Comment »

LaBarge Weinstein Fall 2009 Quarterly

Posted by Shane McLean on December 22, 2009

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

LaBarge Weinstein Fall 2009 Quarterly

Just in time for the holidays, as our long, gentle fall turns the December corner, even the grimmest winter-curmudgeons among us can’t but feel the public/private financing markets heating up their engines in the driveway for what we all think will truly be a breakout 2010.

Our evidence of the recession’s Chinook from the firm’s recent dealflow?  On the private side, Bridgescale’s permafrost-breaking investment in Bluecat Networks, Celtic House’s investment in Peraso Technologies, and Summerhill Ventures’ follow-on investment in Toronto’s Vantrix Technologies. On the public side, a quarter reminiscent of our pre-bubble roots, with each of IMRIS and Chemaphor completing fundraising transactions, and with Dynex Power launching a rights offering during the same period.

Coupled with energetic M&A interest fuelled both by the usual corporate development suspects as well as a new, brash breed of billion-dollar balance sheeters and pre-IPO roller-uppers, we expect a continued ruddy market glow despite the cold…so let it snow, let it snow, let it snow, and please feel free to contact anyone on the LaBarge team if you need some help shovelling that driveway.

Go Public My Son, Go Public…

Most definitely the last quarter’s biggest buzz has revolved around the pending mini-bubble for North American technology companies seeking to go public early in 2010.The Globe and Mail’s Andrew Willis commented on the TSX’s IPO rush this past November, and KPMG recently reported its Canadian and US annual public market pulse surveys confirming over 60% of industry participants expect IPO activity to substantially increase in the near term. South of the border, courtesy of the Valley’s Philip Smith, a summary of IDC’s predictions for 2010 that includes an industry-consensus view of the markets coming back to the tech neighbourhood in the coming year.

What does it mean to you and your board/management team? If your startup is just out of the blocks, you root for an increased liquidity environment to grease the wheels of the private equity funding cycle. If your company is just hitting its stride, you’re very possibly going to be rewarded for your resilience over the past few years, and you should do you best to get networked among the blue suited Bay Street crowd that is again hitting the airwaves and highways to check out the very best companies across the country. Our team can help, and you should feel free to contact any of our partners if you’d like our perspectives or some helpful introductions.

You’ve Changed, Man…

Our partner Shane McLean recently informed us of a troubling British Columbia court decision which awarded a consultant damages for lack of “reasonable notice” of termination much like an employee. In this case, notwithstanding the parties’ explicit treatment of the individual as a contractor, he was entitled to common law reasonable notice (for our clients, the bigger, badder amount depending on the team member’s length of service). For a more complete description of the case and how your startup can avoid the same result, please check out the enclosed link and please feel free to contact Shane at smclean@lwlaw.com if he can assist further.

Best in (Trade) Show…

With the fall trade show season coming to a close, and marketing folks falling asleep with dreams of sugarplum spring show fairies dancing in their heads, we unearthed a great blog post earlier this fall from Jason Calacanis giving startups advice on how to get most from a trade show experience. We asked a few Waterloo-based software business development and sales gurus for their thoughts on the article’s suggestions, and click this link to check out their responses.

Blogs & Other

Congratulations to a couple of LaBarge lawyers for some great achievements this past quarter, with founding partner Debbie Weinstein being elected to the board of directors of Waterloo’s OpenText Corporation (as well as taking a spin with the Olympic torch this past weekend in Ottawa) and more recent addition James Smith receiving recognition as one of Lexpert’s Rising Stars celebrating Canada’s leading lawyers under 40.

The firm is very pleased to announce new offices in Toronto and Waterloo since the end of the summer. In Toronto, we’ve been pleased to bunk with Robin Axon’s and Duncan Hill’s Basecamp Partners group, and its two (and soon to be more) terrific companies housed at 488 Wellington West, Suite 300. In Waterloo, we’ve lucked into a similarly rewarding arrangement with the team at social media analytics firm PostRank, and we’ll look forward to resting our heads (and computers) at its uptown Waterloo Allen Square location as of January 1st. We have a regular group of lawyers and staff passing through the offices, and we look forward to another year of getting closer to their tremendous entrepreneurial communities.

Speaking of networking, we’d appreciate all of you assisting Carleton’s tireless booster Luc Lalande in his efforts to recreate the 2002 poster featuring startups founded by the University’s faculty, students and alumni. In addition, we wanted to pass on a fascinating article courtesy of Luc describing the mathematical foundation of the social networks that form the fabric of tech business community. The article won’t necessarily make that stale croissant any tastier at your next morning biz dev outing, but it makes for great reading nonetheless, thanks Luc.

Finally, James Smith, Mike Morgan and Shane Mclean of the firm were pleased to assist an esteemed group populate a website sponsored by Toronto’s MaRS facility with articles on common startup legal topics. The site was developed principally to support the venture creation efforts among the facility’s tenants, but its content has general application and we encourage budding founders to check it out.

Dealflow Report

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

Events & Calander

Posted in Events, Financing, LaBarge Weinstein, MARS, Misc., Venture Capital | Leave a Comment »

From Wellington Financial — 5 pre-deal questions to ask your venture debt lender

Posted by Shane McLean on October 28, 2009

There is a  good article at the Wellington Financial Blog with a list of questions your should consider asking your “venture debt lender” in the early stages of discussion (see the article here).

For those of you who are not familiar with the term “venture debt lender”, the term is generally used to describe non-bank lenders that operate in the same or similar market as traditional venture capitalists.  Wellington Financial is an example.   Venture debt lenders typically offer a secured debt facility (that they expect to be paid back on set terms) and take some warrant or other equity incentive on the side.  Interest rates are generally higher than you would get from your traditional  bank but that is usually a factor of the level of risk these lenders take and the amounts loaned which are both generally higher than those a traditional bank would tolerate.

If looking at venture debt as a source of funding,  be prepared to discuss quasi-bank style financial covenants with your venture debt lender.  That typically rules out pre-revenue early stage borrowers.

Posted in Financing, Misc., Startup, Venture Capital | 2 Comments »

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 http://www.lwlaw.com// 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 athttp://www.lwlaw.com// and we would be happy to assist.

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

Win $5,000 for your Startup

Posted by Shane McLean on October 5, 2009

The Ottawa Network is running a Startup Boot Camp later in October.   $5,000 is up for grabs for the best developed idea at the end of the process.   Check out the details here and good luck!

Posted in Events, Financing, Misc., Startup, Venture Capital | 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 »