A Corporate and Growth Financing Primer Peter B

A Corporate and Growth Financing Primer Peter B. B. Tobias Viner, Kennedy, Frederick Allan & Tobias LLP Barristers & Solicitors Suite 300 – 366 King Street East Kingston, Ontario (613) 542 -8190 ptobias@vinerkennedy. com

Legal Considerations for a New Venture § Sole Proprietorship • basic taxation - on individual’s own tax return • extent of liability - unlimited • signing e. g. Joe’s Pizza ___________ By: Joe Pepperoni § Partnership • basic taxation – on partner’s tax returns as allocated • extent of liability - unlimited • signing e. g. Joe’s Pizza ___________ By: Joe Pepperoni

Legal Considerations continued…. . § Limited Partnership • passivity requirement – needed to avoid liability • basic taxation - on returns of limited partners as allocated • extent of liability – limited for limited partners – unlimited for general partner • signing e. g. JB’s Pizza Limited Partnership _______________ By: Joe Pepperoni, General Partner § Incorporation • Federal • use of name • extra reporting

Legal Considerations continued…. . • Ontario • basic taxation – separate entity • limitation of liability – limited liability for shareholders • perpetual existence • signing eg. JB’s Pizza Inc. ___________ By: Joe Pepperoni, President

Incorporation - Ontario § Certificate and Articles of Incorporation § Business Corporations Act of Ontario (1990), as amended Creates a separate legal entity § Should cost about $1500 -$2000, depending on structure • name search • drafting of Articles • submission of forms • payment of government fees • preparing organizing proceedings and By-laws • minute book, share books and seal

Articles of Incorporation § Identifies as public information: • initial directors of the corporation • the minimum and maximum number of directors • legally distinct name • may place restrictions on the types of business the corporation may carry out or powers the corporation may exercise, but regularly does not • no public record of shareholders in Ontario

Organizing Proceedings and By-laws § Put in place to give the corporation a means of carrying on business § By-laws set out general operating framework for internal governance § Often modified by a shareholders’ agreement

The Corporate Governance Hierarchy Shareholders elect Directors elect Officers hire Employees § Shareholders do not own the assets of the corporation § Shareholders exercise their influence indirectly through the election of directors § Directors are responsible for policy making and overall operation and direction § Officers and employees are responsible for day to day operations

Shareholders’ Agreement Describes the contractually agreed rules to govern the corporation relating to, for example: § Business conduct § Rights, obligations and restrictions of officers, directors and shareholders § Financing obligations § Restrictions of future issuance and/or transfers of shares § Stock control provisions, for example • right of first refusal – soft or hard • shot gun buy-sell • options to “call” or “put” • “piggy back” or “tag along” • “drag along” or “come along”

Shareholders’ Agreement continued… § Options or rights to deal with • the death of a shareholder • the disability of a shareholder • a shareholder ceasing to be an employee • a shareholder becoming insolvent or bankrupt • a shareholder losing an important license or qualification

Alternative Dispute Resolution Mechanisms § Mediation • usually non-binding § Arbitration • binding • non-binding

Other Common Provisions § Confidentiality provisions • duration • scope • exceptions § Non-competition/non solicitation provisions • duration • scope • geographic reach • business reach

The Business Black Box Shareholders Equity Capital and Governance Control Directors Strategy and Policy Officers Execution of Strategy Debt Capital Employees Supplies Real Property Product Output Business Corporation Service Output Claims for Payment Revenues

Corporate Finance Risk Return Matrix Voting Rights Rate of Return on Investment Security of Return on Capital Government Liens None N/A First High Secured Debt (Fixed) None Low and Fixed High Secured Debt (Floating) None Low and often variable High/Mid Unsecured Debt None Risk adjusted (eg. Junk Bonds) and fixed Ranks after secured Account or Trade Debt None Generally nil to low Ranks last of debt Preferred Shares Cumulative Dividends None (sometimes after failure to pay several dividends) Often fixed Ranks as highest equity but behind debt Preferred Shares Non-Cumulative None Often fixed – can be variable Ranks as highest equity but behind debt Common Shares Yes Variable (what’s left) Last

Typical Stages of Growth Company Financing § Founder funding and contribution of value § Friends, family and existing business contacts § Third party angel or seed investors § Broad exempt offerings by offering memorandum § Institutional investors and venture capital § Capital pool investors or reverse take-overs § Fully marketed initial public offering

Typical Legal and Business Issues that Arise at Each Stage § Access to capital and securities exemptions § Dilution of control, value and earnings and methods of expression of these changes § Practical and legal investment minimums § Listing requirements on junior exchange § Ongoing reporting requirements to support secondary trading

Role of Intellectual Property § Often the core value § Inter-relation with know-how § Scope of patents in the field may dictate appeal as an investment § For unpatentable intellectual property confidentiality and rigour of practice can determine whether a financing can be done

Containing Intellectual Property Value § § § Create a document trail of ownership Lab Books and Programming Notes Employment Agreements Consulting Agreements Ensure the trail of invention and ownership is captured § Keep things secret and confidential – it may be all the protection you can get

Selecting Legal Counsel § Matching personalities § Background and experience – not all the same § Cost and specialty is a trade-off § Short term/Long term § Value added to bargaining range and “market terms” 1 Nothing in this document should be taken to be or relied on as legal advice. Readers are urged to seek professional legal advice on the particular issues which concern them. Members of our firm would be pleased to assist readers with specific legal issues. © Peter B. B. Tobias 2003 -2012, all rights reserved.