Posts by Jennifer MacGregor-Greer

Jennifer MacGregor-Greer
Monday, March 9th, 2015    Posted by Jennifer MacGregor-Greer (posts)
Jennifer MacGregor-Greer
Jennifer MacGregor-Greer is a senior associate with a broad corporate, securities and business transactions practice.

In a previous article, we considered some of the situations in which a closely-held company might wish to expand its board.  This article will go on to consider how to identify possible board candidates.

Selecting board candidates is a process not to be taken lightly.  A company’s directors are responsible for setting its direction and maintaining its corporate governance standards – so the composition of a company’s board can have long-term implications.  If you simply plan to formalize an existing mentorship or adviser role, or if a large investor has negotiated a board seat as one of its investment conditions, you may know already who the director candidate is.  However, in all other cases, identifying suitable candidates is an important step.

The basic requirements for eligibility as a director under the Business Corporations Act (British Columbia) are that the director candidate:

  • is at least 18 years of age;
  • has not been found by a court to be incapable of managing his or her own affairs;
  • is not an undischarged bankrupt; and
  • has not been convicted of an offence in connection with the promotion, formation or management of a corporation or unincorporated business, or an offence involving fraud, with a few exceptions (including the person having received a pardon under the Criminal Records Act (Canada)).

Directors of BC companies are not required to be Canadian residents.  This is, however, not the case for corporations organized under the Canada Business Corporations Act, which requires 25% of a corporation’s directors to be Canadian residents.

Directors are also not required by statute to be shareholders of a company.  However, your company’s Articles may require directors to hold shares.  It is important to review your Articles to determine whether this is the case.

You may next wish to consider the strengths and weaknesses of the existing directors.  If the company’s founder is its sole director, typically that person may have industry expertise, but lack other skills – for instance, a high degree of financial literacy.  In other cases, especially if the founder is a serial entrepreneur, the founder may have excellent business skills but wish to add industry knowledge.  Since the board will set the company’s direction, oversee its finances and safeguard its governance practices, having the necessary skill set to do so is critical.

Another item to consider is your company’s goals and objectives.  Are you hoping to build a particular line of business in the next few years?  It may be useful to have a director who is knowledgeable about that line of business.  Are you intending to enter a certain market?  Having a director who knows the particular issues surrounding that market could be a determining factor in your success.

Finally, you may wish to consider independence and gender diversity when building your board.  Board independence has long been a requirement for public companies, and gender diversity is quickly becoming an important element in corporate governance best practice.  While securities laws require boards of public companies to consist of a majority of independent directors (i.e. directors who are not related to the management of the company and who have no other material relationship with the company), best practices for private issuers also require a meaningful number of independent directors.  Canadian securities regulators have also recently brought into effect “comply or explain” standards that require reporting issuers to disclose recruitment of women directors, and if no such recruitment has occurred, to explain why not.  While these diversity standards currently do not apply to companies that are not reporting issuers, it is reasonable to expect a trickle-down effect whereby investors in smaller companies will begin to demand a higher rate of diversity on boards.

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Posted by Jennifer MacGregor-Greer (posts) | Filed under Corporate Governance | ....
Jennifer MacGregor-Greer
Tuesday, March 3rd, 2015    Posted by Jennifer MacGregor-Greer (posts)
Jennifer MacGregor-Greer
Jennifer MacGregor-Greer is a senior associate with a broad corporate, securities and business transactions practice.

Many companies start their lives as closely-held entities with few shareholders and only one director, who is often the company’s founder and/or principal shareholder. However, as your company grows you may find that you feel uncomfortable being the sole decision-maker, or that others are asking you to add more directors.

Of course, if your company is a closely held family business, or if you are a sole shareholder, there may never be a need to bring on additional directors. The role of a company’s directors, according to the Business Corporations Act (British Columbia), is to “manage or supervise the management of the business and affairs of the company.” If the nature and extent of your company’s business is such that this role can be carried out effectively by a single director, having one director may be sufficient. But if it appears that this role can no longer be adequately fulfilled by a single director, it is time to consider your options. The following are some situations where it may be in the company’s best interest to appoint additional directors:

  • The company is seeking to attract large investors who wish to have a formal role in influencing corporate direction;
  • The company is expanding either geographically or by adding new business divisions, making it desirable to add a diversity of expertise to the board;
  • The company’s business is becoming more complex, making it desirable to add a range of skill sets (such as financial, legal, or industry-specific) to the board;
  • You wish to formally recognize a mentorship or advisory role by appointing a mentor or adviser to the board;
  • Your company’s Shareholders’ Agreement requires multiple directors;
  • You wish to add independent, objective viewpoints to the board; or
  • The company intends to become a reporting issuer under relevant securities law, making it necessary to raise its corporate governance standards in order to comply with best practices.

While having multiple directors generally enhances the governance of a company, this will only be the case if the directors are sufficiently knowledgeable and have the necessary skills to understand the company’s business and effectively carry out their roles. Other limitations to keep in mind include the following:

  • It is generally advisable to have an odd number of directors rather than an even number, since, depending on the company’s Articles, in many cases board decisions are made by a majority of directors. Having an odd number eliminates the uncertainty that could occur if a board decision is split 50/50.
  • The number of directors that your company may have might be limited by the provisions of your company’s Articles. It is worthwhile checking the Articles to determine if they contain any restrictions in this regard, and whether your Articles need to be amended before appointing additional directors.
  • Typically, directors are elected by the shareholders of the company who hold shares that carry voting rights. Depending on the number of shareholders in your company, it might be necessary to hold a shareholders’ meeting at which the new directors are elected.
  • If a company has too many directors, the governance benefits experienced by having a diverse board could be hampered by inefficiency. In all but the largest companies, typically it is not necessary to have more than five directors.

In a future article, we will consider the types of individuals you may wish to appoint as directors.

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Posted by Jennifer MacGregor-Greer (posts) | Filed under Corporate Governance | ....
Jennifer MacGregor-Greer
Friday, December 14th, 2012    Posted by Jennifer MacGregor-Greer (posts)
Jennifer MacGregor-Greer
Jennifer MacGregor-Greer is a senior associate with a broad corporate, securities and business transactions practice.

Many entrepreneurs perceive securities laws to apply only to large publicly-listed entities.  However, securities laws apply to every business, and business owners should include securities compliance in their corporate oversight regimes.  For an entity with a limited number of stakeholders, this is not an expensive or particularly onerous endeavour.

Securities law in Canada is regulated provincially.  While many Canadian jurisdictions have harmonized their securities regimes in recent years, there are certain differences across Canada.  The laws that apply to each business (called an “issuer” under securities law, as an issuer of securities) and investor depend primarily on the jurisdiction in which that issuer or investor resides.  While securities laws differ across Canada, we note that there are greater differences for businesses located in the United States, or for those planning to distribute securities to any investors resident in the United States.  This article is based on securities laws applicable in British Columbia.

Under securities law, every issuance of a “security” requires (a) the publication of a prospectus by the issuer, and (b) registration of any person who is in the business of trading the security.  A “security” can be a wide variety of instruments or things, ranging from shares, units and options, to debt instruments and investment contracts – in effect, anything that would result in a person having an interest in the business of the issuer.  The prospectus and registration requirements are meant to protect investors from the risks associated with investment.  However, most small businesses are able to rely upon exemptions from these requirements for much of their corporate lifespan.  For the most part, these exemptions are found in National Instrument 45-106 of the Canadian Securities Administrators, “Prospectus and Registration Exemptions”.

The exemption that most businesses use in their initial stages of growth is called the Private Issuer Exemption.  Issuers that have distributed securities to fewer than 50 persons (not including employees and former employees) and that have not distributed securities of any class to members of the public are generally able to rely upon the Private Issuer Exemption.  Provided that an issuer complies with the detailed provisions of this exemption, including only distributing securities to certain categories of investors, it could use this exemption for a number of years.  In some cases, we have seen closely-held entities use this exemption for their entire corporate existence.  The categories of investors to whom issuers are able to distribute securities under this exemption include directors, officers and employees of the issuer, accredited investors (see the description below), immediate family members of directors and officers of the issuer, close personal friends and close business associates of directors and officers of the issuer, and existing security holders of the issuer.

Issuers who can no longer rely upon the Private Issuer Exemption, whether because they have distributed securities to more than 50 persons or because they wish to distribute securities to persons that are outside the designated categories of investors permitted under the Private Issuer Exemption, may be able to distribute securities in reliance on certain other prospectus and registration exemptions.  The most commonly used exemptions for small businesses are the Accredited Investor Exemption, the Minimum Amount Investment Exemption, the Family, Friends and Business Associates Exemption and the Offering Memorandum Exemption.

The Accredited Investor Exemption focuses on the attributes of the investor rather than the issuer itself.  In effect, the prospectus and registration requirements are considered not to apply to investors who have the financial means to absorb the loss of their entire investment, and the knowledge and experience to assess the risks associated with the investment.  While there are many classes of “accredited investors”, the most commonly used are (a) the class based on net worth, under which the investor, either alone or with their spouse, has net assets of at least $5,000,000, and (b) the class based on net income, under which the investor has a net income before taxes that exceeded $200,000 in each of the two most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the two most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year.

The Minimum Amount Investment Exemption focuses on the amount of the investor’s financial investment.  Currently, this exemption applies to investors who invest at least $150,000 in securities of the issuer.  Use of this exemption, similar to the Accredited Investor exemption, assumes that a person who has the financial wherewithal to invest at least $150,000 has the financial means to absorb a loss, and the knowledge and experience to assess the risks associated with the investment, and therefore does not require the protection associated with a prospectus.

The Family, Friends and Business Associates Exemption is meant to apply where close personal friends and close business associates of directors and officers of the issuer make an investment, and therefore focusses on the relationship between the investor and the director or officer.  The investor must be able to demonstrate that they have a sufficiently close relationship with the director or officer to be able to properly evaluate the director’s or officer’s capabilities and trustworthiness.  The relationship in each case must be direct.

The Offering Memorandum Exemption gives an issuer access to a very broad range of prospective investors.  However, it does involve producing an offering memorandum in respect of the offered securities, which involves a substantial output of resources.  We do not recommend using this exemption unless an issuer has already exhausted their access to other exemptions and wishes to offer to the public, without becoming a publicly listed issuer.

We caution issuers and investors that most of these exemptions involve making certain filings with the local securities commission.  As well, their use requires a careful review of the issuer’s particular situation and the class of prospective investors who wish to invest.  Each exemption carries with it various requirements that are not addressed in this article, so if you are anticipating issuing securities we recommend speaking with one of our lawyers so we can provide you with appropriate advice.

The prospectus and registration requirements also apply on each occasion that a security is resold, again with certain exceptions.  We recognize that for most small businesses, investors plan to hold their investment for a lengthy period of time.  If this is not the case, investors need to be aware that their ability to transfer securities will depend on factors such as when the securities were first issued, under what exemptions they were issued, and the jurisdictions in which the transferor and transferee reside.

Securities law is complex, and in recent years securities regulators have been placing greater emphasis on compliance, even for those entities that are not publicly listed.  We recommend obtaining legal advice early as to the requirements that will apply to your business.

Please contact Jennifer MacGregor-Greer or Carol Alter Kerfoot for specific advice relating to the distribution of securities by your business.

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