This presentation by lawyers from Heenan Blaikie LLP looks at the start-up and administration of a business through a corporation with a focus on the efficient use of professional service providers, the management of the corporation through a board of directors and the relationships among shareholders of the corporation. Speakers: James McDermott and Andrea Safer, Heenan Blaikie You can download an audio presentation by going to: http://www.marsdd.com/portals/mars/events/videoarchive http://www.marsdd.com/ent101 Click on the March 27, 2007 event.

1. MaRS Entrepreneur Series
The Role of Boards, Advisory Panels And
Service Providers
Life Sciences & Emerging Technologies
Photo: © Tourism Toronto, 2003
Presented by Heenan Blaikie LLP
Jim McDermott / Andrea Safer
March 27, 2007

2. HEENAN BLAIKIE LLP
1973 – inception of the firm
γ
Today the firm has grown to over 400 lawyers
γ
One of the leading law firms in Canada
γ
η With our offices in Montreal, Quebec City, Ottawa, Calgary, Vancouver,
Sherbrooke, Trois-Rivières and Kelowna
HB has within its ranks a number of prominent individuals who have
γ
made their mark on the nation and international stage, such as:
η The Right Honourable Jean Chrétien, P.C., Q.C., former Prime Minister
of Canada
η The Honourable John W. Morden, former Associate Chief Justice of
Ontario
η Pierre Marc Johnson, FRSC, former Premier of the Province of Quebec
and
η André Bureau, O.C., former Chair of the Canadian Radio-Television and
Telecommunications Commission and current Chair of Astral media

3. Heenan Blaikie LLP
Outstanding track record in:
γ
η Business Law
η Labour & Employment
η Litigation
η Taxation
η Entertainment Law
η Intellectual Property
η Life Sciences & Emerging Technologies

4. Heenan Blaikie MaRS Office
Launched the firm’s satellite office at the MaRS Centre in
γ
Toronto on September 19, 2005 which coincided with the official
opening of the MaRS Centre
Heenan Blaikie MaRS Centre Office is part of the continuing
γ
expansion of our life sciences and emerging technologies
groups expansion into these progressive fields of innovation
and business, ensuring Heenan Blaikie’s reputation as a
prominent service provider to research organizations, start-ups,
venture-backed firms, venture capital firms, universities,
hospitals, governments and global pharmaceutical companies

5. Professional Service Providers:
FIT
γ
COST
γ
RETAINER ARRANGEMENTS
γ
COMMUNICATIONS
γ
RECORDS
γ

6. Professional Service Providers
Cont’d. . . .
FIT
γ
η the right professional for the work being requested;
η connecting and chemistry;
η ask for recommendations;
η meet face to face;
η shop around.

7. Professional Service Providers
Cont’d. . . .
COST
γ
η Consultants, particularly, lawyers and accountants are
expensive; use their services judiciously;
η professionals who charge bargain basement rates
usually cut corners on service;
η lawyers usually charge on an hourly basis; try to get
an “upset” price for the work being requested;
η try to do some of the leg work yourself;
η most professional firms have checklists of matters for
clients to consider; ask for them.

8. Professional Service Providers
Cont’d. . . .
Retainer Arrangements
γ
η insist on a retainer letter outlining the scope of the
service provider’s mandate and how the matter is to
billed;
η two components of cost; fees and disbursements (out-
of-pocket expenses); service providers will usually
want their estimated disbursements paid up-front; a
portion of the estimated fees is also usually required;
η a solid retainer against fees is a good incentive for
prompt service.

9. Professional Service Providers
Cont’d. . . .
Communications
γ
η be proactive in communicating with your service providers;
η be aware of time sensitivity and ensure that service provider is
following up on a timely basis;
η require the service provider to advise you of each relevant
communication that they have with third parties and to provide
you with a copy of every written communication sent or received
in connection with the matter being handled;
η if you are concerned with the manner in which your work is being
handled or if you feel that you are being billed too much, voice
your concern immediately because the strength of your
obligations will diminish the longer you ignore the problem.

10. Professional Service Providers
Cont’d. . . .
Records
γ
η keep a record of all communications you have with
your service providers;
η if oral advice is given, ask that it be confirmed in
writing;
η ensure that you receive original signed documents in
relation to the matter being handled;
η ensure that you receive a report from your service
provider once the matter has been completed;
η know what records, if any, are being retained by the
service provider and confirm on-going retention
arrangements in writing.

11. Function and liabilities of
corporate directors
Presented by James McDermott
Photo: © Tourism Toronto, 2003
MaRS Centre
March 27, 2007

12. PREFACE
This presentation is intended to provide a very brief overview of
the function of directors and the principal areas of liability of
directors of Ontario and Canadian corporations and is not
intended to be a comprehensive analysis of the subject matter.
This handout is not intended to constitute legal advice,
but rather to provide a brief summary of the current law relating to this subject.

13. THE CORPORATION AS AN ENTITY
There are various ways of carrying on a business –
γ
one way is through a corporation
The corporation is a separate legal entity: it has
γ
rights and obligations equivalent to a natural person
Shareholders (the owners of the corporation) have
γ
certain rights in the corporation but they do not own
the assets of the corporation

14. MANAGEMENT OF THE CORPORATION
The corporation can only operate and do business
γ
through human activity
The persons who guide, operate and control the
γ
corporation are:
4 Shareholders
4 Directors
4 Officers

15. MANAGEMENT OF THE CORPORATION
The shareholders will select directors who will have
γ
the power and responsibility to manage the
corporation
Directors will delegate the power and responsibilities
γ
needed in the day-to-day management of the
corporation to the officers

16. BOARD OF DIRECTORS
Directors are required to manage and supervise the
γ
management and affairs of the corporation
Directors exercise their power collectively as a Board
γ
of Directors
The term of directors’ tenure is usually specified in
γ
the corporation’s by-laws (ex. directors must be
elected annually)

17. BOARD OF DIRECTORS
A corporation need not have more than one director
γ
The number of directors of the corporation will
γ
depend on the corporation’s founding documents:
η They may specify a set number (ex. 10) or a minimum
and maximum number (ex. min. 1, max. 10)
A minimum number of directors (“quorum”) must be
γ
present at meetings or no business can be carried on
(usually a majority of directors)

18. BOARD OF DIRECTORS
The federal and certain provincial corporate statutes impose
γ
Canadian residency requirements on boards of directors
Vacancies on the board of directors may be filled by
γ
shareholders (if no quorum of directors) or by directors (if
quorum of directors) as specified in the By-Laws
Decisions of the board – called “resolutions” – must be
γ
approved by the majority of directors present at the meeting
As an alternative to holding meetings, directors may act by a
γ
written resolution signed by all directors

19. COMMITTEES OF THE BOARD OF
DIRECTORS
The Board of Directors can set-up committees to
γ
which it delegates certain powers
The Board of Directors can have various committees
γ
such as:
η Audit committee
η Compensation committee
η Finance committee

20. DUTIES OF DIRECTORS
Directors have certain duties toward the
γ
corporation and its shareholders
These duties are imposed by the common law
γ
and federal and provincial legislation
Directors can be held personally liable for a
γ
breach of these duties

21. COMMON LAW DUTIES OF DIRECTORS
Two basic duties at common law:
1) Fiduciary Duty (Duty of Loyalty)
η
2) Duty of Skill and Care (Duty of Care)
η

22. COMMON LAW DUTIES OF DIRECTORS
Fiduciary Duty:
Directors have a duty to act honestly and in good faith
γ
with a view to the best interests of the corporation
Directors and officers cannot:
γ
η take advantage of a business opportunity which the
corporation is seeking
η approve a corporate contract if they have a material interest
that conflicts with the best interests of the corporation
η use insider information for personal gain in a securities
transactions

23. COMMON LAW DUTIES OF DIRECTORS
Duty of Skill and Care:
Directors must exercise the level of skill and
γ
care that a reasonable prudent person would
exercise in comparable circumstances
Business Judgement Rule
4

24. LEGISLATIVE DUTIES OF DIRECTORS
CORPORATE LAW
Both common law duties have been enacted in
γ
legislation governing corporations
The federal and Ontario legislation governing
γ
corporations impose a:
η fiduciary duty
η duty of care

25. LEGISLATIVE DUTIES OF DIRECTORS
CORPORATE LAW
Directors must act honestly and in good faith with a
γ
view to the best interests of the corporation
Directors must exercise the care diligence and skill
γ
that a reasonably prudent person would exercise in
comparable circumstances
The corporation or the shareholders could take
γ
action against directors if they breach these duties

26. LEGISLATIVE DUTIES OF DIRECTORS
CORPORATE LAW
Directors could be liable if they do not comply with:
γ
Corporate legislation and regulations
η
η Articles and by-laws of the corporation
η Unanimous shareholder agreement
A Director must disclose any “material interest” they
γ
may have in a contract with he/she:
(i) a party to the contract or transaction
η
η (ii) is a director of a party to the contract or transaction;
η (iii) has a material interest in a party to the contract or transaction

27. LEGISLATIVE DUTIES OF DIRECTORS
CORPORATE LAW
Directors must ensure that certain “liquidity and solvency” tests
γ
are met before authorizing certain transactions such as:
η Payment of a dividend
η Redemption of shares
If the liquidity and solvency tests are not met, directors could be
γ
liable to pay any amounts distributed
Directors could be liable if the minority shareholders use the
γ
“oppression remedy” to claim relief from unfair or prejudicial
behaviour of the directors

28. LEGISLATIVE DUTIES OF DIRECTORS
Directors could be liable for offences committed by
γ
the corporation even if corporation is not prosecuted
or convicted:
In matters relating to the insolvency and bankruptcy of
η
corporation
Engaging in anti-competitive behaviour
η
Filing false or misleading information
η

29. OTHER DUTIES OF DIRECTORS
SECURITIES LAW
Applies to publicly held corporations
γ
Directors are “insiders” of the corporation because
γ
they have knowledge of confidential information
(“insider information”) about the corporation’s
business
Directors are subject to “insider trading” rules
γ

30. OTHER DUTIES OF DIRECTORS
SECURITIES LAW
Directors are prohibited from passing on insider information
γ
(“insider tipping”)
Insider trading or tipping gives rise to quasi-criminal (fine and/or
γ
imprisonment), administrative and civil sanctions
Directors can be liable and/or receive severe penalties for
γ
misrepresentations contained in documents filed on behalf of
the corporation
Directors must ensure that the corporation makes continuous
γ
and timely disclosure which could have an impact on the market
price or value of the corporation’s securities

31. OTHER DUTIES OF DIRECTORS
EMPLOYEE RELATIONS
Directors can be liable for unpaid wages or for breaches of
γ
employment and workplace related legislation:
Unpaid Wages: directors are responsible for unpaid wages up to
η
specified amounts
Labour Relations: directors have a duty to ensure the corporation
η
complies with labour relations legislation

32. OTHER DUTIES OF DIRECTORS
EMPLOYEE RELATIONS
Occupational Health and Safety: directors have a duty to ensure
η
that the corporation complies with the legislation
Pay Equity: the corporation cannot discriminate against a person
η
that participated in pay equity process or otherwise obstruct or
interfere with this process
Pension Plans: directors owe a fiduciary duty to the pension plan
η
beneficiaries and could be liable for a breach of this duty

33. OTHER DUTIES OF DIRECTORS
ENVIRONMENTAL LAW
Directors may be subject to various obligations under
γ
environmental laws and can be prosecuted under both federal
and provincial environmental laws
Federal: can be required to take all reasonable emergency
γ
measures to prevent the release of a toxic substance or to
remedy any danger to the environment resulting from discharge
Ontario: power to order remedial action and collect costs
γ
incurred by the government when parties fail to act

34. OTHER DUTIES OF DIRECTORS
TAXES AND SOURCE DEDUCTIONS
Directors may be liable for taxes and source deductions
γ
which the corporation is required to deduct and/or remit:
Federal and Ontario income tax deductions
η
Goods and Services Tax
η
Contributions to Canada Pension Plan
η
Employment Insurance premiums
η
Ontario Corporate Tax
η
Ontario Retail Sales Tax
η
Ontario Employer Health Tax
η

35. DIRECTORS’ INDEMNITIES &
INSURANCE
Corporations possess the right, and in some cases the
γ
obligation, to indemnify directors
Insurance will not protect directors from liability in all
γ
cases
Discretionary Indemnification: provided a director has
γ
acted honestly and in good faith with a view to the best
interests of the corporation, a corporation may indemnify
a director against all costs and other amounts paid to
settle an action or to satisfy a judgment

36. DIRECTORS’ INDEMNITIES & INSURANCE
Mandatory Indemnification: a director has the right to the be
γ
indemnified by the corporation for any costs or other
expenses relating to the director’s defence of any proceeding
to which he or she is made a party if substantially successful
on the merits of the case provided a director has acted
honestly and in good faith with a view to the best interests of
the corporation
Both the federal and Ontario legislation governing
γ
corporations also permits a corporation to obtain insurance
for a director, or former director, with respect to liabilities
incurred as a director, except where such liability arises out
of the director’s failure to act in good faith, with a view of the
best interest of the corporation

37. MaRS ENTREPRENEUR SERIES
THE ROLE OF BOARDS, ADVISORY PANELS AND SERVICE
PROVIDERS
Photo: © Tourism Toronto, 2003
MARCH 27, 2007
SHAREHOLDERS AGREEMENTS

38. What is a shareholders agreement?
Usually, an agreement among all of the
γ
shareholders of a corporation, dealing some or all
of the following:
How the corporation will be managed;
1.
How the corporation will be financed;
2.
How shares of the corporation may be issued and
3.
transferred; and
What happens when the shareholders no longer
4.
wish to continue with the corporation’s business
(aka “exit strategies”).

39. Why enter into a shareholders
agreement?
Avoid disputes between the shareholders in the
γ
future:
η People will disagree about what the deal was;
η Businesses change over time; and
η People change over time.
Protect minority shareholders.
γ

40. When to Sign
Ideally, before or concurrently with the issuance of
γ
the shares.
Once the shares are issued you cannot later compel a
γ
shareholder to sign.

41. What to include in the Agreement
Management of the Corporation
1.
How major decisions are made
2.
Financing
3.
Issuing and transferring shares
4.
Consequences of certain types of events
5.
Exit Strategies
6.

42. Management of the Corporation
Directors:
γ
η Who will they be and how many
η How will decisions be made
Officers:
γ
η Who will hold which offices
η What duties will they have
η Authority to sign agreements and banking documents

43. How major decisions are made
When will unanimous or special approval of the directors or
γ
shareholder be required:
η Changes to the articles or by-laws or to the business to be carried
on;
η Sale, lease or pledge of assets;
η Issuance of new shares;
η Declaration of dividends;
η Significant capital expenditures;
η Borrowing;
η Agreements with related parties.

44. Financing
Initial financial contribution required from each
γ
shareholder.
Mechanisms by which corporation may raise
γ
additional funds
η Borrowing from institutional lender
η Borrowing from shareholders
η Obtaining additional share capital
Distribution of profits
γ

45. Issuing and transferring shares
Issuing shares
γ
η Required consent
η Pre-emptive Rights
Transferring shares
γ
η General prohibition on transfer
η Permitted transfers
η Right of First Refusal
η Buy-sell clauses

46. Exit Strategies
Right of first refusal
γ
Drag-along rights
γ
Buy-sell procedure:
γ
η Put right
η Call right
η Shot-gun
Piggy-back rights
γ
Winding up of the company
γ

47. Consequences of certain types
of events
Termination of employment
γ
Death of a shareholder
γ
Marital breakdown
γ
Bankruptcy
γ
Default under agreement
γ

48. Other Issues to Consider
Method of Valuing shares
γ
Employment Contracts
γ
Non-competition clauses
γ
Insurance Policies
γ
Independent legal advice
γ

49. Final Recommendations
Think about the need for a shareholders agreement
γ
early
Try to think about where you think/hope the company
γ
will be in 5, 10 or more years
Try to anticipate specific issues that may arise and
γ
deal with them
Try to anticipate what an outside investor will require
γ
Make sure everyone is on board and understands the
γ
agreement