Lawyer Stuff 101 – What Does a Business Lawyer Do?

This is the second in my series of articles on how you, a business owner, can use your lawyer most effectively. The most frequent conversation I have when meeting with new clients is to explain the role of the lawyer in advising a business. Many have never worked with a lawyer before, or worked with one in a different area. Why are we useful, and what the hell do we actually do that adds value to your business? Once you know what we do, it’s much easier to use us effectively – saving you time, money, and heartache as your company evolves.

A lawyer’s job is to help businesses to understand and manage risk. Full stop.

On Risk

Most entrepreneurs are going into business because they have a great idea – a product or service that they believe they can sell. The act of going into business is risky in and of itself. You’re putting your time, money, reputation, and relationships on the line. The business world is a scary place, especially when you’re the small fish in the pond. Your competitors are constantly working to out-manoeuvre you. Your employees, contractors, investors, customers and suppliers have expectations and problems of their own. The tax man knocks on your loudly and frequently. There’s a maze of regulations to navigate.

Many of those risks are sight unseen for entrepreneurs. Some manage to bob and weave through them by chance, blissfully unaware of close calls. Often in a first meeting I have the unpleasant task of lifting the veil, and giving them a peek at the troubled waters they’re sailing in. Sometimes the business owner walks away with more worries on their mind than they came with. It’s not a fun realization for them, and it’s my least favourite part of the job. It is, however, reality.

The risks exist whether you realize they do or not. Would you rather not know, and be blindsided when something happens, or understand where the risks lie, what the potential consequences are, and be able to make plans to avoid them and minimize their effect on your business?

Keep your head in the sand if you like, but Stats Canada has found that 20% of startup businesses fail within the first year, and 50% don’t survive three years. The businesses that succeed tend to have sound legal and accounting advice from an early stage. If you have sound advice, and the business still fails, you’ll likely end up on more stable ground afterwards – with your personal assets, reputation, and relationships relatively intact.

Lawyers help businesses to manage risk in three main ways:

  • Advising on sound business practices
  • Advising on appropriate legal structures and relationships, and
  • Advising when insurance is wise

Each of these risk management techniques ties in with the others. I’ll talk about each in turn.

Sound Business Practices

The most common, cheapest, and often most effective is to cover your own ass by doing business the right way. Most of these don’t need a lawyer to dream up or implement.

The most common business disputes are about differences between what was promised and what was delivered, billing and payment disputes, employer-employee relationships, and on-premises injuries. Businesses frequently deal with Consumer Protection Act, employee safety, and harassment and Human Rights Code complaints. Complying with government regulation – such as licensing, zoning, Building Code, Fire Code, access for disabled persons, anti-spam, import/export rules, and tax are also sources of friction and risk. It can be a lot to deal with, but there are a few habits that’ll make life easier for you:

  • Do your reading. There is a ton of information out there from government websites, regulatory bodies, accountant and lawyer’s blogs, insurance companies, incubators, entrepreneur groups, and industry publications. Read it all. A responsible business owner knows what laws and regulations govern their industry, and what they need to do to colour between the lines.
  • Put it in writing. If there’s a dispute, what actually happened doesn’t matter – only what can be proved. Written records are more convincing than memory. If you do business over the phone or face to face, keep notes and send a follow up email summarizing what was said and agreed upon. Put employee job descriptions in writing.
  • Keep everything. Having things in writing is useless if you delete it too soon. The limitation period (meaning, the amount of time someone has to bring a lawsuit) in Ontario is two years after the problem is discovered. Do the math, and figure out how long to keep the records after dealing with someone. An IT nerd can burn years and years of data to DVD for you if storage space is an issue.
  • Don’t over-promise. Sometimes the pressure to make a sale can be immense, especially in the cash-poor early days of a business. It’s hard enough to keep people happy even when you do what you say. If you over-promise and under-deliver, or take on work you’re not equipped to do, it’ll come back to bite you in the end. The rear end…
  • Have policies in place. Especially if you have people working for you. There are tons of free resources from the Ministry of Labour, and HR professionals that can get you started. It’s wise to bounce these off your lawyer to make sure they’re current.

As your company grows, your lawyer and other advisors can help to flesh out the practices and policies in a way that suits your business.

Legal Structures

Here’s where I come in. While business practices are a good start, there’s no substitute for on-point legal advice to help minimize business risk. Legal advice costs money, and if you’re in the habit of seeking it before acting, you may wonder what the actual value added to your business is. Legal advice is a bit like bear repellent – the only way you know it’s working is that there are fewer bears around… but if a bear shows up on your doorstep with a lawsuit, the value becomes much more clear. Maybe I went too far with this analogy… I digress…

Sadly, much of what I do is work to clean up my clients’ self-inflicted messes. They try to save money on legal fees by trying to be their own lawyer. Sometimes the damage is irreparable. I’ve watched businesses go down in flames because of vague, improperly drafted contracts. I’ve seen clients held hostage by independent contractors because they didn’t put anything in writing before work started. I’ve seen people’s businesses stolen out from under them because they didn’t think independent legal advice was worthwhile. Even when the business is salvageable, they often end up spending two or three times as much to fix the problem than they would have on legal advice in the first place.

The business lawyer’s role usually falls in one of three categories:

  • Internal relationships. Clearly setting out the roles, responsibilities, and expectations between the founders of the business is essential. Sooner is better – ideally before the business starts to make (or lose) money. No matter what the form of business is, and no matter how good the intentions are at the start, as soon as money is involved, people’s recollection of the deal and expectations can change in a hurry. A house divided against itself cannot stand.
  • The back end of the business. Not only should your business structure make sense from a tax perspective, it should protect the founders, and facilitate long-term growth as much as possible. There are several forms of business available, each with their benefits and obligations. Choosing the right one, and keeping it in good standing with the government and other regulators is critical. Lawyers know what records need to be kept, and what approvals must be secured before taking certain actions. Investors and potential buyers will want to see that the proper decision-making processes were followed in running the company.
  • External relationships. Customers, suppliers, employees, investors, creditors, partners, joint-venturers, government, regulators, landlords, tenants, neighbours, industry associations, and advisors will all be looking out primarily for their own interests, as you should be for yours. Contracts are useful to set out what’s expected of each party, which I covered in detail in an earlier blog. Call your lawyer before trying to enter, break, or change a contract. You may also need help understanding what regulations apply to your business, and help you to colour between those lines.

Insurance

I’m no expert in insurance – my knowledge is limited to knowing when to recommend when it might be appropriate, and how it fits into your overall risk-management plan. I typically recommend insurance options to cover the gaps between your business practices and legal structures, and the risks you can’t hedge against that way.  A few of the common types are:

  • Commercial general liability. This coverage can cover slip & fall and other bodily injury, defamation, emotional pain and suffering, false advertising, medical expenses, and tenant/occupant liability.
  • Disability & key person. As discussed in my articles on contingency planning, these policies can help keep the business afloat if the owner/operator or a key employee is killed or injured and unable to work.
  • Directors & officers. A company can agree to protect its directors and officers in the event that they’re sued for things they did in the course of their duties.
  • Business interruption. Protecting against loss of income in the event of fire, flood, equipment breakdown, and other events beyond the business owner’s control.

Written opinions of lawyers, accountants, and other professionals which recommend a specific course of action as being legal or viable can also be a form of insurance. Your business should be able to rely on those opinions to make its decisions. If an opinion is wrong, and the business suffers losses as a consequence, it’s up to the professional (or their insurer) to make it right.

Bear in mind that insurance is a contract as well – so read it. Know what you want to be covered for, and make sure it’s included in the policy. Have an idea of what amounts of coverage you need for each type of insurance. Ensure it covers liability occurring in the places where your products or services will be delivered. Do some research into the reputation and claim denial rate of the insurance company you’re thinking of dealing with. Call your insurance agent when starting a new aspect of your business. Insurance is supposed to provide peace of mind – which ain’t much use if you don’t actually know what you’re covered for.

You probably already know that there’s a lot more to entrepreneurship than meets the eye, if you’re doing it well. Getting legal advice can be a delicate balancing act as far as cost vs. benefit – especially when cash is tight in the early stages. Sometimes you need more work than you think, other times you need less. Each business’ needs will be different, and the only way to know for sure is to ask questions. Know what you don’t know, and get an expert when you need one. I happen to know a guy…. 😉

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

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Lawyer Stuff 101 – Contract Negotiations

It’s one thing to have professional advisors – lawyers, accountants, etc. – to point you in the right direction. It’s a whole other thing to know how to use them properly. I’ve found it’s a pretty steep learning curve for most entrepreneurs to figure out how to receive advice from, and give instructions to their lawyer. So, this is the first in a new feature I’m calling “Lawyer Stuff 101” – what a lawyer can do for you in different situations, and how the process should work.

I’ve been harping a lot on contracts lately – generally, and for record labels – since it’s a big part of my practice, so the process of birthing a contract seems a logical place to start. Signing a contract without a lawyer is like doing your taxes without a calculator – just because you can do it doesn’t mean that you should. Get your lawyer involved early in the process, as our kind know more about the points that should be covered in different kinds of deals. It’s easier to ask for something from the start than to go back to the drawing board when you realize that your deal has gaping holes in it.

Lawyers do three main things with contracts – writing them (drafting), reviewing them, and help in negotiating them. I’ll touch on each in turn.

Writing Contracts

Usually the party that’s offering the goods or services is the one who draws up the contract. The way your company does business will dictate a lot of the terms of the contract – how goods are ordered, packaged, shipped, and paid for, for instance – so it makes sense that you’d spell that out for the other party first.

It may seem odd, but it’s usually cheaper to get your lawyer to write a whole contract for you than to go through and tweak something you’ve written yourself. In order to “tweak” your contract, the lawyer’s got to review it first (see reviewing, below), and then rework it to say what you want it to say.

I usually send my clients a list of the things that they should consider for the type of contract they’re writing up, and ask them for a list of the things that they want in it. This often involves talking to the other party and figuring out the who, what, when, why, where, and how of the deal. Once that’s done, I’ll put together a first draft of the contract and send it to the client to review it.

Once you’ve read the draft, there’s usually a phone call or an in-person meeting to go through it, clause-by-clause, to make sure it says what you want it to say. Sometimes just talking through an issue raises other points that need to be added or changed in the contract. I make the changes and send an updated draft. It may take some back & forth to get it just right.

Once you’ve got a contract, it goes to the other side. Depending on what the contract’s about, there may be some negotiation involved before you can put pen to paper. The end goal is for you to have a contract that everyone understands, and says what it’s supposed to.

Reviewing Contracts

Any time you’re presented with a contract, it’s important that you understand what it says before you sign it. Contracts are binding legal agreements, and there can be major consequences – like lawsuits – for breaking them.

It’s up to you, the client, how thorough of a review you want. The thoroughness of review depends on a bunch of things – your budget, and the size of the deal tend to be the biggest factors. A review and legal opinion will be more expensive and more thorough than a general overview and flagging of key issues. The bigger the commitments being made, the more important the deal, or the more money involved, the more important it is to get it right.

When my clients send me a contract for review, I’ll ask them to tell me in their own words the deal that they think they’ve made – so I know whether or not the contract actually says that. For a thorough review, my work starts with a quick read-through, to get familiar with the structure of the contract, and its general terms. I may ask a few follow-up questions at this point, or for copies of other agreements or documents that are referred to in the contract.

The next step is a thorough read-through – word by word, clause by clause – to understand the finer points of the deal. I’m looking to make sure that the contract doesn’t contradict itself (consistency), that it ties in with other documents or agreements, that it’s fair and matches the deal you think you’ve made, that there’s nothing illegal, and that there are no significant or unusual risks (liability) that you’re taking on.

The last step is to give a written legal opinion on the contract. In the opinion I’ll explain how the deal works as written, and point out differences from the deal you thought you’ve made. I’ll flag unusual or particularly risky clauses, inconsistencies, and illegal clauses. The amount of detail in the opinion depends on the thoroughness of review you’ve asked for. Once I’ve sent you the opinion, and you’ve had a chance to read it through (a couple of times, at least), we’ll set up a call or a meeting to discuss it, which often leads to….

Negotiation

Most business contracts have room for negotiation, as both sides want a fair deal that will grow their business. The negotiation process is where you try to add as many of the things that you want to make the deal better for you, and to get rid of the things that expose you to unnecessary risk. That said, risk is inherent in business, and usually each side will take a share of it. How much risk you’re willing to accept is up to you. My job is to let you know that it’s there, and recommend a course of action – but it’s up to you to make the decision. Once you know the risk’s there, you can take steps to minimize its potential impact.

The first step of contract negotiation, which is usually tied in with the discussion of my legal opinion, is figuring out what you want. What are your must-haves, nice-to-haves, and things you don’t care about one way or the other? Then we try to figure out what the other side wants and why they want it, and brainstorm ways to work through potentially sticky negotiating points.

I usually recommend that the business people talk directly, before getting the lawyers involved in negotiations. It could be a quick phone call or email to discuss the main points, and get an agreement in principle on the proposed changes. This “meeting of the minds” between the business decision makers helps to keep the lawyers on track when sussing out the details.

Whoever is proposing changes will then have their lawyer make the changes they want to the contract, and send you back a clean copy and a “black line” version with the changes highlighted. The other lawyer will review those, advise on any variation from the agreement you made with the other party, and any new risks. The contract may get bounced back and forth like this a few times to hammer out the finer points, and the lawyers may need a phone call or two to finish it off. Any changes from the deal you’ve instructed me to get will have to be approved by you.

Conclusion

Putting together contracts can be a drawn out process, especially for complicated business deals. Most lawyers will use some variation of the above process. Start planning well in advance, and get your lawyer involved at an early stage. When it’s all said and done, you’ve got a contract that you can live with, and rely on in case it goes south.

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Record Label Contracts

Few artists would want to be considered to be “in business” for doing what they do, but like it or not, as soon as you get paid for it, you’re a sole proprietor. For artist-entrepreneurs, the art lies in the creative process – those endless hours working your fingers to the bone, trying to get that sound out of your head, and into others’ ears. Everything else is business. For a record label, owning the rights to do what you need to make your business viable is the key… and ambiguous contracts will come back to bite you in the long run. In this post, I’m going to talk about one of the first high-stakes legal issues a label and recording artist will face – the record label contract.

Contracts, generally:

A contract is a binding agreement where two parties exchange something of value, called “consideration”. The artist gives up certain rights to their creations, while the label helps you get it to market, and hopefully you both make money. Contracts are rarely an issue when everything goes according to plan… but if things go sour, you can bet your bottom dollar (or, pay it to a litigation lawyer…) that the label will use the contract to get as much for itself as it can. So, it is soooooo frickin’ important to understand what you’re signing, and agree to all of it before you sign it.

Contracts are a two-way street – a business relationship that relies on trust, and common interests to succeed. Therefore, there’s almost always room to negotiate – to remove things that you don’t like, and add in things that you want. You may be really good with keys and chords, but not so slick with the legalese – so it’s a smart idea to get a lawyer to help you interpret and negotiate the contract. The best time to look for a lawyer is at the start of your career, before you go too far down the road on the business side of the game. A little money spent at the outset can save you a ton of heartache, expense, and lost income down the road.

More on contracts in this other blog post…

Record label contracts

Every record label contract is different. Major labels may use a 50-100 page document, while indie labels might be as short as 5 pages. The gist of them is the same – the artist sells rights to exploit their songs for profit to the label, in exchange for a cut of the profits. In return, the label puts its money and influence into recording and promoting the album. Record label contracts typically include:

  • Term & territory
  • Rights & exclusivity
  • Money – royalties & recoupment
  • Cross-collateralization
  • Creative control
  • Rights
  • Release commitment

I’ll explain each of these in turn.

Term

The duration of the contract. It’s usually a fixed term (perhaps one year), during which time the artist must produce a certain number of tracks or albums to a reasonable standard.

Multi-album, multi-year deals are usually not set in stone. Typically the contract will cover the first year and first album, and give the label the option to extend it for successive terms. If the first album does well, the label will likely use its option to extend for another. If it tanks, the label probably won’t extend, and may drop you. Most labels won’t make a firm commitment to release anything beyond the first album.

It’s a good idea to set a “long stop” – or a maximum number of years the contract can run for. This gives a successful artist (as labels will likely only keep successful acts) a chance to negotiate a better deal down the road. Six or seven years is advisable.

Even after the term of the contract ends, the record company must continue to pay royalties for the artist’s work it sells.

Territory

This is the geographic area that the label has the right to exploit the work for profit. Most deals these days are “worldwide” or “universal” thanks to the internet. Smaller labels may buy only North American rights, or for certain countries.

Just because the label has rights worldwide doesn’t mean it has to release the work worldwide. Think practically about the reach of the label, and whether or not it can actually push the work in the whole territory. If not, it may be worth carving some areas out of the territory in favour of a local label or distributor, or having the label give up its rights where, after a period of time, it doesn’t release the work.

Rights & Exclusivity

Rights are what the artist sells – or rents – to the label. These may include:

  • Assignment of copyright
  • Ownership of masters and unreleased tracks/versions
  • Use of name and likeness; merchandise
  • Mechanical rights – who owns the underlying work?
  • Profits from off-stage sales

An exclusive right to the work means the label may exploit any recorded performances during the term of the contract – albums, concert videos, live recordings, etc. The artist (or any member of the group) may not record any material for another record company.

Some acts may sign under a specific stage name, which could leave them free to contract with other labels under a different pseudonym.

If the artist wants to do outside projects, such as making guest appearances with another act, a “sideman” provision should be negotiated.

Show me the money!

For the artist, the financial terms of the contract are some of the most important. They can get pretty complicated, so this is where your lawyer and accountant earn their keep. 80% of acts never sell enough albums to see a cent of artist royalty payments, so understanding the math how much will need to be sold for the artist to earn a profit is ever so important.

At its simplest, the math is:

(Artist Royalties) – (Recoupment) + (Mechanical Royalties)

Royalties

Royalties are the act’s cut of the profits. There are two types:

  • Artist Royalties – money paid to the act for its recorded performances – usually defined as a percentage of the sales price (typically between 9-18% of retail)
  • Mechanical Royalties – paid to the publishers/songwriters for the underlying composition

Royalties for music videos, secondary uses (like commercials or movies), and live performances are sometimes included as well. If you want to be certain who owns them, put it in writing.

Artist Royalties

The money paid to the artist when albums are sold, usually a percentage of the wholesale or retail price. 9-18% of revenue sounds alright… but that’s a gross percentage, not net. The label will deduct every expense that it can – recording costs, reserves against returned albums, free goods, packaging costs, and often pay only reduced royalties for foreign, discounted, and TV sales. The artist is usually expected to pay the producer royalty as well, which is usually around 3% – but shouldn’t be on the hook for income advances paid to the producer.

After all of those deductions, the artist has to pay back the label’s costs out of the artist royalties, known as “recoupment”. Once the label recoups all of its costs, the artist gets paid the excess. I’ll talk recoupment in a bit… but long story short, 80% of acts never see a penny of artist royalties.

Mechanical Royalties

The record label has to pay the songwriter for the use of their songs. Mechanical royalties are not recouped, and shouldn’t be cross-collateralized either (below). That means the songwriter gets paid on every song or album sold. For most singer-songwriters, this is the only payment they’ll ever see. Outside writers get paid first.

Mechanical royalty clauses usually limit the number of songs mechanical royalties are paid on, and the per-song amount the label will pay.

Recoupment

Record labels often spend a bunch of money to get an album to market, which the artist pays back through its artist royalties. Once all of the costs are paid, the artist royalties start being paid to the artist. These costs include:

  • Advances – money paid by the label to the artist up-front to cover cost of living, management commissions, legal fees, etc.;
  • Recording costs, which are either a budget or a fund to cover studio time, production, mixdown/mastering, etc.:
    • Budget – a guaranteed minimum amount. If it’s not spent, the label keeps the money; or
    • Fund – an amount is set aside for recording, and anything left over is paid to the artist when the album’s done;
  • Tour support – money spent by the label to promote the tour;
  • Video production costs – are typically paid 50% by the label, and 50% recoupable from artist royalties

These costs are “non-returnable” – which means that if the album doesn’t earn enough artist royalties to pay for the costs expended, the label takes a loss. The label’s other costs – manufacturing, advertising, promotion – should be wholly paid by the label. That’s why it gets its 82-91% cut of every album.

Some labels reach outside of industry norms to find creative ways to get the artist to reduce the label’s risk on an album, including:

  • A clause in the contract that makes the money “returnable” – meaning that the artist must reimburse the label for the entire cost, and
  • Recoupment from other sources – such as mechanical royalties or through cross-collateralization (below).

Both of these are exploitative, and certainly not standard industry practice.

Now, musical interlude:

Cross-Collateralization

Cross-collateralization allows the label to use royalties from one contract (such as publishing, production, other mechanical licenses, or a separate album-by-album deal) to recoup its costs from another.

Creative Control

How much can the label tell the artist what to do? Usually singer-songwriters have more creative control, while groups assembled by a label will get less. Creative control could mean the right of approval, the right of consultation, etc. Creative control rights include:

  • Videos – song choice, concept, budget, editing
  • Producers and remixers – who, costs, royalties
  • Song selection – what gets recorded, and what goes on the album
  • Use of the act’s name and likeness
  • Marketing & merchandise
  • Artwork
  • Secondary exploitation – commercials, movies, etc

Unless it’s stated otherwise in the contract, once the contract ends, so to does the artist’s creative control over the rights they’ve given up.

Release Commitment

What’s the use of putting together an album that nobody will ever hear? It’s often worthwhile for the act to get a firm commitment from the label to make a meaningful release of the album in the territory of the contract, including a minimum budget. If not, the artist may buy back the masters.

Conclusion

So, those are the nuts and bolts of record label contracts. Often there’s a lot more to them, and there’s a ton of little things that can come back to bite you – whether you’re a label or an artist. As with any contract, it’s a smart idea to get a lawyer to help you write or review it, and most importantly to understand what it is that you’re signing. I happen to know a guy… 😉

Rock on.

 

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca
@MikeHookLaw

Unanimous Shareholder Agreements

This can be a confusing topic. There’s a whole lot of stuff written about it, utilizing an abundance of excessively Brobdingnagian verbiage, but it’s usually a lot of talk about what a unanimous shareholder agreement (or “USA”) is, rather than why you might want one for your corporation. Here I’ll give you the basics of what it is, why you might want one, and what’s in it.

What is it?

A USA is a contract between all the shareholders of a corporation that limits the power of the directors to supervise or manage the business of the company. It could even take all management powers away from the directors. Without one in place, the directors can exercise all of the powers they’re given by the corporate laws, at the director’s discretion. Back in the day, if directors started running the company in a way that the shareholders didn’t like, there wasn’t much that the shareholders could do about it until it was time to vote for the directors again. Nowadays, the USA gives shareholders an out.

The rights, powers, and responsibilities that are taken away from the directors are then assumed by the shareholders. The shareholders will also take on the liabilities that go along with the powers – such as liability for unpaid employee wages, tax remissions, pension, environmental protection, etc. Some liabilities can’t be opted out of, such as the ones in the Occupational Health and Safety Act. Make sure you know the risks before signing on the dotted line!

A USA is a “constating document” of the corporation – like its articles and by-laws – that deals with the inner workings of the company. It is important to make sure that it doesn’t conflict with the articles or by-laws.

Once a USA is in effect, any new shareholders are deemed to be a party to it, and they should be given notice that it’s in place.

Why would I want one?

USA’s are most common in companies with a few shareholders, who own roughly even percentages of the company. They’re typically used to modify or supplement the rules in the Business Corporations Act:

  • Set out a Succession Plan: I’ll blog about succession plans soon, but a USA can be used to hand off the ownership and management of your corporation so that the business can continue after you retire, or if something bad happens to you.
  • Change Default Corporate Law Rules: such as the % of directors required to vote in favour of certain material decisions, such as paying dividends, buying or disposing of major assets, entering into joint ventures, non-arms-length transactions, mortgaging or liening property, or changing the business of the Corporation.
  • Protect Investor Interests:  venture capitalists, angel investors, or banks may want a USA in place to ensure that they can control things that directly affect their investment – such as amending the articles or by-laws, mergers, issuing new shares, or the sale of substantial company assets.

USA’s can also be used to do a few tricky things, which aren’t guaranteed to work out the way the shareholders intended.

  • Foreign-owned Corporations: the law requires at least 25% of directors to be resident Canadians. A USA can take all the powers away from the directors, and let the foreign shareholders do the decision-making. This may work for some purposes, but courts will ignore this sleight of hand in certain situations, particularly to do with tax liabilities.
  • Protecting Directors: where the shareholders own their shares through a holding company. Those holding companies assume the directors’ liabilities, and in theory, the people who own those holding companies are protected. It’s likely that a court would look right through this technicality though, if there wasn’t enough to pay out the creditors.

What’s in it?

Like any contract, the contents are up to the people making it. Typically, a USA may cover many of the following topics:

  • Decision making process
  • Quorum for meetings
  • Restrictions on share transfers, and how to deal with involuntary share transfers on death, bankruptcy, or court order
  • Special rights of minority shareholders, or special restrictions on majority shareholders
  • Process to amend the USA
  • Funding considerations – from existing or new shareholders, or
  • If the directors aren’t stripped of all of their powers – representation on the board, or a right to appoint someone to observe board meetings
  • Dispute resolution
  • Right to dissolve the corporation

There are plenty of templates out there that can get you started, including this useful one from the Law Society – but as I said above, it’s incredibly important to understand the risks before fiddling with the way your corporation is run…. like using a game of Operation to prepare for open-heart surgery.

If you need a lawyer, I happen to know a guy

Mike Hook
Intrepid Lawyer
Email: mike@intrepidlaw.ca
Twitter: @MikeHookLaw