During a recent webinar on the regulatory obligations of franchisors in Ontario, Jean Bedard and I shared our top 5 tips for franchisors. We’ll be providing more details in future blog posts on these and other important issues for franchisors in the coming weeks.
#1 – When in doubt, provide a disclosure document. While exemptions are possible under the Arthur Wishart Act, franchisors need to look long and hard at the facts and get some legal advice before relying on it.
#2 – If you sales team believe that certain facts should be withheld from the disclosure document, these will likely be ‘material’ and should be included. Remember, the disclosure document is not a marketing brochure, it is a legal document and omitting material information can have serious negative implications.
#3 – Don’t forget to include “location specific disclosure” when a franchisee is selling a franchise, on a renewal of a franchise or on the sale of a corporate owned store to a new franchisee. This can be information such as sales figures for a location or changes to a head lease.
#4 – Always wait at least 14 days after providing disclosure documents (or in most cases after providing a statement of material change) before signing any agreements or receiving any consideration. You cannot ask a lawyer to hold the money in trust during that period neither.
#5 - Be sensitive to the duty of fair dealing in the performance and enforcement of the franchise agreement. Franchisors are typically in a stronger position than franchisees when it comes to negotiating and this balance of power is considered relevant by the Courts. Franchisors must be very sensitive to the “duty of fair dealing” in the Arthur Wishart Act. This also applies when negotiating with new franchisee and when renewing agreements.
You can watch a recording of our recent webinar by clicking here.
Andy Scott
A mediated settlement discussion is a dynamic matter that does not lend itself well to a fixed strategy for settlement. Often in preparation for a settlement discussion HR managers will meet with their lawyers to plan a financial range within which the employer is comfortable settling. Often HR managers are instructed on what bottom line the employer would accept and are left in charge of instructing counsel within that range at the mediation.
As a mediated settlement is often a fleeting opportunity to resolve a matter one should not delegate this task to others if they do not have real authority to settle a matter.
In the course of mediation previously unknown facts are often disclosed and HR managers can suddenly find they have a very different case on their hands. The revelation of these new facts can often be followed by the plaintiff making a reasonable offer to settle based on those new facts, but which exceeds the pre-approved bottom line set by the employer. In these circumstances, HR managers cannot enter the agreement without approval from their boss who is back at the office and who has not spent six hours in mediation or had the opportunity to hear the new facts or re-evaluate the litigation. It is very difficult for an HR manager to compress the events of the day into a convincing timely discussion which allays the concerns of their superior and allows for the prompt settlement of the matter. The company representative can also suffer embarrassment and be discredited when they have to inform the mediator that they need to call the office after stating at the outset that they had full authority. So the question for a HR manager in this position becomes: What is going to hurt my career more – settling for a lesser amount or going to court and losing much more at trial?
If the manager can blame a trial loss on the judge but claim the win as their own then they have a real incentive to forgo the settlement. No one can be blamed for not risking their own career to settle a matter but this situation can be easily avoided if each party brings the people who hold real decision making authority to the mediation. In the Employer’s case, this means bringing senior managers with real authority to make decisions. As a mediated settlement is often a fleeting opportunity to resolve a matter one should not delegate this task to others if they do not have real authority to settle a matter.
J.P. Zubec
There are many features of an incorporated business that make them distinct from other business structures. Unlike partnerships or sole proprietors, a corporations a separate legal entity which is completely separate from its owners or shareholders. This separate entity can own property, carry on business, possess rights and incur liabilities in the same 
way a person can. Corporations can also exist in perpetuity.
Shareholders own a share or shares of the corporation but do not own the property of the corporation. If you do incorporate your business and bring personal assets into the business you will no longer own those assets. You will own the shares of the company and the company will own the assets. In addition, it is important to note that rights and liabilities of the corporation are not always the same as the shareholders. As the business grows and the number of shareholders grows, what is in the best interest of the shareholders may no longer be in your personal best interest.
Advantages of Incorporating
- Many businesses choose to incorporate in to improve their ability to raise capital through the sale of shares in the business.
- Corporations also have limited liability. Because the corporation is a separate entity it is that entity that is responsible for the debts and liabilities of the business. I will go into greater detail on liability in a future blog post.
- Corporations also offer tremendous flexibility of ownership. When you own a corporation you can issue almost an unlimited number of shares, including different classes of shares each with their own characteristics.
- Canadian controlled private corporations can also enjoy certain tax advantages.
Disadvantages of Incorporating
- While corporations can enjoy certain tax advantages, when money is transferred from from the company in the form of dividends you will be required to pay personal tax on that revenue. The funds used to pay the dividend will have already been subject to corporate tax.
- There is more record keeping required when your business is set up as a corporation. For example, in addition to your personal tax return you, the corporation will need to file a tax return and there are other annual filings that may be required.
- Finally, there are extra costs associated with the formation of the company and its on-going operation. These can include your book-keeping, maintaining the minute book of corporate resolutions and tax returns.
In upcoming posts I will address some of the other legal issues you will need to consider when incorporating a business including liability considerations, whether to incorporate a named or numbered business, shareholders agreements, licenses and registration, non-disclosure agreements and intellectual property.
For more information on these topics, you can view a webinar I recently presented by clicking here.
Mike D’Aloisio
For many new and growing businesses, signing a commercial lease can be an important and exciting step in the transition from business concept to being a fully operational enterprise. But there are important differences between a commercial and residential lease that business owners must understand before signing any lease.
Not surprisingly the biggest thing to determine when contemplating signing a commercial lease is what the rent is going to be. But, unlike standard residential leases, the majority of commercial leases are ‘triple net leases’ which take all the liability for any costs associated with the building from the landlord and shifts them to the renters. So, the rent you see on the lease is not what you are required to pay every month. These extra costs can include a range of items such as covering the cost of property taxes, utilities and snow removal. In buildings with multiple tenants these costs are usually shared amongst all the tenants and fees are based on the percentage of square footage each unit has. These extras fees can add significantly to the cost of a rental so it is critical that you determine what these costs are before committing to a long-term lease.
Beyond the monthly costs there are other important clauses in the lease that you’ll want to consider before signing a commercial lease. These include:
Building improvements: What improvements need to be made and who is going to pay for the work to be done? At the end of the lease will you get to take those improvements with you or will the landlord now get to benefit from them?
Term of the lease: The minimum term of a commercial lease is typically five years. Depending on each party’s negotiating power this can either be increased or decreased. In addition, the automatic right to renew can also be negotiated into a lease. Be mindful of the notice period required for any renewal. Most renewals allow the landlord to increase the rent.
Rent Increase: Some commercial leases contain escalating rent which increases the rent every year of the lease. Other leases contain clauses which allows the landlord to increase the rent should their costs go up. Landlords often require a personal guarantee in situations in which the tenant is a corporation.
Exclusivity: A clause providing for sector exclusivity is particularly important for retail leases. For example, if you are opening up a hair salon in a mall or plaza you do not want another salon to be able to open in the same complex. The landlord at the same time might want to restrict the range of services or products you are able to offer. For example, the landlord may attempt to restrict the hair salon from providing manicures.
Many of these and other clauses can be negotiated so it is essential that you consult a commercial real estate professional before any lease is signed. The demand for space in a building will of course play a big role in the landlord’s willingness to amend the terms in your favour. In many instances it will be worthwhile hiring a commercial real estate broker to advise you on the locations and lease terms that will best suit your business and budget.
Michael Abrams
When first creating a corporation, it is common place to implement a simple share structure with only one class of shares called “common shares”. The value of the common shares will grow as the company grows in value – this is an important aspect to remember to properly time an estate freeze. When certain conditions are met, a shareholder who sells his shares in a private corporation can receive the first $750,000.00 of sale proceeds tax free (referred to as a personal capital gains exemption), while paying tax on sale proceeds received in excess of $750,000.00. In order to avoid paying such taxes on the excess proceeds, a shareholder can “freeze” the value of his shares (typically as the value approaches $750,000.00) by exchanging them for shares with a fixed value that are equal in value to the common shares being exchanged. The corporation is then free to issue new common shares at a nominal value.
Common shares will then be issued to family members, a family trust or to a holding corporation owned by a family trust (although this would require a sale of the holding company or an amalgamation prior to the sale). Any future growth in the value of the business will be attributed to those new common shares. In the event of the sale of the shares in the corporation, some of the sale proceeds can be attributed to the various beneficiaries of the family trust and each of them can benefit from their $750,000.00 capital gains exemption.
A practical example would be as follows: Jim owns common shares in a corporation that are worth $700,000.00. Jim exchanges his common shares (he gives them back to the corporation) and in exchange the corporation gives Jim shares with a fixed value (typically referred to as preferred or special shares) totalling $700,000.00 in value – the value of the fixed value shares will not grow. New common shares are then issued to the family trust for nominal value, but the value of these shares will increase as the company value continues to increase. The shares in the company are eventually sold and have a total value of $2.25M. Jim will receive $700,000.00 for his “fixed value” shares tax free. The remaining $1.55 million is attributed to various beneficiaries of the trust, with no more than $750,000.00 being attributed to each, allowing them to also benefit from their personal capital gains exemption, and therefore the entire sale proceeds are received tax free. Numerous considerations must be made before proceeding with this type of restructuring and the advice of a chartered accountant will be required. Implemented properly, estate freezes are a powerful tool to reduce the tax burden on the sale of shares in a business.
André Munroe
There are several different scenarios which a family business shareholders agreement can address when it comes to defining who controls the business, transferring management and ownership and establishing a timetable for succession.
Many family businesses are comprised of active parents and their children. In these businesses it is reasonable and beneficial to have a timetable in place for the retirement of the parent(s) or senior decision maker so that an orderly transfer to the next generation can be planned. Taking these active steps ahead of time will help protect the business from the adverse affects of a parent remaining in management for too long. However, the agreement should provide for the continued participation of the parent to allow for the transition with clients, suppliers, employees and other parties that have a long history with the company. In many cases parents will retain a significant financial interest in the business even after they have turned over management and/or control. This can be a very delicate situation that needs to be addressed carefully to ensure the parent does not feel they are being pushed out of the business. Turning over voting control is usually much less important than handing over the day-to-day management/control. The transfer of the control of the business can be achieved in many different ways within the shareholders agreement.
When siblings are in control of a business the situation can be complicated. Because of the tensions and conflict which can arise it is important to include a mediation mechanism within the agreement. It must contain clauses that deal with what is to occur if the attempts to resolve a dispute through mediation fail. In these circumstance some form of exit strategy needs to come into force. These options can include a ‘shot-gun’ provision, buy/sell agreement or mandatory binding arbitration. Other issues that should be addressed in a shareholders agreement when siblings run the business include deciding how control will be exercised. Will it be by majority or is unanimity required? There are pros and cons to both. For example, when business ownership is split 50/50 the business runs the risk of not advancing if decisions require unanimous support.
Many family business must also deal with active and non-active shareholders. The family members who are not active often won’t be concerned with the day-to-day operation of the business and may treat their shares in the business in the same way they treat other investments. Alternatively they may demand a high level of accountability and benefits. In these circumstances conflicts can arise for a variety of reasons including non-active shareholders feeling that the active shareholders are treating the business as their own and using it for their own private advantage. A shareholders agreement can contain provisions that recognize the different view points by establishing an expected rate of return and it can also contain negative covenants that put limitations on the active shareholders. Family members with non-voting shares can also be given the right to vote on decisions that will fundamentally change the nature of the business.
Lawrence Silber
The recent headline in the Ottawa Business Journal ‘More Businesses Looking for Loans, banks say‘ was an encouraging sign that business confidence is improving in our local economy. For many businesses the downturn and economic uncertainty of the past few years has meant putting their expansion and strategic development plans on hold. But it now seems we’ve turned a corner and more companies are beginning to look for opportunities to grow. However, economic confidence increases the competition and interest in strategic opportunities will also increase. Business owners looking to move quickly on strategic expansion using commercial loans can significantly speed up the lending process by addressing three key issues before approaching a lender.
- Have your team of advisors in place. This step is particularly important for business owners looking for financing from a bank for the first time. Assembling a team of professional advisors including a lawyer, accountant and other relevant industry professionals will help demonstrate to the bank that not only are you taking the venture seriously, but your are seeking professional input to improve the likelihood of success.
- Complete your corporate structure. Establishing an appropriate corporate structure is one of the first things your team of advisors can assist with before you approach a bank. Often a more sophisticated structure offers tax efficient benefits and reduces liabilities and the exposure of other existing assets. In addition, delays can often occur in the processing and approval of a commercial loan if the corporate structure being used by the company has not been completed. Finally, if corporate structural changes are required in the future it may result in fees that could have been avoided if the appropriate structure was implemented from the outset.
- Have a financial plan. Your accountant should work with you to develop a financial plan and cash flow forecast that can be submitted to a potential lender. This forecast will help the bank assess the commercial viability of the project and their likely rate of return on the loan.
With a team of advisors, a completed corporate structure and a financial plan, you will put the bank in position to proceed expeditiously in reviewing and processing your loan application. This efficient use of time will be especially beneficial if the bank is shopping other deals or there is a strategic move your company is looking to make that is also of interest to your competitors or is time sensitive for the market generally.
J.P. McAvoy
In the second installment of the ten most common employment law mistakes made by business owners and HR managers Nick Milanovichand I look at the factors that are considered when determining reasonable notice. In our experience, employers and HR
Employers and HR managers often put too much weight on an employee’s length of service when determining reasonable notice and do not give other factors appropriate consideration.
managers often put too much weight on an employee’s length of service when determining reasonable notice and do not give other factors appropriate consideration.
Length of service is but one of the factors a court will consider when determining reasonable notice. Other factors include age, character of employment and availability of similar employment. There is trend towards not placing a disproportionate amount of weight on any one of the four factors that a court typically considers when determining reasonable notice: Honda Canada Inc. v. Keays, [2008] 2 S.C.R. 362.
More recently, in Love v. Acuity Investment Management Inc., 2011 ONCA 130, the Ontario Court of Appeal extended, from 5 to 9 months, the notice period awarded to a fifty year old employee with 2.5 years of service as a chartered accountant and senior vice-president. The Court of Appeal held that the trial judge had erred by, among other things, placing a disproportionate amount of weight to the employee’s length of service.
Many employers do not take into account that determining reasonable notice in short service cases can be unpredictable. For starters, employees with short service will often need a minimum period of 2-3 months to find work. However, notice periods can go up from there, sometimes significantly.
J.P. Zubec
Successful business people are often asked to serve as directors of start-up businesses or other growing companies. These are often people that have “been there” before and know the challenges associated with getting a business off the ground, raising capital and just getting things on track. But just like with any transaction, it is important to do your due diligence before agreeing to sit on the Board. One of the things that is often overlooked in this situation is whether the corporation has a Directors and Officers Liability insurance policy. As its name suggests D&O insurance indemnifies directors and officers for actions they have taken while serving in this role. With many start-ups or small business being short on cash, potential plaintiffs often name directors in their personal capacity. If there is limited cash in the Corporation’s bank account, directors could be on the hook to pay defence costs out of their own pockets. That’s where the D&O policy comes in, as it will generally cover these costs.
I recently acted on behalf of a lawyer who was named in his personal capacity as a director of a small business. This lawyer did everything right before agreeing to serve as a director – he specifically asked whether there was a D&O policy in place, and was told that one was in the process of being purchased. However, unbeknownst to him, the Corporation later decided not to purchase a policy because it was too expensive. Soon after the lawyer was elected to the Board of Directors, a disgruntled shareholder sued the Corporation and its directors personally. When this lawyer asked that the insurer be put on notice, he learned that the Corporation had not actually purchased the policy.
It is difficult to pierce the corporate veil (a topic for another post!) and get at officers and directors personally, so we were able to obtain a quick dismissal of the action against the lawyer at minimal cost to him. However, had a D&O policy been in place from the outset, there would have been no cost to him at all, and he would have avoided what is certainly an awful feeling when a process server shows up at your door to hand you a Statement of Claim.
The lesson in this is, unless you are comfortable with the risk of not being insured, always ask to see a copy of a D&O policy before agreeing to serve as a director. If it isn’t provided to you before the election takes place, consider refusing the appointment.
Richard Sinclair
What are the most common employment law mistakes made by employers? That was the question put to arbitrator, mediator and independent workplace investigator Nick Milanovic and myself during a recent joint presentation. Over the next few weeks will be sharing our view of the ten most common employment law mistakes made by HR managers and business owners. We begin with a look at the negative consequences of using aggressive tactics or outrageous positions in an effort to move the other party to settlement via fear.
Using aggressive tactics or outrageous positions in an effort to move the other party to settlement via fear can have negative consequences for employers.
Aggressive litigation tactics by employers are usually met with uncompromising legal positions by plaintiffs and all you have succeeded in doing is increasing the cost of litigation and reducing the possibility of resolving the matter without a hearing.
There is an emotional component to resolving every employment dispute for each party to a lawsuit. Anger and loss are usually the prime emotions for employees who have had their employment terminated. If you use a strategy designed to back an individual into a cost-conscious settlement or withdraw their case they will react in kind. A person backed into a corner has no choice but to come out fighting and this diminishes the potential for settlement. You have just stoked the fires of litigation.
At the same time, HR managers and business owners should be aware of their own emotional state during settlement discussions. An element of remorse or guilt or a need to justify ones decision often influences individuals who are tasked with discharging an employee whether cause is present or not. These feelings can unknowingly influence the manner of dismissal and settlement discussions. For example, you may feel that a discharged employee was treated fairly during his or her tenure and offered reasonable package, despite the fact the employee’s performance was unsatisfactory. Taken by surprise by the allegations made by the employee or the position taken in a demand letter, may cause you to react angrily and instruct counsel to withdraw an offer and, in exceptional cases, file a counter claim. In most cases, this would be a mistake because it would incite and prolong litigation: The former employee will become more emotional; the employee’s lawyer may assume the financial risks of going to trial in order to develop his or her reputation; and hardball tactics will expose your company to additional claims for costs.
J.P. Zubec
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