GYM MEMBERSHIPS

In Ontario, most gym memberships or contracts are regulated by the Consumer Protection Act, 2002 (Act).  The Act applies to any gym or other physical activity membership if you have to pay $50 or more in advance.  These contracts as classified as “personal development services” agreements under the Act.  The rules in the Act apply to most gyms, sports clubs, dance classes, martial arts clubs and yoga studios.  They do not apply if the gym or fitness centre is a not for profit (such as a YMCA), is owned by its members or is run by a city or the Province of Ontario.

Recently, there have been some reports in the media that some gyms and other physical activity clubs have been reclassifying their contracts as “student tuition agreements” to avoid their obligations under the Act.

How a contract is classified can make a significant difference in your rights as a consumer.  Of course, although a gym may try to classify a contract as a student tuition agreement, there is no guarantee that a court would agree with that classification.  However, challenging this would require you to take legal action, which could take time and cost you money.

As mentioned, gyms and other physical activity clubs may try to classify their contacts as student tuition agreements, because there are strict rules for personal development contracts.  Under the Act, you have the following rights when you sign a personal development contract:

  • The contract must be in writing;
  • The gym must give you a copy of the contract, if you do not receive a copy, you can cancel the contract at any time within 1 year of signing;
  • After receiving the contract, you have a 10 day cooling off period, where you can cancel the contract, without any reason, and do not have to pay any penalty;
  • The contract cannot be for longer than 1 year;
  • Instead of being for 1 year, the contract can be on a month to month basis, but then you can cancel on 1 months’ notice;
  • If there is an initiation fee, it cannot be more than double the cost of the annual membership;
  • Gyms must offer an instalment plan that allows you to make equal monthly payments;
  • The total amount paid under the monthly instalments must not be more than 25% of the fee if the full amount was paid at the time of signing; and
  • There’s a minimum warranty on the quality of the gym services, which means that it must provide you with a reasonable use of its premises and equipment, the premises should be clean and there should be sufficient space and equipment.

If the contract is classified as a student tuition agreement, then none of these rights would apply. Sometimes gyms are trying to classify their contacts as student tuition agreements so that they can:

  • Automatically renew the contract for more than 1 year;
  • Not provide you with a copy of the contract; and
  • Bill you for 2 months within the first few weeks.

Some consumers have complained that they are invited to attend free trial classes at a gym or club and then are pressured into signing a student tuition agreement.  You should not sign any contract for a gym or a physical activity club until you have reviewed and made sure that it is a personal development contract that protects you rights under the Act.

ONTARIO SCALE UP VOUCHERS PROGRAM

The Ontario Government has adopted the Scale Up Vouchers Program.  This is a four-year, $32.4-million initiative funded by the Government of Ontario, and delivered through MaRS, Communitech and Invest Ottawa.  The program aims to accelerate the development of Ontario technology and innovation-based firms.

The program is available to Ontario based firms.  To be eligible, a firm must:

  • be privately held;
  • 50% or more of its full-time employees must be based in Ontario, 50% or more of its senior executives must have their principal residence in Ontario and at least 50% of its wages, salaries and fees must be paid to employees and contractors who spend a majority of their time working in Ontario;
  • be in technology and innovation intensive industries, such as:
    • information and communications technology;
    • advanced materials and manufacturing;
    • clean technology; or
    • life sciences;
  • earning $1 million to $50 million in annual revenue;
  • already experiencing a 20% annual growth rate in revenue, sales or employment; and
  • have secured private investment of at least $2 million in the previous two years.

To participate in the program, a firm must complete an application.  The applications are reviewed and the vouchers are awarded by a selection committee made up of senior technology and innovation leaders.  The committee scores applications based on criteria that are set out in the program’s web site at http://www.ontarioscaleupprogram.ca.

Firms with revenues between $1 million and $5 million can receive a voucher for up to $150,000, with an expectation for the firm to match 33% of the voucher value, or up to $49,500.

Firms with revenues over $5 million can receive a voucher for up to $250,000, with an expectation for the firm to match 50% of the voucher value, or up to $125,000.

A firm that is awarded a voucher will sign a contract outlining the specific terms of its voucher.  All vouchers expire after 24 months and a firm can only receive one voucher.  The vouchers can be used for a range of both direct and indirect expenses to help the firms execute on their growth strategy in the areas of:

  • hiring employees and contractors
  • accessing financing
  • developing products and intellectual property
  • international expansion.

Firms that participate in the program will also have access to growth coaches, who will acts as mentors, help them develop growth plans, introduce them to their networks and help them with the voucher application process.

Not-for-Profit Corporations: It May be Time for You to Transition!

If you are a federal not-for-profit corporation that was incorporated under the Canada Corporations Act, Part II (the “CCA Part II”) and you have not yet transitioned to the new federal not-for-profit legislation – the Canada Not-for-profit Corporations Act, S.C. 2009, c. 23 (the “NFP Act”) – it is now time to do so.

Corporations Canada has set a final deadline of July 31, 2017 for all existing federal not-for-profit corporations to transition to the NFP Act. It is important to remember that the NFP Act does not automatically apply to existing corporations. Therefore, if you are a not-for-profit corporation that incorporated prior to October 17, 2011 and you do not possess a Certificate of Continuance it means that you have yet to “continue” to the new legislation and must do so.

If a not-for-profit corporation does not transition by the deadline, the unfortunate result is that the corporation will be dissolved and will no longer exist as a legal entity. If the corporation is also a registered charity, this may lead to its registered status being revoked.

So what does your not-for-profit corporation have to do to transition? The letters patent of the corporation will have to be replaced by articles of continuance, an initial registered office and first board of directors form filled out and a name search report submitted. Once all documentation is submitted and approved by Corporations Canada, a Certificate of Continuance will be issued to the corporation. Further, the by-law requirements are different under the NFP Act, so it will be necessary for each corporation to review its by-laws and amend them accordingly. New by-laws compliant with the NFP Act and approved by members of the corporation can either be submitted with the continuance documents or filed with Corporations Canada within 12 months of member approval.

If your not-for-profit corporation has not yet transitioned, keep in mind that the corporation must receive its Certificate of Continuance on or before July 31, 2017. For this reason, it is important to start this process early and not wait until the last minute.

The foregoing is meant to be a summary of the requirements to continue under the NFP Act. If you have any questions, please contact us and we will be happy to assist.

Private Right Of Action Under Anti-Spam Law

Most of Canada’s anti-spam law (CASL) came into effect on July 1, 2014. However, not all of the provisions of CASL came into force at that time. On July 1, 2017, the provisions of CASL that provide for a private right of action for a breach of CASL are scheduled to come into force. This will represent a big change and a big risk for businesses.

Right now, CASL is enforced by the Canadian Radio-television and Telecommunications Commission, the Privacy Commissioner of Canada and the Competition Bureau. These regulators can, and have, enforced breaches of CASL.

Starting on July 1, 2017, individuals, or more likely class action lawyers, will be able to sue any company or other business that breaches certain provisions of CASL, such as:

  • Sending a commercial electronic message (such as an email) without consent of the recipient or that does not otherwise comply with CASL
  • Altering transmission data (hacking) so that the message is delivered to a different destination other than the one specified by the sender
  • Installing computer programs, such as cookies, malware or viruses, on someone’s computer without their consent
  • Aiding, inducing, procuring or causing any of the things listed above
  • Breaching the provisions of the Personal Information Protection and Electronic Documents Act (PIPEDA) against using computer programs to collect email addresses
  • Breaching PIPEDA by collecting personal information by illegally accessing someone’s computer system
  • Breaching the Competition Act by using email to send false or misleading information

Under CASL’s private right of action, not only would a corporation or business be liable for the breaches listed above, but its directors and officers would also be personally liable if they directed, authorized, assented to or acquiesced in the breach. Directors, officers and their corporation would be jointly and severally liable, which means that each would be liable for the entire amount of the damages. Businesses would also be liable for any actions of their employees if the breach was within the scope of their duties.

The private right of action will give complainants the right to receive compensatory damages for any losses that they have suffered. In addition, it also gives them the right to receive what are called statutory damages for the breaches described above. For instance, the statutory damages for sending non-compliant emails are $200 for each breach, up to a maximum of $1 million per day. The statutory damages for hacking transmission data, installing unauthorized computer programs, collecting email addresses and collecting personal information are a maximum of $1 million per day. A person who sues under these provisions can claim these amounts without having to show that he or she suffered any actual losses as a result of the breach. This is likely to provide a strong incentive for class action lawsuits for any of these types of breaches.

One important thing to note is that if a business enters into a voluntary settlement or undertaking with the applicable regulator, then it will not be subject to the statutory damages. This will provide a strong incentive for any business that learns of a breach to enter into a voluntary settlement with the regulator.

To protect themselves, business owners should review their email and other computer practices to make sure that they are in compliance with CASL and avoid any risk of either being sued in a class action or being prosecuted by the regulators.

Is Your Promissory Note A Security?

Many small businesses regularly use promissory notes, such as when they are borrowing money or when they are paying suppliers. Most small business owners never think about whether their promissory notes are securities. However, the issue is far from clear-cut and can have significant consequences.promissory note document

Under the Ontario Securities Act (Act), a “security” is defined very broadly and includes any note or other evidence of indebtedness. This would seem broad enough to cover almost any promissory note. The consequences of a small business issuing a promissory note that is a security can be very serious. It would make Act applicable to the note. This means that the business would either have to comply with the Act, by issuing a prospectus, and if applicable, registering as a dealer, or more likely, the business would need to be able to rely on one of the exemptions from the prospectus requirements in the Act.

Ontario Securities Commission v. Tiffin et al.

This issue was recently considered by the Ontario courts in Ontario Securities Commission v. Tiffin et al. Mr. Tiffin was a financial advisor licensed to sell insurance. Previously he had been licensed to sell other investments and he had gotten into trouble with the OSC. In particular, the OSC had issued some orders against him preventing him from trading in securities and requiring him to pay over $500,000. This caused problems for his insurance business, Tiffin Financial Corporation (TFC). TFC borrowed about $700,000 from its clients and issued 14 promissory notes. The OSC learned of this and charged Mr. Tiffin with various breaches of the Act. The only issue at trial was whether the notes were securities.

After reviewing all of the evidence the court decided that the notes were not securities. The court stated that the literal interpretation of the word “note” in the definition of a “security” conflicted with the purposes of the Act, which are to protect investors from unfair, improper and fraudulent practices and foster fair and efficient capital markets.

The OSC had argued that all notes were securities unless there was a specific exemption under the Act or the regulations. The court disagreed and held that you need to look at the substance of the transaction and not just the definition in the Act and the specific exemptions available under the regulations.

In this case the court held that the notes were not securities for all of the following reasons.

  • The notes were exempt because they were a type of note that the courts in the US and Canada have previously decided is not a security. They were notes to a small business that were secured by a lien on some of the assets of the business. The fact that the notes were secured was important because it provides protection to the lenders. In this case they were secured by a lien over a toy soldier collection owned by TFC. The court held that the protection of the Act was not necessary because the lenders could enforce the notes under contract law and they could also register their lien and enforce their security. If there is no collateral for a loan, then it is much more likely that a note will be deemed to be a security.
  • Previous cases have held that were notes are issued to deal with a small business’ cash flow difficulties, they are less likely to be deemed securities.
  • While TFC was seeking the loans for general business purposes and the lenders were expecting a profit in the form of interest, there was no sense that the notes were an investment in the traditional sense or that they represented any interest in the business of TFC.
  • The notes were issued to TFC’s existing customers most of whom were friends of Mr. Tiffin. There was no general public solicitation of lenders or investors.
  • The lenders all viewed the transaction as a loan and not an investment.
  • Although the loans were made to TFC, the parties described them as personal loans. Some of the money was used by Mr. Tiffin to pay for his personal expenses. In addition, Mr. Tiffin was the sole shareholder and director of TFC. He appeared to run his personal finances through TFC and did not have his own bank account.

Summary

This decision provides some comfort to small business owners that if they issue secured promissory notes to specific lenders or suppliers, the money is used for business purposes, such as to help with cash flow, and the notes don’t provide the lenders with any other interest in the business, then they will usually not be securities. This is a practical decision that recognizes how small businesses operate.

Ontario Adopts New Forfeited Corporate Property Act

The Ontario government has adopted a new Forfeited Corporate Property Act, 2015 (“FCPA”) and made related changes to the Ontario Business Corporations Act. The FCPA is scheduled to come into force on December 10, 2016.

New 3 Year Deadline for Forfeited Corporate Property

As the title of the statute implies, the FCPA specifies what happens to any remaining corporate property once a corporation is dissolved. So, if a corporation is dissolved and some or all of its property was not transferred, sold or distributed, then starting 3 years after the dissolution, the Government of Ontario can use the forfeited property for Crown purposes, sell it and remove or amend any encumbrances or security interests registered against the forfeited corporate property. The FCPA applies to both real property and personal property that was owned by a dissolved corporation. In particular, that FCPA also applies to any personal property left in, on or under forfeited real property, regardless of whether this personal property was owned by the corporation or someone else.

The 3-year deadline for the government to take or sell forfeited corporate property represents a major change. Under the current rules in the Ontario Business Corporations Act (“OBCA”) and the Corporations Act (“OCA”), the owners of a dissolved corporation have up to 20 years to apply to revive the corporation and recover its assets. After the FCPA comes into force, the corporate owners will still have 20 years to apply to revive the corporation. However, as a general rule which is subject to some exceptions, they will not be able to recover its assets if the revival occurs more than 3 years after the dissolution.

Corporations Will Be Required to Keep Register of Real Property

As part of these changes, the government has also approved amendments to the OBCA and the OCA. These two corporate statutes have been amended to require a corporation to keep an updated register of the corporation’s ownership interests in real property. This register must be kept with the corporation’s books at its registered office or at another location approved by the corporation’s directors. The register must show each ownership interest that the corporation has in land, the date it was acquired and the date it was sold (if applicable). The corporation must also keep with its real property register the deeds, transfers and other documents that contain the municipal address of the property, the registry or land titles division, the property identifier number (PIN), the legal description and the assessment roll number. Presumably, the purpose of keeping all of these records with the corporation’s books is to simplify the government’s task in using or selling any forfeited corporate property. For corporations that own real estate, this will become an additional burden. They will either need to maintain these records if they keep their own minute books, or provide all of the necessary information and documents to the law firm or other service provider who keeps their minute books.

The requirement to keep a register of real property owned by the corporation and the related documents will not come into effect until December 10, 2018. So corporations will have a 2-year period to get ready to implement this change.

Equity Crowdfunding – How Is It Working

Equity crowdfunding has been in place in most provinces in Canada since the end of January 2016. We thought it would be interesting to see how it is working in practice. As of June 20, 2016, the National Crowdfunding Association of Canada’s Canadian Crowdfunding Directory listed 16 equity portals operating in Canada. Not all of these portals appear to be fully up and running.

We went to several of the portals to see how the crowdfunding offerings were being structured. Our review was not systematic nor is it necessarily representative of the typical equity crowdfunding offering. Instead, we concentrated on offerings for which documents were available and could be reviewed.

We examined 4 offerings that are ongoing. We did not examine real estate offerings, because they generally appear to use their own limited partnership structure.

Of the corporate offerings that we reviewed, 2 were offering standard common shares with voting rights, one was for non-voting common shares and the other was for non-voting preferred shares.

Voting Rights

While this is a small sample, it is surprising to see some companies offering voting common shares. At a minimum, this means that these companies will need to send a notice of any shareholders’ meetings to all of the crowdfunding investors. Depending on the jurisdiction in which the company is incorporated, it may also need to send a management proxy circular to all of the shareholders. As an example, the Canada Business Corporations Act only exempts a company from the management proxy circular requirement if it has 50 or less shareholders entitled to vote at the meeting. In contrast, the Ontario Business Corporations Act only requires a management information circular for an offering corporation, generally a company whose shares are listed on a stock exchange or which has filed a prospectus. So, the jurisdiction of incorporation is an important consideration.

Shareholders’ Agreement

The two offerings of non-voting shares did not require the crowdfunding investors to sign a shareholders’ agreement. While this may seem normal for non-voting shares, it may cause difficulties later on. Although the shares are non-voting in general, under the corporate statute they will be entitled to vote on certain fundamental changes, such as certain amendments to the company’s articles or on an amalgamation. In some cases, they may be entitled to vote separately as a class. It was generally anticipated that the crowdfunding investors would be required to sign a shareholders’ agreement or voting trust agreement, giving management the power to vote their shares.

One of the common share offerings did require the crowdfunding investors to sign a minority shareholder agreement. This agreement contains share transfer restrictions, a pre-emptive right in favour of the crowdfunding investors, a drag-along clause, a clause appointing the founder as the investors’ attorney for the purpose of the drag-along clause and a clause requiring the crowdfunding investors to vote in favour of a sale of all or substantially all of the assets of the company if the offer is accepted by the founder and would result in gross proceeds per share at least equal to the subscription price paid by the crowdfunding investors.

Application of Take-Over Bid Rules

The inclusion of the drag along clause is interesting. This would apply in the case of a share purchase transaction. Based on the maximum offering and the minimum subscription for each investor, it appears that the company would have more the 50 shareholders. If this is the case, it would be difficult to see how a share purchase transaction could be structured without having to comply with the take-over bid requirements of Canadian securities laws. Generally, Canadian securities laws contain an exemption from the take-over bid requirements if the company is not a reporting issuer, there is no published market for the shares and it does not have more than 50 shareholders, not counting employees and former employees. If this exemption is not available, the purchaser would need to prepare a formal take-over bid circular, which would be too expensive and time consuming.

As mentioned above, the minority shareholder agreement contains a provision requiring the crowdfunding investors to vote in favour of certain asset sales. While this may help management or the founders to sell the company’s assets, it is probably not the ideal structure for the sale of the business. Usually, it is more advantageous from a tax and other legal perspectives for the shareholders of the company to sell their shares. An asset sale would also require the company to then distribute the net proceeds to the shareholders, which may have its own tax issues.

A more likely structure would probably be to sell the company by way of an amalgamation with the purchaser. This has many of the same advantages as a share purchase, but does not trigger the take-over bid rules. It is surprising that the minority shareholder agreement does not contain a clause requiring the crowdfunding investors to vote in favour of an amalgamation that is approved by the founder and which meets a certain minimum price.

We can expect that the deal structure and documents used in crowdfunding will evolve over time as stakeholders gain experience and see what has worked in previous deals and which issues have been problematic.