AMENDMENTS TO THE ONTARIO CORPORATIONS ACT

The Ontario government has introduced legislation to amend the Ontario Corporations Act (“OCA”).  The OCA is the statute that currently governs provincially incorporated not for profit corporations.

Back in 2010, Ontario adopted a new law for not for profits called the Not For-Profit Corporations Act, 2010 (“ONCA”).  The ONCA modernizes and updates the law for not-for profits.  However, it has still not come into force and will not do so for several years.  Before the ONCA can come into force the Ontario government needs to upgrade its technology so that it can work with the ONCA.  In the meantime, Ontario not for-profits are still governed by the OCA.

The proposed amendments modernize the OCA to bring it up to date with other corporate laws in Canada and to enable Ontario not-for profits to benefit from some of the provisions that are in the ONCA, but are not yet applicable.  Eventually, the ONCA will come into force and all Ontario not for-profits will be governed by it and will need to comply with the ONCA.

Electronic Communications

The proposed changes amend the OCA to specifically allow electronic notice of meetings of members and for the actual meeting of members to be conducted electronically.  Although some Ontario not for-profits have been holding electronic meetings, this is currently not specifically authorized by the OCA.  An electronic meeting can be held by telephone, computer or other electronic means.  If an Ontario not for-profit does not want to allow electronic notices or electronic meetings it will need to amend its by-laws to prohibit electronic notices and meetings.

Other proposed amendments to the OCA will allow the receipt, filing, keeping and searching of documents in electronic format.

Directors will not have to be Members

The proposed amendments will allow a not-for-profit to changes its by-laws so that directors do not have to be members of the not for-profit.  An Ontario not for-profit will only need to change its by-laws if it wants to add this flexibility to its director requirements.

Powers of a Natural Person

Currently, Ontario not-for profits only have the powers and capacity specifically listed in their letters patent and the OCA.  This can limit some of their funding and financing activities.  The proposed amendments will give Ontario not-for profits the rights, powers and privileges of a natural person.  An Ontario not-for profit will no longer need to pass a by-law to confer a specific power on its board, such as the power to borrow money.

Pre-Incorporation Contracts

Ontario not-for profits will be allowed to adopt contracts entered into prior to their incorporation.  This will bring the OCA into line with other corporate statutes in Canada.

Standard of Care for Directors and Officers

The OCA does not contain a standard of care for the duties owed by a not for-profit’s directors and officers.  This means that the default common law subjective standard applies.  Under the common law, a director is expected to exercise the degree of skill and care that may reasonably be expected of a person with similar knowledge and experience.  This imposes a higher duty of care on directors with particular skills or experience, such as lawyers, accountants, engineers or investment advisors, which discourages such individuals from volunteering.  The proposed amendments will impose and objective standard care to act honestly and in good faith with a view to the best interests of the corporation and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

Removal of Directors

The OCA currently allows a not for-profit to have a provision in its by-laws or letters patent that gives members the right to remove directors by a resolution approved by at least 2/3 of the votes cast a members’ meeting.  If the letter patent or by-laws don’t include this right, then members cannot remove a director.  The proposed amendments will allow directors to be removed by a majority vote at a members’ meeting.  This proposed change will not apply to ex-officio directors, who are not elected, but are directors automatically by virtue of holding another position.

Audit Exemption

Ontario not for-profits are currently required to have their annual financial statements audited, unless they have annual income of less than $100,000 and all of the members consent in writing to an exemption from the audit requirements.  The consent requirement will be changed to 80% of the votes cast at a members’ meeting.

Sale of All or Substantially All Assets

The proposed amendments will allow an Ontario not for-profit to sell all or substantially all of its assets if it has been authorized by a resolution of the board of directors and a resolution approved by 2/3 of the votes at a members’ meeting.

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Cryptocurrencies

Cryptocurrencies have been in the news recently.  By one estimate, over US$1.2 billion has been raised worldwide in initial coin offerings (“ICOs”) and initial token offerings (“ITOs”).  This increase in activity has also captured the attention of Canadian securities regulators.

ICOs/ITOs are generally used by start-up businesses to raise capital from investors through the internet.  In an ICO/ITO investors can visit a website to purchase crypto coins/tokens in exchange for fiat currency or another cryptocurrency such as bitcoin or ether.  An ICO/ITO can be very similar to a traditional initial public offering (“IPO”) of shares by a business, because the value of the coins/tokens may increase or decrease depending on how successfully the business executes its business plan.

The Canadian Securities Administrators (the “CSA”) are concerned about ICOs and ITOs because they raise investor protection concerns, due to issues around volatility, transparency, valuation, custody and liquidity, as well as the use of unregulated cryptocurrency exchanges.

Is a Crypto Coin or Token a Security?

To date, most organizations have either taken the position that securities laws do not apply to their ICO/ITO or have ignored the issue.  CSA Staff have confirmed that crypto coins and tokens may be securities, and may be subject to the same securities laws that apply to an IPO of shares.

If a crypto coin or token is deemed to be a security, then:

  • an ICO or ITO would be subject to Canadian prospectus requirements, unless a prospectus exemption is available for the ICO or ITO;
  • businesses and individuals in the business of trading in or advising on crypto coins or tokens would need to be properly registered or rely on an exemption from registration; and
  • A platform that facilitates trades in crypto coins or tokens may be a marketplace and would need to comply with marketplace requirements or obtain an exemption from those requirements.

The CSA acknowledge that each ICO/ITO is unique and will be assessed on its own characteristics.  For instance if an individual purchases coins/tokens that allow him to play video games on a platform, then those coins/tokens would likely not be securities.  On the other hand, if an individual purchases coins/tokens whose value is tied to the future profits or success of a business, they will likely be considered securities.

To determine whether the coins/tokens being sold in an ICO/ITO are securities, the CSA will consider whether the ICO/ITO involves:

  • an investment of money;
  • a common enterprise;
  • the expectation of profit; and
  • if the profit would come significantly from the efforts of others (i.e., not the efforts of the investors).

Compliance with Prospectus Requirements and Ongoing Disclosure Requirements

If a business and its advisors conclude that its coins/tokens are securities, then they must either comply with the prospectus requirements of Canadian securities laws or rely on an exemption from the prospectus requirements, such as the accredited investor exemption or the offering memorandum exemption.

The CSA noted that some fintech businesses publish whitepapers for their ICOs/ITOs, which describe things like their fundraising goals, their business, the project for which they are raising funds, how many coins/tokens management will keep and how long the ICO/ITO will remain open.  These whitepapers do not contain all of the information required by a prospectus or offering memorandum and do not comply with securities laws.

Even if a prospectus exemption is available for an ICO/ITO, the business would still be subject to the requirements of securities laws, such as providing audited annual financial statements and other ongoing disclosure to investors.  Some prospectus exemptions, such as the offering memorandum exemption contain restrictions on the amount that each investor can invest.  In addition, ICO/ITO coins/tokens would be subject to resale restrictions, so that investors would not be allowed to resell them unless they could rely on a prospectus exemption.

Failure to comply with securities law requirements could result in the persons involved in an ICO/ITO being liable to the investors for damages or to refund their investment.

Trading in Securities and Registration as a Dealer

In addition to complying with the prospectus requirements, businesses doing an ICO/ITO may also be trading in securities for a business purpose.  If that is the case, then they will need to either be registered as a dealer or be able to rely on an exemption from registration.

If the sale of coins/tokens by a business is considered trading in securities, then the business will need to comply with certain fundamental obligations to its investors, such as know-your client and investment suitability.  This would require these businesses to verify each investor’s identity and collect sufficient information to ensure that the purchase of coins/tokens are suitable for the investor, taking into account his or her investment needs, objectives, financial circumstances and risk tolerance.  The CSA acknowledge that it is possible that a business could fulfil these obligations through a robust, automated, online process that incorporates investor protections. These investor protections could include limits on investment amounts and concentration, as well as risk warnings.

Cryptocurrency Exchange

Cryptocurrency exchanges are online exchanges that allow investors to buy and sell cryptocurrencies, such as s bitcoin and ether, and they may also offer coins/tokens that have been sold pursuant to ICOs/ITOs.  A cryptocurrency exchange that offers coins/tokens that are securities will be deemed to be a marketplace under Canadian securities laws.  Marketplaces are required to comply with the rules governing exchanges, such as those applicable to the TSX, or alternative trading systems.  If an exchange is doing business in Canada, it must apply to its local securities commission for recognition or an exemption from recognition. To date, no cryptocurrency exchange has been recognized in any jurisdiction of Canada or exempted from recognition.

CSA Regulatory Sandbox

The CSA have set up an initiative that it calls the Regulatory Sandbox, to support fintech businesses seeking to offer innovative products, services and applications in Canada. It allows firms to register and/or obtain exemptive relief from securities law requirements, under a faster and more flexible process than through a standard application, in order to test their products, services and applications throughout the Canadian market on a time-limited basis.

The CSA want to encourage financial market innovation and facilitate capital raising by fintech businesses, while at the same time ensuring fair and efficient capital markets and investor protection.  To avoid costly regulatory surprises, businesses considering doing an ICO/ITO should first consult legal counsel and then approach their local securities commission to discuss how they can comply with securities laws.

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.

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.