Category: Business Law

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Business Law Employment Law

Ontario’s Bill 149 Receives Royal Assent

photo of bartender preparing drinks representing Ontario's Working for Workers Four Act, 2024 coming into force

Maintaining strong and clear employment laws in Ontario is crucial for ensuring fair treatment of workers and fostering a healthy, productive workforce. In recognition of this mandate, the Ontario legislature recently passed Bill 149, Working for Workers Four Act, 2024, (the “Working for Workers Four Act”) a statute that amends various workplace laws. This blog post will provide an overview of the new requirements and regulations introduced in the Act so employers can better understand their obligations.

The Background to Bill 149

In November 2023, the Ontario government introduced this legislation as part of its “Working for Workers” package. Previous legislation in this package included the Working for Worker’s Acts of 2021, 2022, and 2023. This legislation is the latest of the Ontario government’s ongoing efforts to modernize employment and labour legislation and enhance worker rights. The Working for Workers Four Act, received royal assent on March 21, 2024.

Amendments to Current Employment and Labour Legislation

Broadly, the Working for Workers Four Act, 2024 amends the following statutes:

The Working for Workers Four Act, 2024, primarily addresses changes to regulatory requirements in the hospitality industry.

New Requirements Related to the Employment Standards Act

The Working for Workers Four Act introduced new rules for employers, particularly for their hiring practices. Employers must now provide a compensation range when advertising an opening for a position and disclose whether artificial intelligence is being used in the hiring process. Employers must also maintain copies of their advertised positions for at least three years after a post is removed. Further, a job posting cannot exclusively require Canadian experience for a position, as this may amount to discrimination under the Human Rights Code.

Although these regulations are not yet in force, they are likely to have a significant impact on hiring practices in Ontario.

Specific Regulations for the Service and Hospitality Industry

The Working for Workers Four Act has implemented extensive regulations for employers in the service industry. These changes include:

  • Prohibitions on Wage Deductions – an employer can no longer deduct wages from an employee if they are staffed when a customer leaves without paying for services or goods, such as in a ‘dine and dash’ scenario.
  • Tips – as of June 21, 2024, an employer will be required to post their tip policies in the workplace and tips are to be paid by cash, paycheque, or direct deposit.
  • Trial Periods – it is now prohibited for employers to require prospective employees to undergo an unpaid ‘trial shift’ and the legislation explicitly amends the definition of “employee” to include such individuals, meaning the standards under the Employment Standards Act apply with regard to payment of minimum wages, overtime, etc.
  • Vacation Pay – an employee is entitled to seek and enter alternate vacation pay arrangements with their employer, which must be set out in an “agreement.”

It is crucial that employers in the service and hospitality industry (including restaurant owners) become familiar with these new requirements and comply with the required changes.

Changes to Injured Workers Legislation

Lastly, the Working for Workers Four Act includes changes that would allow for greater monetary compensation for injured workers. This includes reducing the employment duration for firefighters to qualify for compensation when diagnosed with esophageal cancer and “super indexing” for Workplace Safety and Insurance Board benefits so that injured employees could receive increased compensation above the annual inflation rate. However, these changes have yet to come into force.

Contact Bader Law for Advice on Changes to Employment Standards and Legislation

The experienced employment lawyers at Bader Law regularly assist business owners and entrepreneurs to ensure compliance with their legal and financial obligations. We help employers understand and fulfill their obligations towards employees and workers while helping them manage and mitigate possible risks and liabilities. If you have questions about an employment law matter, contact us online or call us at (289) 652-9092 to schedule a confidential consultation with a member of our team.

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Business Law

Provincial or Federal Incorporation?

Incorporating a business federally or provincially in Canada involves distinct processes with varying implications. Federal incorporation provides nationwide recognition and protection of your business name but requires compliance with federal regulations, which can be more costly. Provincial incorporation limits your business operations to the specific province, ensuring compliance with provincial laws.

This blog will outline a business owner’s primary considerations when deciding whether to incorporate federally or provincially.

The Advantages of Incorporating a Business

Incorporating a business is the process of legally establishing a company as a separate entity from its owners. This means the business becomes a distinct legal entity with its own rights, obligations, and liabilities. In comparison, there is no distinction between the individual and the business when operating a sole proprietorship.

Incorporation offers several advantages, such as limited liability, which protects the owners’ personal assets from business debts and lawsuits. It also provides a perpetual existence, meaning the business can continue to operate even if the owners change. Additionally, a corporation can issue shares, allowing for easier capital raising and potential tax benefits.

Incorporating a business can also provide a level of protection and flexibility that is not available to unincorporated businesses. However, the jurisdiction in which a business owner chooses to incorporate can have differences, especially in Ontario or federally. These differences are explored in more detail below.

The Canada Business Corporations Act

The Canada Business Corporations Act is federal legislation that governs the incorporation, regulation, and dissolution of corporations in Canada. It sets out the rules for how corporations are created, how they operate, and how they can be dissolved.

Incorporating under the Canada Business Corporations Act provides broad rights to business owners concerning the operation of their business in the country as a whole and it enables businesses to operate across all provinces and territories of Canada. Federal incorporation also provides business name protection in every jurisdiction, regardless of where the business is registered. This protection can be very valuable, depending on the nature of the business.

If incorporated federally, there are specific requirements that the corporation must meet, which are generally not required of provincial corporations. Specifically, this includes, but is not limited to:

  • 25% of the corporation’s directors must be resident Canadians to incorporate and operate under the Canada Business Corporations Act; and
  • Federal corporations must keep a register of “individuals with significant control” and provide this information to Corporations Canada so that it can be made available to the public. We have previously written about these new transparency requirements.

Although generally more demanding in terms of regulatory requirements, federal incorporation can be cheaper, depending on the jurisdiction. For example, incorporating under the Canada Business Corporations Act typically costs approximately $200, whereas in Ontario, the initial incorporation fee is $300.

The Ontario Business Corporations Act

The Ontario Business Corporations Act governs the formation, governance, and dissolution of corporations in Ontario. Similar to the Canada Business Corporations Act, it sets out the rules and regulations for incorporating a business, including the requirements for shareholders, directors, and officers.

Although largely reflective of the requirements of the Canada Business Corporations Act, the Ontario Business Corporations Act has some differences. Most notably, the Ontario Business Corporations Act does not provide the ability to perform business in any jurisdiction other than Ontario. To do so, a provincially incorporated business must register under the respective extra-provincial registration legislation, which can be costly. This means provincial incorporation should generally take precedence when performing business solely or primarily in Ontario.

The Ontario Business Corporations Act also only protects a company’s business name in Ontario. The business name must be registered under the respective extra-provincial registration legislation to attain name protection in other provinces.

However, despite its protective shortcomings compared to the Canada Business Corporations Act, the Ontario Business Corporations Act does not require Canadian director residency or the sharing of the “individuals with significant control” register. Currently, the Ontario Business Corporations Act has less restrictive reporting obligations.

Ultimately, the legislation that a business should incorporate under depends on the specific needs and goals of the business and its owners.

Contact the Corporate Lawyers at Bader Law for Assistance With Incorporation

If you are contemplating incorporation, it is important to seek legal advice regarding your options. At Bader Law, our knowledgeable corporate lawyers provide comprehensive business services to address every element of a corporation’s life cycle. Our business law team has been advising businesses and business owners for over a decade and we have built a reputation for providing tailored and trusted legal guidance to develop strategic legal solutions to fit your needs. We also assist companies with various legal issues from employment contracts to real estate matters. Our lawyers help business owners and employers consider the complete picture to identify and mitigate potential risks while protecting the continued growth and success of the business. Contact us online or by phone at (289) 652-9092 to learn how we can assist you.

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Business Law Commercial Litigation

Court Refuses to Order Winding Up of a Corporation

Operating a business necessitates not only understanding incorporation and the various corporate transactions that follow, but also requires contemplation of winding up, or dissolving, a corporation. This blog will provide a brief overview of the process of winding up a corporation in Ontario. It will also review a recent decision from the Ontario Superior Court of Justice, where the Court considered whether or not to permit the winding up of a corporation.

The Ontario Business Corporations Act: Winding Up Procedure

The Ontario Business Corporations Act (“OCBA”) governs the liquidation procedure of winding up a corporation. Under certain circumstances, such as insolvency, the corporation may be liquidated per the federal Winding-up and Restructuring Act (“WURA”) provisions. This blog, however, will focus on the voluntary liquidation procedure contained in the Ontario Business Corporations Act.

The Ontario Business Corporations Act permits shareholders to voluntarily liquidate a corporation by special resolution, the procedures of which are laid out in sections 193-205. Generally, the process calls for the appointment of one or more liquidators, who can be directors, officers, or employees of the corporation. Following the resolution, the corporation ceases its regular business operations and any subsequent share transfers require the approval of the liquidator. The liquidator assumes control of the corporation’s assets, selling them to settle debts and liabilities. After the liquidator completes asset disposal and debt settlement, a final shareholder meeting is called. The liquidator files a form with the director, publishes a notice in the Ontario Gazette, and, three months later, the corporation is dissolved unless a court order defers or accelerates the dissolution.

However, there is also the process of winding up by the courts. The court may wind up a corporation where it cannot continue with its business and it is advisable to have it wound up, even if it is not bankrupt. There is also a catch-all provision that allows a court to order a corporation to be wound up when “it is just and equitable for some reason, other than the bankruptcy or insolvency of the corporation.”

Company Founded in Blockchain Technology Company

In Srivastava v. DLT Global Inc., the Court considered the grounds of what may be considered “just and equitable” to wind up a corporation where there had been a falling out between the founders. The case involved an application by Mr. Srivastava, a shareholder, co-founder, former director and CTO of DLT Global, a blockchain business, for an order to wind up the business.

After several years of operating a company under a different name in the same space, Mr. Srivastava met Mr. Owen, who had experience growing blockchain businesses. The two entered into business and eventually incorporated DLT Global. The company went on to generate significant business and proprietary technology that was subject to patent applications. However, despite its initial success, the company began to lose money and the relationship between Mr. Srivastava and Mr. Owen broke down.

In the ensuing dispute, Mr. Srivastava claimed ownership of the source code based on his previous corporation’s business activities, which he claims DLT Global adopted. Mr. Owen denies that DLT Global is using intellectual property owned by Mr. Srivastava.

Court Considers Whether Winding Up the Business is Appropriate

Firstly, Mr. Srivastava claimed that DLT Global cannot, by reason of its liabilities, continue its business and it is advisable to wind it up. He submitted that the company was unable to pay a variety of expenses, had expenses in excess of $1.4M per month, and was involved in ongoing litigation. As a result, he claimed that the company would not be able to sustain operations through the next year and had no reasonable prospect of changing course.

The Court considered whether winding up was appropriate in these circumstances, especially where less restrictive options are available. The Court was persuaded by DLT Global’s evidence that it had raised $17M in the previous months and could fund its deficiencies for the time being. As such, the Court found that it was not established that DLT Global could not continue with its business and the Court declined to make an order under the section.

Mr. Srivastava also claimed that it was “just and equitable” to wind up the corporation because the “animating purpose” of the business (to grow his pre-existing business) had been lost. He also submitted that DLT Global was essentially a partnership between himself and Mr. Owen, and due to their dispute, the continuation of the business was not equitable.

Court Dismisses Application to Have Corporation Wound Up

Despite the Court’s finding that there had been a breakdown in the relationship, the Court refused to order a winding down of DLT Global. The Court rejected the submission that Mr. Srivastava and Mr. Owen were to operate the company effectively as partners and that DLT Global had failed to meet its reasonable expectations, which resulted in unfairness such that an order for winding up was just and equitable.

This case sheds light on the facts that the Court might consider when ordering a winding up of a corporation. It is clear that even if a company has a significant burn rate, funding necessary to maintain operations for the time being will often be enough to prevent court intervention. Depending on the facts, it may not be just and equitable to wind down a corporation where there has been a breakdown in the relationship of founders and shareholders.

Get Help with Corporate Liquidations

Purchasing or selling a business is a complicated matter that can result in significant risk and liability if not handled correctly. Corporate transactions involve a variety of legal issues to consider, from employment contracts to real estate matters. If you are a business owner considering a purchase, sale, merger, acquisition, or other transaction, having the right legal team behind you can help you ensure the best outcome.

Contact the Mississauga Corporate Lawyers at Bader Law for Advice on Winding Up a Corporation

At Bader Law, our experienced corporate lawyers provide business services that address every element of a merger or acquisition. We have been advising businesses and business owners for over a decade and we help clients identify and flag potential trouble spots before they become bigger problems. Our goal is to eliminate as many unknown elements in the process, so that transactions can move as smoothly as possible. We strive to ensure our clients understand their legal obligations and communicate closely with them to respond proactively to their needs.

At Bader Law, we always provide advice that is in your best interests and the best interests of your venture. Our business law team considers the complete picture to identify and mitigate potential risks while protecting your business’ continued growth and success. Contact us online or at (289) 652-9092 to speak with a member of our team and learn how we can help you.

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Business Law

Changes to Canadian Corporate Transparency

Operating a company in Canada comes with many requirements, including adhering to the reporting requirements contained in the Canada Business Corporations Act (also referred to as the “CBCA”). The federal government recently amended this legislation to include new transparency requirements for corporations. This blog will provide a summary of these changes so that business owners can avoid any costly repercussions.

What is the Canada Business Corporations Act?

The Canada Business Corporations Act is the primary legislation governing the establishment and operation of federal corporations in Canada. Enacted in 1975, the Canada Business Corporations Act provides a comprehensive framework for the organization, governance, and dissolution of corporations at the federal level. Its primary objective is to ensure transparency, accountability, and fairness in corporate practices.

The Canada Business Corporations Act is not to be confused with similar provincial legislation, such as the Business Corporations Act of Ontario. The provincial legislation includes its own set of requirements for provincially incorporated corporations.

The Canada Business Corporations Act outlines the process for incorporating a company, specifying requirements for articles of incorporation, bylaws, and directorship. It also mandates corporations to maintain accurate records, hold annual meetings, and disclose pertinent information to shareholders. The Canada Business Corporations Act also addresses issues such as the rights and responsibilities of directors, shareholder remedies, and the process of amalgamation or dissolution. In March 2023, Parliament introduced Bill C-42, An Act to amend the Canada Business Corporations Act and to make consequential and related amendments to other Acts to increase transparency related to corporate ownership.

Individuals with Significant Control

Corporations are currently required to keep a register of individuals with significant control. These are individuals who own or control greater than 25% of the corporation, either individually, jointly, or in concert with others, such as individuals who own 25% of the voting or non-voting shares of the corporation. Individuals with significant control are also individuals who have “control in fact” of the corporation, which is defined as the ability to influence the corporation’s economics, operations, and day-to-day management despite not owning any shares.

The corporation has some autonomy as to how to keep this register, such as in a logbook, database, or spreadsheet, but the register must contain:

  • The full legal name of the individual;
  • A description (i.e., source) of the individual’s significant control;
  • The individual’s date of birth;
  • The country of residence of the individual;
  • The individual’s residential address;
  • The date where the individual gained significant control; or if applicable,
  • The date when the individual ceased to have significant control.

Bill C-42 provides new requirements regarding the register of individuals with significant control.

Bill C-42: New Transparency Requirements

The proposed amendment will require Canadian corporations to make certain information in the registers available to the public to increase corporate transparency and accountability for corporations governed under the Canada Business Corporations Act. Specifically, Bill C-42 would allow Corporations Canada to make the name, address, and share ownership of individuals with significant control publicly available. Bill C-42 would also require that an individual’s residential address be included in the register for the purposes of service and confirmation of citizenship.

Further changes proposed include:

  • Increasing non-compliance consequences, such as fines, criminal imprisonment, refusal of Corporations Canada to issue a certificate of existence or dissolution;
  • Corporations must proactively submit information regarding individuals with significant control to Corporations Canada on an annual basis or when a change of control occurs; and
  • Exempting certain corporations from these reporting requirements, such as reporting issuers, wholly-owned subsidiaries of an exempted corporation, and Crown corporations.

Even with the expanded requirements, Bill C-42 allows an exemption from sharing the above information as long as disclosure would present a “serious threat” to that individual’s safety, or as long as the information must be kept confidential under conflict-of-interest legislation.

These new reporting requirements have come into effect as of January 22, 2024. As such, business owners must carefully review the information in their individuals with significant control registers and update it where necessary. Failure to adhere to these changes could result in some of the consequences of non-compliance mentioned above.

Get Help with Corporate Transactions

Corporate transactions involve a variety of legal issues to consider, from employment contracts to real estate matters. If you are a business owner considering a purchase, sale, merger, acquisition, or other transaction, having the right legal team behind you can help you ensure the best outcome.

Contact the Corporate Lawyers at Bader Law for Legal Advice on Corporate Transparency

At Bader Law, our knowledgeable corporate lawyers provide comprehensive business services to address every element of a merger or acquisition. Our business law team has been advising businesses and business owners for over a decade. We have built a reputation for providing tailored and trusted legal guidance to develop strategic legal solutions to fit your needs. We consider the complete picture to identify and mitigate potential risks while protecting your business’ continued growth and success. Contact us online or by phone at (289) 652-9092 to learn how we can assist you.

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Business Law Shareholder Agreements & Disputes

Owning a Business and Share Capital

Owning a business can be a complicated venture, and understanding how shares work is essential to any business’s success. Shares are not merely financial instruments; they represent a stake in ownership, a vote in decision-making, and a potential source of capital. This blog will act as a guide to understanding the fundamental workings of shares in Ontario business law.

Shares as a Legal Mechanism

First and foremost, shares are the legal representation of an ownership interest in a corporation. Each share is a fractional part of the ownership interest in the corporation. A share certificate evidences the ownership of a share. Depending on the type of share and the rights associated with such shares, a share can confer rights on the shareholder, which can include:

  • a right to a dividend,
  • voting rights for any actions that the corporation may make, or
  • a right to a share of the assets of the corporation upon a winding-up.

Per the Canada Business Corporations Act (CBCA) and the Ontario Business Corporations Act (OBCA), a shareholder also has the right to:

  • receive notices of meetings of shareholders, if entitled to voting rights;
  • receive information about the corporation, such as annual audited financial statements and minutes for meetings of shareholders; and
  • vote on the winding-up and dissolution of the corporation.

The legislation divides shares into “authorized capital” and “issued capital.” Authorized capital refers to the maximum number of shares a company can issue. The Ontario Business Corporations Act requires that any maximum issuance of shares is recorded in the articles of incorporation, along with the conditions that attach to each class of shares if there is more than one. Issued capital is the portion of the authorized capital the company has issued and sold to shareholders. The Ontario Business Corporations Act requires that shares are fully paid for before being issued.

Classes of Shares

The corporation may have one class of shares or multiple classes of shares.

If the corporation has one class of shares (typically known as common shares), the Ontario Business Corporations Act requires that such shares must rank equally and that all rights prescribed for such shares will be applied to all issued shares (otherwise known as shares ranking pari passu). The legislation requires that these rights include the right to vote at all shareholders’ meetings and to receive property upon the dissolution of the corporation.

If the corporation has more than one class of shares, the Ontario Business Corporations Act requires that the specific rights and obligations attaching to a class be set out in the articles of incorporation. The rights described above can be allocated among one class of shares or another. For example, one class may have the right to vote at a meeting of shareholders, while another class has the right to the corporation’s property upon dissolution.

It is important to review the articles and the legislation to determine whether there are multiple classes of shares and the specific rights assigned to each.

Stated Capital Account

According to the Ontario Business Corporations Act, every corporation must maintain a stated capital account, which is an accounting record of the money it received for issuing shares for each class. If shares are issued for other types of consideration, such as property or past services, the corporation’s directors must determine the amount of money the corporation would have received if the corporation received money for those shares and the value of the property or past services. This amount must then be added to the stated capital account.

The director of a corporation must be familiar with these requirements when issuing shares in a corporation.

Paid-Up Capital

“Paid-up capital” is the source of much confusion when determining the tax consequences on the corporation when issuing capital. In accordance with the Income Tax Act, paid-up capital is an amount of money a corporation may return to its shareholders free of income tax. In simple terms, paid-up capital refers to the total amount of money that a company’s shareholders have paid for the shares they own. For example, if a company issues 1,000 shares at $10 per share, and shareholders buy all those shares, the paid-up capital would be $10,000. This is the actual money that the company has received from its shareholders in exchange for the shares they hold.

However, paid-up capital can have tax consequences. For example, on a purchase of a share for cancellation, the amount paid by a corporation to a shareholder for the purchase in excess of the paid-up capital of that share is treated as a deemed dividend, which is generally taxed at a higher level.

Contact Bader Law in Mississauga for Advice on Shareholder Matters

The intersection of share ownership and income tax is one of the most critical aspects of understanding how shares work, especially if the issuing corporation is public. The business law team at Bader Law provides comprehensive business organization advice to our clients, including share purchase options, buy-sell arrangements, corporate reorganization and restructuring, and shareholder disputes. We work with our clients to help them determine what legal structure is best suited for their needs in order to reduce liability and maximize income. To speak with one of our lawyers about your business needs, contact us online or call us at 289-652-9092.

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Business Law Organizing Your Business

Legal Entity Review: Sole Proprietorships

This volume of the legal entity review series will cover sole proprietorships in Ontario. Sole proprietorships are a popular and flexible choice for entrepreneurs and business owners who work alone and prefer a flexible and low maintenance business structure. Similar to our post reviewing general partnerships, we will review a sole proprietorship’s formation, liability risks, and dissolution in the context of Ontario law.

“Sole” is the Key Word

The sole proprietorship is the simplest form of business structure characterized by an individual carrying on business in their own name. Many small businesses operate as sole proprietorships. The distinguishing factor of sole proprietorships is that there are no other owners and no legal distinction between the owner and the business. This is important when considering legal liability, which will be discussed below.

Formation of a Sole Proprietorship

As with many businesses in Ontario, the sole proprietorship must comply with the Business Names Act. Specifically, section 2(2) states that:

“No individual shall carry on business or identify his or her business to the public under a name other than his or her own name unless the name is registered by that individual.” 

If the potential sole proprietor intends to carry on business in a name other than their own, it must be registered with the province. Otherwise, there are no other legal steps to take as the sole proprietorship is automatically formed when an individual begins doing business in their name.

However, this does not exempt the business from other legal requirements, such as having the necessary permits to perform services, filing business taxes, maintaining insurance, and registering for HST.

The Issue with Liability

The minimal formal requirements to register and form a sole proprietorship may make it seem like the most attractive option for the business owner. However, this benefit is counterbalanced by the lack of legal protection a sole proprietor offers.

Unlike general partnerships and corporations, a sole proprietor is not a distinct legal entity from its owners. This means that the owner is personally responsible for all aspects of the business, including its finances, liabilities, and day-to-day operations. If an action is commenced against a sole proprietor, the personal assets of the owner may be seized if damages are awarded against them. Even if the sole proprietor incurs debts for the business, the owner’s home or savings may be used to satisfy those obligations.

The primary protection of a sole proprietor is through contract or insurance. Further, it is not uncommon for sole proprietors to maintain (or be required to maintain) commercial general liability insurance. If the sole proprietorship is sued, the Business Name Act states that leave of the court is required to defend the lawsuit under a different name than that of the business. Depending on the specifics of the case, however, this may be difficult to achieve.

Dissolution of a Sole Proprietorship

In order to cancel or dissolve the sole proprietorship, the business owner must close the business by filing the appropriate request with the provincial government to cancel the Master Business License.

Taxation of Sole Proprietorships

Under the Income Tax Act, individuals with business income must report that income on a calendar-year (fiscal period) basis. This requirement also applies to sole proprietorships. However, the sole proprietor may elect to use a non-calendar-year fiscal year, such a request to be filed with the Minister of National Revenue (“MNR”).

Similarly, the income or losses from the sole proprietorship must be amalgamated with the business owner’s personal income or losses, and this total amount is subject to the applicable tax rate under the Income Tax Act. Sole proprietors are permitted to offset their income from other sources and carry it back to reduce income in any three previous taxation years in the 20 years following the year of the loss.

There could be various tax benefits for business owners choosing between a sole proprietor versus another type of legal entity so it is important to consult experts when making this important decision.

Contact the Corporate Lawyers at Bader Law for Trusted Business Law Advice

The experienced business lawyers at Bader Law regularly help business owners organize their business structures and help them choose the appropriate entity to carry on business under. Our lawyers provide clients with a review of their specific needs and work closely with them to design contracts and business structures that align with their goals and contemplate future potential issues. Whether you run a small family business or manage a large corporation, our team has the requisite knowledge to effectively address the needs of your organization.

Our business law team also regularly advises clients on corporate transactions, shareholder agreements and disputes, and business organizations. To schedule a consultation with one of our corporate lawyers, call us at 289-652-9092 or contact us online.

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Business Law

Court of Appeal Decision Highlights Importance of Contingency Planning

Running a business can be difficult as there are many challenges that business owners have to navigate, such as securing financing, managing day-to-day operations, and employing the right people. However, few business owners contemplate the difficulties faced when relationships break down between business partners. When a business relationship breaks down, it can have both financial and operational consequences. The importance of clear shareholder agreements and well-defined mechanisms for addressing relationship breakdowns cannot be overstated.

In the recent Court of Appeal decision in Aiello v. Bleta, a relationship broke down between two siblings who owned and managed several entities, leading to costly litigation due to the lack of an explicit agreement. This case demonstrates the necessity of having a plan for disputes and following legal formalities when carving out business ownership.

Siblings Inherit Companies after Father’s Death

After the death of their father, LeRoy Bleta and Bertha Aiello assumed ownership of three companies: Floriri Village Investments Inc., Niazi Holdings Inc., and Korce Group Ltd. Soon after, their relationship deteriorated, and they enacted an agreement as to their ownership and management of these companies.

It was this agreement that was the subject of the trial at first instance. The respondent, Bleta, claimed that this agreement only provided for a temporary division of management responsibilities, and there was no agreement as to the ownership of these companies. On the other hand, Aiello claimed there was an agreement as to ownership such that she was the exclusive owner of Floriri Village Investments, Bleta breached the agreement and the fiduciary duties owed to her, and Bleta was unjustly enriched at her expense.

Trial Judge Finds Agreement was Valid

Aiello sought a declaration that she was the beneficial owner of Bleta’s shares in Floriri Village Investments, along with an order that she be entitled to purchase his interest in exchange for transferring her interest in the Bleta Family Trust. This would effectively transfer her ownership in Niazi Holdings and Korce Group to Bleta.

The trial judge ruled in favour of Aiello, finding that there was an agreement between the two siblings regarding the ownership of the three companies. The trial judge also found that Bleta owed and breached his fiduciary duty to Aiello and that he was unjustly enriched. The declaration was made, and upon a different action’s completion, Aiello could seek an order for specific performance regarding the transfer of shares in Floriri Village Investments.

Bleta appealed, arguing that the judge erred in finding there was an agreement, that he was unjustly enriched, and that he owed a fiduciary relationship.

Affirmed Agreement and Unjust Enrichment

The crux of the appellant’s argument was that the documentation and behavior of the parties demonstrated, at most, that there was only “an agreement to agree.” At the time of the breakdown, Bleta prepared resolutions where he became a director of Niazi Holdings, Aeillo a director of Floriri Village Investments, and Aiello also signed a “Renunciation Agreement” resigning as a trustee of the Bleta Family Trust, which made no reference to Floriri. Even so, Bleta argued that there was no agreement as to significant terms.

The Court found that there were factual findings to support the trial judge’s reasons in deciding that the parties agreed that Bleta would release his interest in Floriri Village Investments, and in exchange, Aiello would release her shares in the Bleta Family Trust. For example, the Renunciation Agreement did not hint that this was a temporary agreement, nor was Aiello reinstated as a trustee. Furthermore, the parties acted as if they had “unimpeded management and control”; Bleta even sold properties owned by Niazi and managed properties owned by Korce without consulting Aiello.

The Court found that the trial judge was entitled to deference, as the conduct of the parties and the terms of the agreement supported the finding that there was a valid agreement. Therefore, as Bleta had not transferred his interest in Floriri to Aiello, the agreement was breached, and he was unjustly enriched.

Fiduciary Duty Owed and Breached

Bleta also appealed the trial judge’s finding that he owed Aiello a fiduciary duty based on the judge’s conclusion that there was an undertaking to act on her behalf. The requirement for an undertaking was given in Galambos v. Perez. Furthermore, the Supreme Court in Alberta v. Elder Advocates of Alberta Society found that a fiduciary duty may be found without an express undertaking as long as the fiduciary could exercise some discretion unilaterally to the detriment of the other party’s interests and the other party was vulnerable to this exercise of power or discretion.

The Court found no error in the trial judge’s decision, even without referring to the Alberta v. Elder Advocates of Alberta Society decision. The Court ruled there was an implied understanding that Bleta would act in accordance with his duty of loyalty, especially since he was a lawyer by profession. Bleta exercised discretion by drafting the resolution and agreements, which affected Aiello’s rights. The Court also found that Bleta knew Aiello was vulnerable, and although he advised her to seek independent legal advice, he would not allow her to access company funds to pay for such advice.

The Court found no basis to interfere with the trial judge’s determination that Bleta breached his fiduciary duty to Aiello.

This case highlights the importance of ensuring that there are contingencies for the breakdown of the business relationship and the proper legal formalities are followed when carving out ownership and management of the resulting business.

Contact Bader Law for Valued Advice Regarding Shareholder Agreements and Disputes

The experienced business lawyers at Bader Law regularly advise clients on the full spectrum of business matters, including start-up and reorganization, corporate financing and lending, corporate transactions, shareholders agreements and disputes, employment issues, and more. In the event of a dispute amongst shareholders, our lawyers work to ensure that resolutions are reached in a timely and cost-effective manner. Call us at 289-652-9092 or contact us online to schedule a consultation with a member of our trusted business law team.

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Business Law Organizing Your Business

Legal Entity Review: General Partnerships

Business owners can choose from several legal entities when beginning their endeavour, and these entities will be the topic of a legal entity review series. This series will begin with a comprehensive review of general partnerships. This blog post will unravel the complexities surrounding the formation of a general partnership, the responsibilities of partners, liability risks, and dissolution of these entities in the context of Ontario law. This blog post will allow you to consider all the implications of forming a general partnership and whether it is suitable for your needs.

General Partnerships, Generally

In Ontario, general partnerships are governed by the Partnerships Act and the common law (as specified by section 45 of the Partnerships Act). The Partnerships Act outlines the legal foundation for general partnerships and defines partners’ rights, responsibilities, and liabilities, addressing critical aspects like profit sharing, decision-making, and dissolution procedures. This blog post will outline the basic requirements for general partnerships below, as contained in the legislation and supplemented by the common law.

Partnership Formation

There are three requirements for a partnership to exist, per the Partnership Act, namely:

  1. There must be a “business,” which includes “every trade, occupation, and profession.” The definition of broad virtually any commercial activity would likely constitute a business. Few potential partnerships would fail on these grounds;
  2. There must be a “view to profit,” which essentially excludes charitable, social, or cultural endeavours; and
  3. There must be an agreement to carry on business in common and share profits. In this sense, the rules of contract formation apply, where a contract can be written or oral, as long as it includes the essential elements of a contract.

The third criterion is the most wrought with failure, as it may be difficult to establish that the persons or entities entering the agreement intended to be partners. As with most endeavours, it is best to ensure that an agreement is made in writing, clearly setting out the terms, including the profit sharing between the partners. Obtaining legal advice during the negotiation and drafting process is important to ensure that this agreement is fair and sound.

Partnership Registration

The potential partnership must comply with the Business Names Act, which includes special rules for general partnerships. The legislation specifies that the partnership can only conduct business if its name is registered by all the partners. Failure to adhere to this requirement has severe consequences; it prevents the partnership and its partners from maintaining a proceeding in Ontario as it relates to the partnership’s business.

Needless to say, registering the partnership name should be a priority for a partnership.

No Separate Legal Existence

Unlike other business entities, partnerships are not a separate legal entity from its partners. Partners can sue or be sued in the partnership name. This also has implications for employment law matters. A fundamental rule for contractual formation is that no person can contract with him or herself. Since the partnership is not a separate legal entity, a partner cannot also be an employee, as the employment contract would be between the same person.

Liability

Each partner in the partnership is jointly liable with the other partners to the full extent of his or her assets for all debts and obligations incurred while a partner. Reduced further, this means that each partner can be held accountable for the partnership’s debts for their personal belongings. Liability also extends beyond death, as the deceased partner’s estate also remains severally liable if they remain unsatisfied.

It is also important to note that the partner will not be liable for any losses incurred by the partnership before becoming a partner. However, retirement does not work the same way, as partners can still be liable for losses incurred by the partnership prior to retirement unless discharged by agreement. In general, business owners should carefully review all liability obligations that arise during a general partnership.

Partners in Relation to Each Other

As noted above, partners can be parties to an agreement that governs their relationship, but this is not always the case. In the absence of such an agreement, the Partnership Act’s provisions will apply, a non-exhaustive and simple list of which is below:

  • Partners will share equally in profits and contribute equally to losses;
  • The partnership must indemnify partners for personal liabilities or preservation of the partnership;
  • Partners are not entitled to interest on their contributions to the partnership;
  • Partners are entitled to take part in the management of the partnership, and
  • A majority vote can decide disputes for ordinary matters, but a change in the nature of the business must be unanimous.

As long as the agreement satisfies the above formation requirements, the partnership is protected by the Partnerships Act. Even so, a written agreement can avoid a myriad of disputes not contemplated by the legislation.

Dissolution of a Partnership

An agreement between the partners usually governs dissolution, but the Partnership Act includes a variety of situations when a partnership is dissolved. Generally, it expires if the term has been fixed and surpassed, if the specific purpose for its existence has been terminated, by notice of one partner to the others, and by the death of a partner. Nevertheless, these situations can be excluded by agreement between the partners.

Contact the Corporate Lawyers at Bader Law for Trusted Business Law Advice

The experienced business lawyers at Bader Law regularly help business owners organize their business structures and draft partnership agreements. Our lawyers review each client’s specific needs and work with them to design contracts that contemplate future events and set out strategies for managing a variety of potential issues. We help clients ranging from small family businesses to large corporations, and our team has the requisite knowledge to address the needs of any organization effectively.

Our business law team also regularly advises clients on corporate transactions, shareholder agreements and disputes, and business organizations. To schedule a consultation with one of our corporate lawyers, call us at 289-652-9092 or contact us online.

Categories
Business Law Wills & Estates

Succession Planning for Business Owners

Most business owners are familiar with the taxes associated with business operations. However, they may not be as familiar with the taxes associated with the administration of an estate. When a business owner passes away, their estate becomes subject to various tax implications that can affect the distribution of assets and the financial well-being of their heirs or beneficiaries. Understanding estate taxation rules allows business owners to plan and implement effective estate strategies. This helps ensure a smoother business transition to heirs or partners, avoiding disruptions in operations or forced liquidation. It is also essential to understand how the business owner’s shares will be transferred or disposed of in the event of their passing. Shareholder agreements will often contemplate these events.

This blog will focus on the key “need-to-knows” for business owners in order to effectively minimize the tax burden on their estate and business and understand the implications of estate planning on their shareholdings.

The Consequences of a Deemed Realization

In Canada, a “deemed realization” occurs when an asset is considered sold or disposed of, regardless of whether a sale occurred. Per the Income Tax Act, death triggers a deemed realization for assets such as non-depreciable and depreciable capital properties. The realization can significantly impact a business and an estate, as the business or its shareholders may be liable for a large tax liability as a result of the deemed realization.

As a result, depending on the business’s liquidity, shareholders may need to liquidate assets to cover the tax liabilities of the business, which could affect short-term operations and the business’s long-term goals. Succession planning may also be impacted as the realization could lead to an unequal distribution of assets amongst family members, which, in turn, can change the business’s management, despite the business owner’s intentions. Further, the deemed realization is stipulated to occur at fair market value. However, evaluating a business’s assets and shares can often be complex. Without professional help, the deemed realization could result in tax liabilities that are greater than is required under the law, which is a particularly important factor when considering capital losses.

It is important for business owners to carefully plan for the consequences of a deemed realization, as it could affect not only the business, but also the heirs and beneficiaries of their estate.

Income Sprinkling

In 2018, the Canadian Revenue Agency adopted new rules regarding “income sprinkling.” They are designed to limit the ability of owners of businesses to pay dividends or distribute business income to family members that are disproportionate to that family member’s contribution to the business. The new rules operate to tax the dividends distributed to family members under the age of 18 years old at the top marginal tax rate. These are known as the “tax on splitting income” (“TOSI”) rules.

These new rules are also relevant to estate planning, as they may affect the taxation rate of inheriting property and passive income received through a private corporation. However, these rules do not apply in every circumstance, and income or dividends can still be distributed to family members if specific exclusions apply. In any event, the TOSI rules must be considered when planning for the succession of the family business.

Involuntary Transfers of Shares

Shareholders’ agreements contemplate various circumstances concerning the shareholding of a shareholder, one of which is their death. Depending on the agreement’s specifics, the business or corporation typically can acquire or dispose of the deceased shareholder’s shares, otherwise known as an involuntary transfer.

A business owner subject to such a shareholder agreement must carefully consider its provisions to understand what will happen to their shares upon their passing. Generally, the corporation may have several options, for example:

  • The other shareholders may be able to buy the shares from the deceased shareholder’s estate at fair market value or a predetermined price. This could have significant implications for the business, as the other shareholders could cede more control of the business, and the estate could have higher tax liabilities,
  • The corporation may have the right to redeem the deceased shareholder’s shares, again for fair market value or a predetermined price, triggering tax liabilities, or
  • Even if the shareholder’s agreement does not restrict the transfer of shares to an estate, the corporation could require the transfer to occur subject to various legal restrictions. For instance, the shareholder’s agreement could require that the beneficiaries enter into a voting trust agreement, restricting the voting rights associated with the transferred shares. It may need the estate or its beneficiaries to vote on the shares in a particular manner, or grant voting control to specific individuals or a trustee.

Contact Bader Law in Mississauga for Experienced Advice on Estate Planning and Business Matters

Bader Law provides clients with trusted guidance on the estate planning process and corporate matters. Our experienced wills and estate lawyers guide clients on best practices in both simple and complex estate matters to ensure they have a sufficient plan in place to protect their interests and minimize their estate tax obligations. Our business team also regularly advises clients on matters involving corporate transactions, shareholder agreements and disputes, and business organizations.

Our firm represents individuals, families, and business owners in Mississauga and the Greater Toronto Area. To book a consultation with one of our lawyers, call us at 289-652-9092 or contact us online.

Categories
Business Law Shareholder Agreements & Disputes

Court Turns Down Presumption of Lost Opportunity Damages

Contracts serve as the bedrock of business relationships, especially for business shareholdings, ensuring that parties fulfill their obligations. When one party fails to uphold their end of the bargain, it can lead to significant consequences and potential litigation. This is where the concept of breach of contract comes into play, and having an understanding of the available remedies can be crucial.

In many cases, the harm caused is relatively straightforward, as the innocent party is often entitled to any combination of compensatory damages, specific performance, and injunctive relief. However, there are also cases where harm is more abstract, such as when a party breaches the duty of honest performance. In these cases, the innocent party may be entitled to damages for loss of opportunity. This blog post will provide an overview of the availability of these damages in light of recent case law decided by the Ontario Court of Appeal.

Legal Principle: Loss of Opportunity

Damages for loss of opportunity is a legal principle that allows a party to claim damages based on the loss of a specific opportunity that resulted from a breach of contract or wrongful act. It recognizes that certain breaches or wrongful acts can deprive a party of a valuable opportunity, and the injured party should be compensated for the lost chance or potential benefit.

In the decision of M. Callow Inc. v. Zollinger, the Supreme Court of Canada held that where a duty of honesty is breached, it can attract damages for loss of opportunity. However, it is important to note that the dishonesty complained of in the case was directly linked to the performance of the contract, where the lost opportunity flowed from the conduct of the infringing party.

In a recent case before the Ontario Court of Appeal, the appellants asserted that the above ruling created a legal presumption of loss where there was a breach of the duty of honesty.

Company Missed Revenue Target after Late Deal Close

The case of Bhatnagar v. Cresco Labs Inc. involved the appellants, Boris Giller, Ashutosh Jha, and Gopal Bhatnagar, who were the founders of a company conducting business as 180 Smoke, which is a retailer, wholesaler, and manufacturer of vape products. In 2019, the founders sold 180 Smoke in accordance with a share purchase agreement for $25 million to a company operating as Origin House. Per the share purchase agreement, the appellants could earn an additional $15 million if 180 Smoke achieved certain revenue milestones and $2.5 million if they acquired a cannabis licence.

Later that same year, Origin House announced that it was going to be bought out by Cresco Labs Inc. The transaction was intended to close before the end of 2019. However, it was delayed until January 8, 2020, due to poor market conditions and difficulties securing financing. In the meantime, there was little chance 180 Smoke would reach its revenue target. As a result of the late closing, Origin House only paid the appellants a portion of the amount owed under the share purchase agreement, representing the 2020 and 2021 revenue payments.

Application Judge Finds Duty of Honesty Breached; No Damages Awarded

The appellants brought an application for the 2019 payment and the cannabis licence, claiming that they missed the revenue payments due to the breaches of the share purchase agreement by Origin House, amongst those being a breach of the duty of honesty.

The judge found that Origin House had breached this duty as a result of its “failure to advise the appellants that Cresco Labs Inc. intended to delay the closing of the deal to January 8, 2020, after having advised the Appellants on numerous occasions that the closing was expected to occur in 2019.” Nevertheless, the judge did not award damages since there was little chance that 180 Smoke would meet its revenue target or force the Cresco Labs Inc. transaction to close in 2019. In effect, the judge ruled that there was no evidence of lost opportunity.

No Evidence of Lost Opportunity; Court Dismisses Appeal

The main thrust of the appellants’ argument in their appeal was that the case of M. Callow Inc. v. Zollinger establishes that even if there is no evidence of a lost opportunity, the Court must presume this loss where there is a breach of a duty of honesty. The appellants relied on the following passage:

“As the trial judge found, Baycrest “failed to provide a fair opportunity for [Callow] to protect its interests” (para. 67). Had Baycrest acted honestly in exercising its right of termination, and thus corrected Mr. Callow’s false impression, Callow would have taken proactive steps to bid on other contracts for the upcoming winter (A.F., at paras. 91-95). Indeed, there was ample evidence before the trial judge that Callow had opportunities to bid on other winter maintenance contracts in the summer of 2013 but chose to forego those opportunities due to Mr. Callow’s misapprehension as to the status of the contract with Baycrest. In any event, even if I were to conclude that the trial judge did not make an explicit finding as to whether Callow lost an opportunity, it may be presumed as a matter of law that it did since it was Baycrest’s own dishonesty that now precludes Callow from conclusively proving what would have happened if Baycrest had been honest (see Lamb v. Kincaid (1907), 38 S.C.R. 516, at pp. 539-40).”

Although the end of the paragraph appears to create such a presumption, the Court noted that this paragraph must be read as a whole. The Court pointed out that there was “ample evidence” that the innocent party had other opportunities but chose to forego them based on the conduct of the infringing party. The Court also noted that the paragraph includes permissive words rather than mandatory words. Even so, the appellants did not provide any evidence as to what would have happened or what they would have done if they had been advised of late closing.

The Court dismissed the appeal and turned down the appellants’ argument that such a presumption must be made. In doing so, the Court reinforced the importance of forwarding evidence of a lost opportunity where claiming damages for the like and a breach of the duty of honesty does not give rise to a presumption of a lost opportunity.

The Lawyers at Bader Law Advise Clients on Contractual Disputes in Ontario

The respected business lawyers at Bader Law advise clients on a range of business matters, including start-up and reorganization, corporate transactions, shareholders agreements and more. Our advice has helped many corporate clients avoid costly disputes while ensuring that their needs are met and they are set up for success. Contact us at 289-652-9092 or complete our online form to schedule a consultation with a member of our business law team to learn how we can assist you.