Episode Transcript
[00:00:00] Speaker A: Foreign and welcome to this episode of Unlocking YOUR people. We've had a lot of conversations over the last previous episodes around culture and leadership and building trust and engagement. Today we're going to have a little bit of a different conversation because I'm joined by Anna Cook, who is a partner at Cox and Palmer, the law firm. So Anna's going to be talking to us more about legal implications for small business owners, particularly things like how do you set up and structure your business, at what point do you incorporate, how do you pay attention to share ownership or managing things with partners or co CEOs, all of those legal bits and pieces that sometimes we don't know about and trip over as we work our way through being business owners. So that's the plan for today. So let's head over and see what Anna has to say.
So I am joined today by the absolutely fabulous Anna Cook, who I have to say is like my go to for all things legal business, general help keeping my sanity.
And she's going to provide her insight and wisdom to us on a whole bunch of topics. But before we get into peppering you with questions, Anna, just take a minute, tell us about you, what you do, who you work for and then why law? Why did you get into law?
[00:01:13] Speaker B: Oh my gosh. Okay. Well, I've been a lawyer now for about, I guess probably 25 years.
I've been with the same firm with Cox and Palmer. We're an Atlantic Canadian law firm and I'm based out of the St. John's office.
I'm a partner here. I practice corporate commercial law.
[00:01:29] Speaker A: So.
[00:01:29] Speaker B: So all things business related, from small business to medium sized business to large business.
And then if it gets into things that are complicated like employment law or tax or things that are specialized areas, I kind of hive that off to some of my partners here at the office.
So aside from that, I guess I'm vice chair of the Board of trade here in Newfoundland Labrador, which is exciting. I'm addicted to rowing, two dogs, two daughters who are teenagers and keeping me on my toes and spending all my money.
And that's kind of, that's, that's me, that's who I am. We're a volunteer team with St John Ambulance as well, which, so I want to put a little plug in there for St. John Ambulance too.
[00:02:09] Speaker A: Yes, we will make sure we keep that one in. Why law, Anna? Because you're damn good at it. But why did you get into it?
[00:02:15] Speaker B: I appreciate that. I did my undergrad in English and was thinking about doing my master's in English and maybe even a PhD and sort of heading down that road, but wasn't really sure what I was going to do with it.
And I was talking to my parents and my dad ran his own business his whole life along with my mom. They ran the business together.
And I remember talking to him specifically and saying, I think I'm going to do my master's and then I'm going to kind of advance a career in English. And he looked at me and he says, and then you'll be a what?
And it put me right back on my heels. And I mean, you have to know my dad, he's, you know, he's well into his 80s now, but at the time, as an entrepreneur and a business owner, he was focused on the, on the career and then you'll be a watt. So it sent me off on a path of thinking about what I could do with an English degree and somebody who likes, you know, to read and likes words and likes the way words fit together. That, that kind of put me into law school. And so I applied, I wrote the LSAT and applied, and here I am 25 years later.
[00:03:22] Speaker A: English has lost, has been our gain for sure.
And I, I'm really thrilled you said yes to doing this, because I do.
You are absolutely one of the first person like people I think about. Like, I need Anna's advice. So the fact that we can do this and other people can pick your brain vicariously is awesome.
[00:03:40] Speaker B: Oh, I delighted to do it.
[00:03:42] Speaker A: So I'm going to start with something pretty simple, at least simple for you, more complicated perhaps for the rest of us.
Start with something straightforward. So we're talking largely about small businesses, how we help small businesses do the things they do and all the people stuff related to that.
At what point, from your perspective, do you incorporate?
[00:04:01] Speaker B: That's, that's kind of a tough one. A lot of businesses. First of all, let me say that you can start off a business obviously as a sole proprietor, which means that you are not incorporated in any way, shape or form. You just are business. So if you are making mittens in your rec room and selling them or fixing people's computer for money, well, congratulations, you're a business. You're an entrepreneur.
When a business gets into hiring employees, potentially having real estate, signing significant contracts, at that point, in my view, you've outgrown the sole proprietorship model. It's time to start thinking about separating yourself from the liabilities and the traps and the risks that are associated with carrying on business. If you're A sole proprietor, you and your business are the exact same thing. So if the business gets sued, you get sued. If the business makes money, you make money. It's all one and the same.
When you get into having employees kind of growing your business, holding real estate, like I said, or leasing space, or people coming and going and customers and get a little bit more sophisticated, more sophistication naturally ups the risk.
So at that point, then the whole point of incorporation is separating the business from the individual. And that allows the person, the individual behind the business, to be protected from those risks.
The other thing that's important about that too is that when a business starts to grow and looking for, for example, government funding or government programs or incentives for employment, most of the time banks, lenders, government institutions are not prepared to advance any kind of funding or any sort of incentives to an individual, to a sole proprietor for the same reason that I said, because the business and the individual are all the same. So it's all one bank account, it's all one pot kind of thing.
[00:05:59] Speaker A: That's probably one of the clearest explanations I've heard, not least of all the risk management pieces. I don't think that people really think about the risks associated with their size of organization and their business. And even just the idea about hiring somebody, taking somebody on, like what's involved in that. If you've got to pay those people, are you going to do it from your own, your own bank account? Because you and the, you know the same thing. So I think that's, that's really clear cut.
[00:06:25] Speaker B: Yes. The other aspect of it too is, I mean, I'm, I'm certainly in no way, shape or form a tax lawyer. And this is something that you'd want to get some tax or maybe specialized accounting advice on. But the tax rates for businesses sometimes are different than they are for individuals, and they can be better and there can be sort of more favorable tax treatment for an incorporated entity. So, you know, that's another reason that once your business gets a little bit more sophisticated than your dining room table, it's time to start thinking about whether or not the structure works for you.
[00:06:54] Speaker A: Perfect. That's very good.
Earlier on in the series, we had Jeff McLoone on. So Jeff runs an organization called Smart Energy Company with his brother Mark.
And he. One of the things we were talking about is the kind of the risks and challenges that go along with running a business with family. So whether that's your spouse or just a very good friend or, you know, in his case, a family member so incorporation is a risk management mechanism. If you're going into business with family or friends, are there other things that you legally would recommend people think about?
[00:07:28] Speaker B: Absolutely. I am so glad you asked that question.
Anytime that I am advising a small business where there is more than one shareholder, I will always push very, very, very strongly and very hard for a shareholders agreement. Because in my view, it's a little bit like the old expression that good fences make good neighbors. So you want to, while everybody's getting along and before you have any problems, that's your opportunity to set the ground rules for how we're going to carry on business together.
And it deals with things like what happens when one individual wants to retire, what happens if we are ultimately not getting along and one of us has to go?
What happens in the event that one individual passes away? What's going to happen to their shares? So shareholder disputes are unfortunately, they are common. They are particularly common and more challenging in family run and family owned businesses because you've got a whole other layer dynamic on top of it. Absolutely.
So setting out at advance right at the beginning, what the rules are going to be, how we're going to govern our relationship and what's going to happen to our shares as we move forward.
Setting that out at the beginning makes things very easy and straightforward in the event that circumstances change.
You have to remember that shares in a business are somebody's own property. So if you and I just own a business together, your shares are yours, minor mine. I can will them to somebody in my will. I can sell them just the same as I could sell any other property of mine. So as my business partner, you may have a view on that and you may have a view on what I do with my shares that you own.
Half of the business wants my niece.
[00:09:22] Speaker A: To be owner, part owner in my business. So I started, I would. But that's what.
[00:09:26] Speaker B: Exactly. I'm perfectly happy to be in business with you. I may not be perfectly happy to be in business with, you know, whoever you decide to will these shares to, you know, in your, in your will after you pass away. So setting those sorts of rules up at the beginning allow for a very, very smooth transition and a speed, a smooth resolution process in the event that circumstances change.
[00:09:52] Speaker A: Yeah, it's kind of. It's your business prenup like it's 100%.
[00:09:56] Speaker B: That's a great.
[00:09:57] Speaker A: It's funny, it's funny how often we don't do those things ahead of time. Like, I mean, we talk about prenups for marriages. This Is a business. Business marriage. Yeah. But even from, in my world, when you're putting a team together, right. We, we don't take the time to do contracting on how the team is going to work and how are we going to give each other feedback and what happens if we bang heads and how do we make decisions. But all of that stuff takes the bumps, a lot of the bumps off the table for later if you can nail that stuff down first.
[00:10:22] Speaker B: Well, exactly right. And there's always a lot of enthusiasm and excitement about starting a business and we're going to go in this together and we're going to be 50, 50 and we're going to be equal partners and it's going to be great.
And I can tell you that if that were true, there would be a lot of lawyers out of business.
[00:10:38] Speaker A: Yeah.
So do our prenups first? Basically? Yes.
[00:10:43] Speaker B: Well, well, well, exactly right. Because it's too late later on in the process to call me and say, oh, my business partner and I are not getting along so I don't want her to be a shareholder anymore.
You know, it's too late at that point. And my personal favorite is, well, we drafted a shareholders agreement and we've got a pretty good advance Dr. But we never actually signed it. I mean, well, there's not a whole lot I can do with do for you @ that point.
[00:11:08] Speaker A: Does it speak any to So I don't have another shareholder in the business, so I don't have a shareholders agreement.
Does it speak any to price? So there's a lot in there that was around, what if I retire or I don't own my shares anymore, passing my shares on? Does can the shareholder agreement speak to like conflict resolution strategies and things like that as well? Or is it more like once I've made a call?
[00:11:29] Speaker B: Okay, yeah, it does. There's a couple of ways that shareholders agreements will typically deal with dispute resolution. One is to set a process of good faith discussions, followed by mediation, followed by arbitration.
That's the common process that you'll see.
The other option is what's called a shotgun clause, which I know sounds very scary, but you see them often in shareholders agreements where it ultimately says, okay, if we can't get along anymore, either I'm going to buy your shares for this price or you're going to buy my shares for the same price, but one way or the other where one of us is left standing and the other is not.
[00:12:07] Speaker A: Yeah. So, well, it's a way out, right? It's a straightforward way out that is baked into the contract. It makes a lot of sense.
[00:12:13] Speaker B: Well, it's a lot. It's the other. The only other way out, assuming you don't have a shareholders agreement, is potentially a court process.
[00:12:19] Speaker A: Yeah.
[00:12:20] Speaker B: And that's a bad for everybody.
[00:12:22] Speaker A: Like growing ups and divorces. Let's not talk about that.
[00:12:25] Speaker B: Exactly.
[00:12:26] Speaker A: Let's not talk about that. But.
[00:12:28] Speaker B: Yes, that. But you're exactly right.
[00:12:30] Speaker A: When I started the business, I think I'm like a lot of entrepreneurs. I didn't actually set out to start a business. I think there's a camp of people in the world who start businesses and there's a camp of people who find themselves running businesses because that's their employment or that's what they're good at and so on. And so I've always stood by the adage that there were two areas. I always wanted external support. One was legal and the other was accounting. Like, without those, I could do the people stuff, but the legal stuff and the accounting stuff I need support for.
As somebody who doesn't have a legal background, I think I do a reasonable job of running my organization, but I'm very cognizant that there's a lot of stuff I don't even know. I don't know in the legal space, and that's true in the accounting space, but certainly in the legal space.
What are some of the things that you regularly see organizations that are Perhaps, you know, 10 or more, 20 more employees starting to grow, trip over that you wish someone would take a big billboard on the side of the road and say, by the way, don't do this.
Anything like that that you advice you would give those of us who are trying to grow and don't know what we don't know.
[00:13:28] Speaker B: Yep, there's a few, because they're the things that I kind of see frequently.
One is don't be afraid to seek the advice from the lawyers and the accountants. What happens sometimes is I think people are, and rightly so, starting a business. They're so cost conscious and they're terrified that the second you contact a lawyer or an accountant that all of a sudden they're going to be into massive fees and expenses that they can't afford. But you would be surprised how much good advice and good guidance that you can get just by picking up the phone and having a quick call to talk to somebody to get some basic advice and get you pointed in the right direction.
That would be probably step one. The other is I would really like it if people did not do their own incorporations and that Sounds like I am trying to create, you know, business for myself, but that's. That's not the case. And I can tell you that in Newfoundland and Labrador, and I suspect that other provinces in Canada are the same from the registry's perspective. And I don't want to get into too much detail on this, but from the registry's perspective, you file your three forms and put in your appropriate fee, and you've got your certificate of incorporation. So, congratulations, you're a business, except you have no shares, you have no share certificates, you have no bylaws, you haven't appointed any officers. Like all the.
The more important bits, the registry of companies doesn't care about any of that. So you think you're incorporated until somebody says, well, who are the shareholders of your company? And you go, I don't know. Who are the officers of the company? I don't know.
[00:15:15] Speaker A: What is the difference between a shareholder and an officer?
[00:15:18] Speaker B: Exactly. All of those sorts of things. Exactly right.
The other thing that I would recommend, again, that I put on my big billboard is allow your advisors to talk to each other.
Because as you know, Jess, from other things that you and I have been involved in, that once the accountant and the lawyer and potentially the banker, too, are talking together, all of a sudden, that's when the magic happens. That's when the problem solving happens, and that's when we're realizing that we can save the business some money here. Or the better way to do things is this way. But keeping them in silos, because you're afraid of the legal fees or the accounting fees that are going to be associated. It's a bit of kind of pennywise pound foolish.
So that would be another. Another big one that I would. I would recommend.
[00:16:09] Speaker A: I would definitely endorse that one.
So those dogs, like we do accounting with Noseworthy Chapman and Dorothy and Anna have a lot of conversations about me, about help me figure things out. I regularly show up to conversations and go, ladies, I have no idea what I'm doing. Somebody please tell me how this would work. And they have all the guidance that I need to make things work. And I just. I don't think it would work anywhere near as well if I if playing middleman. I don't even know. I only half the time I'm asking you to slow down and explain the conversation to me. So if I was the one transferring information, there's no way that would work effectively. So your.
[00:16:44] Speaker B: Your advisors are acting in your best interest.
You know, they're not acting in their best interest. They're acting in your best interest. So it just makes sense for your advisors to be speaking together.
[00:16:55] Speaker A: Yeah, I think the cost point is really valid. I mean, to some extent we would see that in the HR space too. Right. Like you get a tangly accommodation or a tangly issue with an employee or even an exit and people think I'm just going to do it myself.
And maybe eight times out of ten that's fine, but the ninth time or the tenth time it's not. You actually end up incurring all the costs you would have incurred if you just asked for the advice the first few times. And I just, I don't know that I personally, I don't think it's worth it. I would rather spend the money on the accounting support and the fine and the legal support to make sure I don't hit those things.
[00:17:30] Speaker B: Well, exactly. Right. It's never a problem until it's a problem. Right.
[00:17:34] Speaker A: You know, and to your point on timing. So we are going through a process now. We're looking at the trademark. So your company helped us do the trademark originally, which takes a long time. People, if you don't know. So do it now if you don't know.
But I had a 15 minute conversation with Stuart on like the next piece of that was 15 minutes. I got all the information I needed to go do what I needed to do sensibly and properly. And like, then I don't have to think about it again because it's being taken care of too. Right. Like I have enough plates to spin to try and figure out things that are not my area of expertise.
[00:18:05] Speaker B: Yeah, yeah, exactly. And despite the reputation that lawyers, you know, have, you know, the meter doesn't go on every time somebody picks up the phone. That's just not, you know, that's just not the way it is, you know.
[00:18:15] Speaker A: No, I think there's a different type of law firm too. Right.
[00:18:18] Speaker B: Yeah.
[00:18:18] Speaker A: So.
[00:18:18] Speaker B: Yeah, yeah, yeah.
[00:18:20] Speaker A: Awesome.
Back to, Back to the. The cost consciousness of small businesses. So quite apart from do we spend money on external support, often we are challenged with how do we attract talent when we're competing with bigger organizations. And I mean, we spend a lot of time talking to people about their full kind of employment proposition.
[00:18:45] Speaker B: Right.
[00:18:45] Speaker A: Like, what is it that you offer staff. But one of the questions that comes up time and time again that I, given I'm not lawyer or accountant, not in a position to answer is the whole world of equity and shares and stocks and other things that exist. So like, can you. I don't even know what the Question is, I want to ask, ask you because I'm not sure I know enough to formulate a question in this space. But if I'm a small business owner and I've got somebody in my team who's super invested and like been with me for six years and I see them maybe taking over the business and I want them to have some kind of stake, can I do that? Like, what sorts of things exist to us to help in that world?
[00:19:18] Speaker B: Yep, there's, there's lots of options that can help in that world. And you're right that sometimes, you know it, your small business is in a real bind because they want to attract good talent, they need to have good people, but they just simply can't afford to pay these people what they're worth. Or to your point that you made there at the last of your comments, how do you keep those people with you that you really want to keep with you, that you potentially see as a successor? So it's attracting, but it's also the retention piece.
And there are some really cool strategies for the way that you can do both of those and achieve both of those objectives that don't necessarily be mean. Salary right off the hop. I mean, salary is easy and the obvious one, but stock options is a good plan or even straight, you know, shares is another option. So again, not to go kind of too far, you know, down into the rabbit hole, but the way stock options work, and you see that a lot with new businesses, is that they'll say, okay, well, look, I can't afford to pay you, but I'm going to give you the option to purchase and I'm going to super simplify this, by the way. You know, I'm going to give you the option to purchase share at a later date at a cheaper price. So right now we're just starting our business.
We are brand new, but we think that this business is going to skyrocket in terms of value. But right now it's you and me on my dining room table. So I'm going to give you the option to purchase shares later for what they're worth today. So what they're worth today is probably not very much, but what they're going to be worth later is hopefully if you and I work really hard, are going to be worth significantly more.
So then the employee says, okay, well then that means that if I work like a dog and get this company successful and give it everything that I have, then I'm going to be able to flip that value and realize on that value Later.
And the beauty of a stock option is that the individual is not a shareholder at the time. So that you as the business owner, you don't need their permission to do stuff, you don't need to get their signatures, you don't have to share your financials, any of the rights associated with being a shareholder. They're kind of parked to the side in waiting. Right, right, exactly. But they're highly motivated and incentivized to make sure that the business does really, really well and grows because the better the business does, the better they do.
So stock options is sort of the obvious one, particularly when the business is, is, is not yet really worth a whole lot or the shares are not worth because. Because it's in its infancy.
The other option is straight up shares to have the individual invest at a time in particular when the business is not worth all that much or is worth a lower amount because the shares that they would ultimately have to receive or have to pay for would be worth less.
But at that point the difference I suppose is that once the individual is a shareholder, then they have all the rights associated with being a shareholder. So they have a right to see the financial statements, they have a right to vote on somebody certain things.
So you may or may not have appetite for having an individual vet involved in the business. Like that's not, that's not.
[00:22:37] Speaker A: Do you want to share all that information with that person at this point in time?
[00:22:40] Speaker B: Right, you may, because it may be somebody that you see as being shoulder to shoulder with you forever, or it may not be. It may be just a strategy to incentivize some computer wizard, for example, to come on because you need them but you can't afford to pay them them.
[00:22:55] Speaker A: What are the other factors that might prompt you to go one way or the other? Are there any other considerations that we'd want to think about?
[00:23:00] Speaker B: I guess the biggest thing is that when you have options and you don't have actual shares, there is that feeling that you're shareholder in waiting.
So if it's somebody that you are anticipating being a successor, that individual may not be satisfied with just having options because really the options, when it all comes down to it, they ultimately become a check.
[00:23:24] Speaker A: Yeah, I'm assuming that too then applies if I want to make family members shareholders. We're back to shareholder agreements again, Right. So you need agreements for all of these things. Even if that's a 2% shareholder, it doesn't matter.
[00:23:37] Speaker B: Yeah, exactly. As soon as you have more than, than one shareholder, then I'm strongly recommending a shareholders agreement to deal with all those sorts of things in terms of how those shares are dealt with and handled once they are in the property of the individual.
[00:23:53] Speaker A: Yeah. And we're back to getting advice for things. If you're going to offer stock options to a vast variety of your employees, then I think it starts to get complicated. Make sure you know what you're doing.
[00:24:03] Speaker B: Yeah. And it's surprising. There's a, there's an, A lot of small business who, again, without getting the proper advice. And I know I sound like I'm, you know, like it's a pitch for lawyers, but there's, there's a lot of people who will say, okay, well, you know, I need to get this business off the ground. I don't have any capital, so I'm going to give 30. I'm going to give 30% of the shares to my best friend or my co worker or whatever in exchange for $10,000. Just. I'm just making up numbers.
And then it's astonishing how many people don't realize they do that things chug on and then eventually it lands on my desk for advice. And they don't realize that you've actually given up 30% of your company and that, that, that that person actually matters and they have a stake. They have a significant stake in the business. So that there are things that you cannot do. You may think it's your business, but it's actually only two thirds your business.
[00:24:58] Speaker A: Well. And that 30% is not worth what they paid for it anymore. It's 30% of your business.
So you're thinking 30% and thinking it's the original 10 grand they put in.
No, it's the value of your organization today. So buy them out sooner if you think you're going to grow.
[00:25:15] Speaker B: You know what, Jess? You are exactly right, because I've, I've, I've actually heard that, like when, when it's, it's come to me in a shareholders dispute, it's. Well, you know, she doesn't even live here anymore and she works for the government and, and how she's got these shares, but really I'm the one doing all the work, so I should get all the benefits. And I'm like, oh, no, no, that's not the way that shareholdings work, unfortunately.
[00:25:35] Speaker A: No. So you agree sometimes it's a rude awakening.
[00:25:39] Speaker B: Yes.
[00:25:40] Speaker A: Yeah.
[00:25:40] Speaker B: Yep. And that, and that comes as a shock. It comes as a bit of a rude awakening.
[00:25:45] Speaker A: Yeah. Yeah. I think that the connection between shares and decision making is not always understood. So obviously there's lots of small business owners out there and we, you know, small, small. The term small business covers a vast variety of organizations too. Right? I mean, small business by the governance definition is someone with less than 100 employees. Well, if you've got 80 employees, you're not. In my world, you're not a small business at that point. But five people probably would still constitute a small business. So, yes, there's lots of people out there who have, quote, unquote, small businesses who have shares and all that stuff and know it. But I have come across a lot of people, particularly starting businesses, not from any commercial background, who really don't understand the link between having shares and ownership and decision making. And. What do you mean? I need 51% and I. But I own the company. Well, no, you don't. You are the CEO of the company.
But ownership and leadership are not the same thing, and I don't always know that. We do a terribly good job of clarifying any of that for folks before.
Well, you don't need to.
You can make up and file your incorporation paperwork without ever doing any of the learning around, any of it.
[00:26:47] Speaker B: Well, exactly right. So let's just take a quick second to talk about the cast characters. So when you incorporate a business, there's sort of three different roles. There's the shareholders, there's the directors, and there's the officers. Now, those can all be the same person.
You can be the sole director, sole officer, sole shareholder. I'm looking at you, Jess, for sure. Or it could be a whole bunch of different people. So who does what? The shareholders are the owners of the business.
And generally speaking, other than certain decisions and sort of major decisions, they're largely passive.
Shareholders have limited access to the financials and the books and the records of the company. They get to see the financials on an annual basis, but it's not doors wide open to the shareholders. You can imagine how chaotic that would be for a business business. Then you get to the board of directors level. Now, the directors is where the decisions are made, where the overall strategy is set, and they're the ones that set the course for the organization.
Directors can be shareholders. They don't have to be. There's lots of individuals who make a living out of sitting on boards of directors, because directors can be paid or not paid, but they're the ones that are kind of staring the ship, we'll say.
And they report to the shareholders and they are appointed by the shareholders and they sit at the pleasure of the shareholders. So the Shareholders say, okay, well, we're just going to, we're going to enjoy the ride. Check in with us when you need. But we're giving the, you know, the steering wheel to you.
So the directors make make are the ones who make the decisions they ultimately can take on liability for certain things. They can be personally liable for certain decisions of the business. We could go off for days on that one.
But they are the ones that are taking a little bit more of the risk because they're the ones that have full access to all the books and records, the financials and the decision making.
When it comes to actually implementing that decision, that's when you get to your officers. So that's when you get to your president, your CEO, your VP Finance, your cfo, all those sorts of those officers. Those are the individuals who have been appointed to implement the decisions that have been made by the board of directors.
So those are your three kind of hats. But most of the time, lots of the time, the same person is wearing all three hats.
[00:29:05] Speaker A: And I don't know that a lot of the time people understand that that's what they're doing. Because if you talk to people, they'll say, well, I don't have a board of directors. And it's like, well, you don't, but you do have a director because you appointed yourself the director. You are your board of directors. It's not that you, yes, you don't have a board of people, but you do have them.
So can you talk about where classes of vot like this shares fit in? So, like decision making shares, like I have voting rights, don't have voting rights. Like, where does that fit into all of this?
[00:29:31] Speaker B: Yep. So as I said, shareholders have the right to vote on certain things, but not, not everything.
What often happens is you can have shares, your shares and the rights and the privileges that are associated with them are as creative as your imagination will allow you to be.
There's three basic rights that go with holding shares is the right to vote or not, the right to dividends or not, and the right to receive some amount of the property and assets of the company on dissolution. So when it's all said and done and all the bills are paid and there's money and property left over, you either get, you get a right to share in that or not.
So as long as those three rights are distributed somewhere, then you've met the requirements of corporate law. So you'll often see some shares are voting or not. Some have a right to dividends, some are not, or there are different classes of dividends. And a lot of that is all strategic because it allows the company to flow money out to one shareholder and not another by way of dividends, if that's something that is advisable or not. And as far as the voting goes, again, that sometimes comes down to a point of negotiation that you want somebody to come in, you want them to invest, but you don't necessarily want them to have a right to vote. And maybe they don't want to have a right to vote, they just want to be completely hands off and be a silent investor. That's the term you hear sometimes.
So it's not a requirement that there be non voting chairs, but you do see it oftentimes and it's.
There's not a whole lot of requirement behind that other than what might be required by the unique terms of the deal that have been worked out with an individual. So getting back to you for a second with employees, if you had employees who were shareholders, like your starting position and you're starting, I guess where you would want to end up is that your employees may be shareholders, but you don't necessarily want them to have a right. Right to vote.
[00:31:39] Speaker A: To decision. Yes, to.
[00:31:41] Speaker B: To decision making. Yeah. So then they still get some oversight and still get some disclosure and information because they're shareholders. So they get a right to see, you know, what their shares are worth and what the company's doing, but they don't necessarily get a right to participate in the decision making.
Yeah, yeah.
[00:31:59] Speaker A: Now that makes a whole lot of sense. And it's figuring out, I like the clarification too, that there's no fixed set of. If there's this type of share and this type of share, it's about the deal and the strategy that you have around who are your owners and your shareholders.
[00:32:12] Speaker B: Yeah, totally. And as a company gets more sophisticated and gets into sort of more, more complex tax planning and tax strategies, again, I'm not a tax lawyer, but that's where you will see multiple classes of shares. There's three or four types of commons, there's three or four types of, of preferred shares. And it's a bit of a spider web of different classes of shares. When you see that that is typically the product of some sophisticated like accounting and tax advice because it's all strategies for moving money around in a tax efficient way.
Yeah.
[00:32:51] Speaker A: And back to your original comment about get your accountant, your lawyer and your banker to talk to each other because they could help you formulate the strategy.
[00:32:58] Speaker B: Yeah, exactly. And those, these types of strategies you know, while. Yeah, it's going to cost you in legal fees and accounting fees, of course, but the whole point of it is to save you money in the long run.
[00:33:08] Speaker A: It'll pay back later.
[00:33:09] Speaker B: Yeah, exactly. Right.
[00:33:12] Speaker A: One of the things that I know shows up in our world all the time from a employment law perspective is around documentation and expectations and things like that. So obviously, in my world, I'm very clear about what that needs to look like from a people perspective. But can you talk a little bit about the things that we as business owners should be. Be documenting, the records that we should be keeping, that's. That are the ones we might get asked for if there's a tangle, like that kind of thing? Because I'm not sure that's always. I'm not sure I know that the answer to that question.
[00:33:43] Speaker B: Yeah, no, absolutely. And it is one that.
That is incredibly important and always missed.
So it's a little bit of good housekeeping. So remember when, when we started our conversation, we talked about incorporating yourself and not doing any of the other bits that go with, you know, being an incorporated entity.
So if your incorporation is done properly and you get off on the right foot, what will happen is you have your corporate records, you'll have your initial incorporating resolutions. So there's the shareholders resolutions and the director's resolutions. There's a. There's a minute book, a corporate record book, that, if I thought about it, I would have brought one with me today. But it's this lovely big black binder that keeps all of the corporate records together.
It shows you at any time who was ever a director and who ceased to be a director, who became a director when they were. Same thing for officers, same thing for shareholders. It traces the history of every share that was ever issued and where it ended up. So that at any one time, you know exactly the full corporate history of this company right from the date of incorporation right to today.
Anything that a company does, any sort of major decisions are supposed to be done with approval of the directors. So there will be a director's resolution. So, for example, if a company were to buy a piece of real estate or sell a piece of real estate or get financing at the bank or something like that, all those sorts of things. These big major business decisions have to be approved by the directors and in some cases had to be approved by the shareholders too, depending on what you're doing. And that's all done through minutes and resolutions and paperwork and documentation.
So many companies don't do any of that until it matters.
So and when does it matter? Is the obvious question. So when it matters is when you are going for potentially bank financing or government investment or taking in a new shareholder or selling your business, which may be, you know, your dream and your goal. And somebody says, okay, well, I'm interested in your business. I'm interested in buying E3, Jess. So let me see your corporate records. Let me see what the whole history of this company is. And you look at me and say, what records?
You know, and I say, okay, no, you won't.
Or you may.
[00:36:16] Speaker A: I do have a minute book. Not even show you now. I have a minute.
[00:36:18] Speaker B: Who are the shareholders of the company? Oh, I'm the shareholder. Okay, let me see your share certificates. Well, we don't have any. And I can tell you, like, so, so it.
And why that's important is because, number one, it gives you no sense of comfort as to what this company has done and who it's. You know, what it's all about, and that its records are proper. Are proper. It's required under the Corporations Act. But there's really not a whole lot of enforcement around that. That's not the motivator for me. What the motivator is is that when in the middle of a significant business transaction, like, for example, taking in a partner or doing a joint venture or amalgamating with another business or selling your business, major bank findings, all these sort of big milestones in a company, if while you're trying to do that, you also have to go back and recreate a minute book and figure out who your shareholders were and find your great aunt that you issued a share certificate to when you incorporated. And now you can't even find it. And you can't find her either. Like, it creates a lot of time, a lot of wasted effort and energy. Whereas if you start as you mean to go on, so to speak, then you. It's, it's. It's good housekeeping. You're ready, you're organized. You seem like, you know, everything is. You got your act together kind of right from the beginning. And it'll save you so much hassle of having to try and put all this stuff together right in the middle of trying to sell your company. Company.
So you've heard the term due diligence. So in lots of corporate transactions, you end up in a due diligence process. And one of the first things that somebody would look for in a due diligence process is your corporate minute book. And if you don't have one, then you and your legal counsel are going to spend a whole lot of time putting that back together with bubblegum and elastic bands.
Whereas if you. If you kept proper records going forward, you know, it's a lot. It's a lot easier. It looks a lot more professional, it looks a lot more organized, and you can have a lot more comfort on terms of the state of the company now. Like, as I said, have. Like, there are loads and loads and loads of companies that don't have great corporate records. It's not the end of the world while. While I'm preaching, you know, good housekeeping, good records for all the reasons that I said, it's not the end of the world if you don't. Because lawyers can do what's called a rectifying resolution, which is like an omnibus resolution, where the shareholders and director, the current shareholders and the directors say, okay, I don't know what went on beforehand, but we swear that as of today, this is who the shareholders are, who the directors are, who the officers are, and everything the company did up to this point, we hereby ratify and approve and confirm.
So, you know, you can. You can kind of patch it up that way.
Not ideal.
Yeah, not ideal, you know, but. But it works.
[00:39:18] Speaker A: Well, I would guess, too, that there's also the other side of it, which I'm thinking. Thinking about myself in some of these scenarios where don't necessarily have a vision to sell. So you're not thinking about, I need a minute book or to record who's the shareholder, because I'm just merrily bowling along trying to, you know, do what I'm doing.
And then something happens and you get an opportunity and you realize you actually aren't. Aren't ready to do those things because you don't have the documentation or things in place.
[00:39:44] Speaker B: Exactly right. And that's. And that's exactly my point, Jess, because then when you. When that app. Opportunity falls in your lap, and then suddenly you're trying to advance, you know, a letter of intent towards some sort of a transaction, and then you're getting distracted over this way, you know, staging the house.
So it's too many houses. Yeah, yeah, exactly. Right.
[00:40:06] Speaker A: Interesting.
[00:40:07] Speaker B: Yeah.
[00:40:07] Speaker A: Oh, that's a good advice. Anything else?
While I've got you, anything else, you're thinking about me and other people like me that you'll be like, have you done this? Have you done this? Have you done this?
[00:40:17] Speaker B: Well, one thing to keep in mind is. And this is kind of on the topic that we were talking about in terms of, you know, your minute book and your corporate records is there's been some recent changes in the Corporations act here in Newfoundland. They came in in the federal corporations legislation a while ago, and they're relatively new here.
And it's all focused on sort of anti slavery, anti forced labor, anti money laundering, sort of knowing exactly who the individuals are behind a company.
So there's a little bit more of a push. It's coming from the federal government and kind of coming down, pushing through the other provinces as well to have a register of exactly who. Who the warm bodies are behind all your shareholders.
And the government, like the federal government in particular, can request that you provide that and submit that. So that may not be relevant starting out, because if you've got Anna Cook and Jess Chapman as the shareholders, well, then we're it. But when you get into, you know, family trusts and holding companies and all these sort of more complex structures, you need to be able to trace right back to the actual individuals and that. Yeah, and there's a lot more, you know, and for legit, you know, reasons of sort of criminal organizations and forced labor and, you know, those sorts of things. There's. There's a lot of a push to make sure that Canadian companies are.
Are indeed held by the people that we. That we think they are.
So that's one that's sort of, you know, and I'm not trying to, you know, scare everybody and freak everybody out, but that is one to start kind of thinking about or just sort of be mindful of in terms of who your shareholders and who your investors kind of are, because there's a little bit more of a push to make sure that there's transparency around that.
[00:42:13] Speaker A: Awesome.
See, just need to have a clone of you right there all the time, follow you around.
[00:42:20] Speaker B: I was going to say, I think we've had a text or two in our day.
[00:42:26] Speaker A: One or two. When I'm like, I need to talk to you. How quickly can I talk to you?
[00:42:29] Speaker B: Anytime. You know that. Yeah.
[00:42:33] Speaker A: Kind of odd. Maybe an odd final question.
So if I am a small business and I am growing rapidly and I'm in one of the Atlantic provinces and I want to grow into the others legally, I. I am continuing to always be astonished by how different the provinces are now. That's probably because I'm British and there's a lot more similarity in, like, leg things work in England and looking at things here, do I need more than. So obviously Palmer is Atlantic, so that's a bit different. But do I need different lawyers for different provinces or like, can you tell me about Nova Scotia law, like, how does that work?
[00:43:09] Speaker B: Yes and no.
So Quebec is different because they have a civil law system, whereas the other provinces have a common law system.
When it comes to the law across the other provinces, again, except in Quebec, it is generally the same, but not always the same.
So, for example, if you handed me a contract that you were going to sign for something that E3 was going to do or a product or a service or whatever and said, anna, can you have a look at this for me and give me some advice? And I looked at it and it's governed by the laws of Ontario. Just say, and the contract says, it'll say down there in the boilerplate clauses and the ones that the lawyers get excited about, it's going to say that this contract is governed by the laws of Ontario. I'm just using that as an example.
[00:43:57] Speaker A: Example.
[00:43:58] Speaker B: Well, then I'm going to be able to look at that for you, Jess. What I'm probably going to say to you is this. So I'm not an Ontario lawyer, so I'm not necessarily sensitive to or aware of the intricacies or anything that may be unique about Ontario law. I can look at it for you from a general contract perspective and a general Canadian law perspective, but you would be advised to also have it vetted or reviewed by an Ontario lawyer just to make sure that there isn't anything from an Ontario law perspective that I wouldn't necessarily be sensitive to.
[00:44:36] Speaker A: So they're more familiar with case law in Ontario and things to say, well, there was a precedent, yes, that's true. But there's a precedent that was set last year and that kind of thing that you wouldn't necessarily have anywhere.
[00:44:45] Speaker B: Exactly. Or from statutory as well. Like you think about it in your world from a. From a labor and employment perspective perspective. So labor standards are different in every province of Canada.
So I could look at a contract for. If I were an employment lawyer, as a Newfoundland lawyer, I may look at something and say, this is perfect, this works great. But a Nova Scotia lawyer is going to look at it and say, no, no, no, you need to have so many days off, which is different. Or you need to have, you know.
[00:45:11] Speaker A: Whatever holidays is the one that's always a trip up for people. And unfortunately, in Covid, I was going to talk to you about this because we did discuss maybe somebody from your world coming on as an payment lawyer folks for the next season. Because one of the things we're getting a lot of people tripping up over is with COVID everyone went remote.
No one's thinking about where is remote, because just like, it's become a label. Right. I'm a remote work. Yes, but you live somewhere, you're working somewhere. You are somewhere in the world. So that is your working jurisdiction. Right. So is your contract under your home office? Is your contract under the head office? Is your, like, what are the labor standards? What are the requirements? What are the vacation entitlements? And you have to have all of your paperwork to cover all of the jurisdictions that you have people working in. And I think a lot of people who just went, okay, it's Covid. Everyone's got to go work from home, are now hiring remote talent in different places and thinking, well, I'm in Newfoundland, therefore, if you're working for me, you're covered by Newfoundland law, which is not necessarily the case.
[00:46:15] Speaker B: It's not necessarily the case, exactly. Right. Yeah. Yeah. So to get back to your question, yes, the laws are different in every province. And the Canadian law is federal. Is, you know, from a federal perspective, is different again. And Quebec is super different.
But you can get general advice that would be from. From a lawyer, but really, before you signed a contract, you would want it vetted by a lawyer who practices the law by which the contract is governed.
[00:46:47] Speaker A: Right. And then that's the benefit of somebody like yourselves in Atlantic Canada, because you would have a counterpart in Nova Scotia you could connect me to.
[00:46:55] Speaker B: Exactly. And what I've often done in situations like that, you know, particularly, you know, like with a client like you that, you know, we've got a good, strong, you know, working relationship and you trust is, I'll go through it and say, look, here are the things that I think are. Are the red flags from a. From a commercial perspective, from a general corporate commercial perspective, here are the things I think you need to be worried about. Jess. I've passed it through Nova Scotia, and they've looked at it just through a Nova Scotia lens. So it's not a. It's not double lawyering. It's a. Here are the things that are not compliant.
[00:47:23] Speaker A: Legal. Yeah.
[00:47:24] Speaker B: Here are the things that are not compliant from. About this contract, from a Nova Scotia law perspective.
[00:47:30] Speaker A: Awesome.
[00:47:31] Speaker B: Yeah.
[00:47:31] Speaker A: So better safe than sorry.
[00:47:33] Speaker B: Well, you know, Exactly. Right. And, you know, what happens sometimes, unfortunately, is, you know, business owners, and I can understand why, you know, because of, you know, the fear of cost and budgetary concerns, but end up getting in trouble as a result of not getting the advice early.
Yeah, exactly. And getting it early enough. And then all of a sudden it's, well, I pulled this contract off Google and I got it signed and now it doesn't seem to be working for me. Can you fix it?
[00:48:04] Speaker A: We have the same thing now. So we are launching a self serve HR toolkit for small businesses in September and I did have a minute of pondering, well, now there's AI. But you can go ask AI to give you something and it will give you something that is completely wrong.
It actually told me that if I was going to terminate somebody's employment in Newfoundland Labrador, I didn't need to pay them any money.
So just be careful if you're out, you know, go to ChatGPT and ask it questions but just make sure it's giving you answers that aren't going to get you into trouble. And that's when thinking about when is the answer with chat GPT. Okay. And when do you need to call an answer cook?
[00:48:46] Speaker B: I'm no employment lawyer, but that doesn't seem right.
[00:48:53] Speaker A: Yes. All right, perfect. Well, look, I'm conscious of time, so I'm really grateful for an hour of your.
[00:49:01] Speaker B: It's really been fun.
[00:49:03] Speaker A: Love having the opportunity to chat to you about everything and anything to do with your world and more. So thank you very much if people do want to have a conversation with you about commercial law and leverage your services. So Cox and Palmer is your law firm?
[00:49:20] Speaker B: Absolutely. Yep. And there's a couple of. If you go to our website, I have published a couple of articles about some of the things that we've talked about. One of them is called getting your documents in a row. See what I did there?
And it's all about the corporate records and the things that we talked about. And there's a few other good articles there from me and from my colleagues that, you know, new business owners can certainly, you know, get a lot of information from those types of publications.
[00:49:44] Speaker A: Perfect. I will have a look at sharing those links on our website so that people can and maybe we can put them in the show notes for us and see if people can have a look for those. Awesome.
Thanks, Anna, so much there. But the biggest thing I'm walking away with today is I need to go look at my minute book and I need to have a conversation with my banker because they're not part of the dynamic duo I have. I need a maybe I need a terrific trio here to be helping me with what I do. So some fantastic advice. Thank you again and I will be talking to you soon.
[00:50:15] Speaker B: Okay. Nice talking to you, Jess. Bye.
[00:50:20] Speaker A: All right, R. What's on the docket for today?
[00:50:24] Speaker C: Hey, Jess. Okay, I Got a great one for you today. Now, I'm sure that by now you've seen and heard about this crazy viral video of a CEO and his head of human resources getting caught on a kiss cam at a Coldplay concert concert. This is a few months ago now, but the head of the tech company Astronomer just happened to be at this concert. And when the kiss cam panned over to the crowd, he was there with his arms around a woman who apparently was not his wife and was the head of human resources.
So a little bit of drama there because this is so obviously the world of work, the world of employees and employers, and, you know, office romance is something we haven't really talked about. I was wondering if you have any thoughts about this meme that was heard around the world.
[00:51:22] Speaker A: Yeah, I mean, I think most of us were made aware of that scenario in one way, shape or form if it wasn't through social media, through people who have social media.
It's an interesting question and a bit of a dilemma because we wouldn't comment on that from a situational perspective. That's up to the organization to comment on. But the thinking about it for people is, I think, really important. And I think you're right.
Most organizations, particularly small organizations, don't think about the challenges of relationships in the workplace quite often, because we have friends and family and people who are in relationships already in the organization. But there have been several situations that we've seen and dealt with where those relationships, for whatever reason, became a problem at work. And I think that's the distinction that you need to remember. So nobody is interested in preventing people from getting together with coworkers or colleagues. It's not that it's illegal or immoral or unethical or any of that kind of stuff. It's that personal relationships, when they're bought into the workplace, can then turn into things that become problematic. So in this instance, one of the concerns was around conflict of interest. Right. So if HR is meant to challenge and ensure that things are done ethically and fairly, but there's a personal relationship of that level involved, what is the implication of that for the decisions that need to get made? And so it's not about saying the relationship can't happen. It's about saying, how do we effectively manage this situation now? So the most important thing, if you're going or getting into a relationship with somebody at work, particularly if they are a senior decision maker, is that you disclose that relationship. So the organization can make the appropriate, appropriate steps in terms of process and procedure, like if, if you're in a, in a, you know, introvert relationship with a senior leader that can judge your performance, for example, if you get into a relationship with your boss, for example, that person is going to treat you differently as a result, they're going to be very difficult for them not to. And there are ways around it, but you don't need to fire anybody or change anything. You just change the parameters. So maybe the HR director now reports to the board instead of reporting to the CEO. Right. There's, there are ways around all the of, of this stuff, but you need to have the processes and policies defined so people know what to do. And part of the challenge with this kind of thing, it's not like I'm trying to think of something else that would fall into this category, but people don't necessarily always straight away consider themselves to be in a relationship. Right. It's not. If you're thinking about how we get together with people, it's not like on Tuesday I'm single and suddenly on Wednesday I'm not like, not anymore anyway. Maybe once upon a time and not anymore.
So at what point does going out for coffee turn into dating, turn into a relationship that I need to disclose? Right. So those things are what tend to trip people up. I don't generally think people hide stuff. It's just they weren't thinking about it in terms of the implication of it. So realistically, most big organizations say that you can't be in a team or lead somebody who's a family member or you're in a personal relationship with. With.
That's the general standard role. Now in a small business, that's tricky because you may not have anywhere else to put the reporting line. And if it's a privately owned business, you don't necessarily have shareholders or boards to tell you what the process or policy should be.
But the principle of preparing for it still applies. Right. So in our conversation with Anna, she's talking about how do you protect yourself when you have other people involved? This would turn into one of those situations to say, let's imagine what happens when this situation goes wrong. So in the case of the CEO and the HR person, they split up. Then what happens?
Right, they split up amicably, sure. But it's still going to change things. They split up and it's not amicable. Who leaves?
Does somebody leave? Do they both stay? Are they trying to be professional? It's going to affect the way the organization works. So you need to work through all of those things to figure out how it will all work in the worst case scenario. It's like I said, when you get into kind of of workplace relationships, co CEO, you get married, you have a prenup.
If you're a celebrity, you get a prenup for the divorce. You think about the worst case scenario up front. That is what we're talking about with personal relationships in the workplace. Because when they break down, they can break down spectacularly.
And then you still have these two people who need to collaborate and work together in an environment where that's not happening and performance suffers and then the organization suffers. So ultimately organizations don't care about your relationship unless it affects the workplace. But all personal relationships are likely to some way show a form affect the workplace. So if you find yourself contemplating more than a coffee with somebody, start thinking about do I need how do we need to manage this with the organization and organizations? Small business leaders put something in your handbook of policy so that people know they're supposed to disclose personal relationships or make it known that that's the thing that gets done right so that people don't trip over it later.
[00:56:23] Speaker C: Awesome. Jess, thanks so much.
[00:56:25] Speaker A: Have a great week.
[00:56:26] Speaker C: Talk to you soon.
[00:56:27] Speaker A: So that's it for today everyone. Some great conversations as usual. And thank you to Roz for asking me one of her own questions today.
Next time around, I am joined by two small business owners who will be asking me their questions on whatever topics they want to talk about to do with people and the wonderful world of work. So I hope you can join us then. See you soon. Sam.
