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  • The TSX Venture Exchange reaches out to the VC community

    The TSX Venture Exchange (the “TSX-V”) has released a white paper which describes how it intends to become an attractive public market for early-stage companies from fast-growing sectors such as technology, clean technology, renewable energy and life sciences (the “high-growth sectors”) and how it intends to ensure that private equity firms, venture capital (“VC”) funds and angel investors consider the TSX-V as an effective strategy to exit the capital of such early-stage companies. The question remains whether these changes will result in a smaller-size IPO on the TSX-V becoming an attractive exit for the VC funds invested in a large number of these companies. REVIEW OF SOME OF THE CHANGES AND STRATEGIES PROPOSED BY THE TSX-V The TSX-V indicated that it intends to generally review its policies and tailor them to further reflect the needs of the companies from the high-growth sectors, recognizing that such policies were traditionally more adapted to the mining and oil and gas sectors. It also intends to hire a sales team dedicated to bring companies from these high-growth sectors to become listed on the TSX-V. The sales team will notably attempt to introduce the dealers community to companies from these sectors that can grow their business and create wealth for investors. The TSX-V recognizes that the reluctance for such companies to become listed on the TSX-V is in part the consequence of the administrative and compliance costs resulting from such a listing. It therefore proposes specific changes to its rules that are aimed at reducing the costs and simplifying the process for a company wishing to be listed on the TSX-V. One of the affected rules would be the sponsorship requirement. While this requirement can be waived, the TSX-V currently requires that an application to list on the TSX-V be sponsored by an existing member of the TSX-V or of the Toronto Stock Exchange. The TSX-V proposes to eliminate this requirement. Given that obtaining sponsorship typically takes several months and can cost a company between $50,000 and $100,000, the TSX-V believes that this change will allow companies wishing to achieve an IPO to save time and money. Another set of rules that might be reviewed is the escrow requirements. Securities regulators and the TSX-V each impose escrow requirements on the securities of the company completing an IPO held by the directors, officers, principal shareholders and promoters of the company, which typically includes all the VC funds invested in such company. These requirements result in the VC fund that has invested in the capital of the company requesting to be listed being typically required to enter into escrow agreements with an escrow agent whereby the shares or debt securities of the company held by the VC fund are put in escrow with the escrow agent for a period of 18 to 36 months after the IPO. The TSX-V has indicated in its white paper that it will abandon its own requirements and simply impose compliance with the requirements of the Canadian Securities Administrators (to which such companies were already subject to and which are similar to the escrow requirements of the TSX-V). Being subject to only one set of rules will simplify things in that regard. The TSX-V also intends to increase its general use of technological tools, particularly by offering an automated online filing system for additional types of transactions (the white paper does not specify which ones). This is intended to allow companies to file routine transactions themselves rather than having to use the services of external lawyers, and therefore reduce their costs. The TSX-V also seeks to develop mobile and web-based tools to stream summaries of securities offerings by companies listed on the TSX-V in order to facilitate more direct communications between the issuers and their investors. Other changes are proposed and can be found in the full version of the white paper available on the TSX-V’s website. CAN THE TSX-V BE SUCCESSFUL IN ITS APPROACH? All these changes aimed at increasing the listings by early-stage companies from the technology, clean technology, renewable energy and life science sectors should be welcomed by the VC community. IPOs remain an attractive exit for VC funds who often are major shareholders of these companies. It remains one of the best methods for a VC fund manager to establish a track record to attract investors for its follow-on funds in a context where such investors are often forced to rely on very few performance indicators to establish the skills of the VC fund manager and decide whether to invest in its follow-on funds or not. It should also be considered by entrepreneurs as one of the preferred methods of exit that they can provide to the VC funds that have invested in the capital of their company, given that it is one of the rare methods that will ensure to these entrepreneurs that they remain at the helm of the company. Other forms of exit, such as an acquisition or a secondary sale to a private equity fund focused on growth stage companies, will often result in forced changes to the management of the company, making the entrepreneur effectively lose the control of its business. In the context of an IPO, while the entrepreneur will have to report to its shareholders and may be vulnerable in the future to hostile take-over bids, the management team will generally remain in place in the short term (except for some additions to ensure that the necessary skills are present). Further, public markets remain the deepest source of capital, making IPOs being particularly well suited for these high-growth companies. However, to be fully effective, these initiatives will need to receive the support of the Canadian Securities Administrators, given that the major costs associated with an IPO are those associated with the rules imposed by these securities regulators and not by the TSX-V. In the meantime, Lavery intends to fully collaborate with the TSX-V in allowing it to become more attractive for these types of companies.

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  • Crowdfunding: Enhanced capital raising opportunities for startups

    Equity crowdfunding will soon have a new framework in which to operate in Canada and this is excellent news for investors and startups alike. On November 5, 2015, the Canadian Securities Administrators announced that regulatory authorities in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia published the final version of Multilateral Instrument 45-108 - Crowdfunding (the “Equity Crowdfunding Prospectus Exemption”), which is expected to come into force on January 25, 2016. Crowdfunding will no longer be limited to advance purchases of goods and services in Canada, as the new Equity Crowdfunding Prospectus Exemption will allow startups to raise capital by issuing and selling securities to the public, using online funding portals, without having to file a prospectus. An offering document that meets regulatory requirements will nonetheless have to be prepared and published on the electronic funding portal. The document must contain certain particular information on the corporation, its officers, and the terms of the offering. ISSUER ELIGIBILITY CRITERIA Under the Equity Crowdfunding Prospectus Exemption, eligible issuers may raise a maximum of $1,500,000 per 12-month period. The main eligibility criteria for an issuer are namely that it be incorporated under Canadian laws and headquartered in Canada, that a majority of its directors reside in Canada, and that the issuer is not an investment fund. SUBSCRIPTION LIMITS FOR EACH INVESTOR Subscription limits for investors will vary depending on whether an investor is an accredited investor (as defined in the securities regulations) or not. In Ontario only, another category of investors, “permitted clients” (as defined in the securities regulations), is subject to its own specific investment limits. Investments by non-accredited investors will be limited to $2,500 per private placement (up to an annual maximum of $10,000, only in Ontario). Investments by accredited investors will also be limited, albeit to a greater amount of $25,000 per investment (up to an annual maximum of $50,000, only in Ontario). In Ontario, investors who are classified as permitted clients will not be limited in the amount of capital that they can invest. LEAD INVESTOR INCENTIVES It is no coincidence that accredited investors qualify for higher investment limits. The intention is to encourage them to act as lead investors who can set the pace for less experienced, non-accredited investors, by providing skills and expertise in management for the benefit of all investors. The emergence of lead investors is also encouraged by the fact that issuers will be able to distribute their securities under other prospectus exemptions during the crowdfunding distribution period with different prices, terms and conditions from those being distributed under the Equity Crowdfunding Prospectus Exemption. This type of model has already proven advantageous in the United States, where equity crowdfunding syndicates have been developed. Such syndicates, which are made up of angel investors and venture capital funds, allow small investors to invest their money in tandem with more experienced investors. CONTINUOUS DISCLOSURE Issuers who issue securities pursuant to the Equity Crowdfunding Prospectus Exemption will also be subject to certain continuous disclosure obligations, including the obligation provide the relevant securities commissions with financial statements and to make such financial statements available to investors within 120 days of their financial year end. The extent of such continuous disclosure obligations will vary in accordance with the total amount of funds raised by the issuer pursuant to one or more prospectus exemptions, from its date of formation to the end of its last financial year, based on the following thresholds: $249,999 or less: no requirement Between $250,000 and $749,999: financial statements accompanied by an examiner’s report or an auditor’s report $750,000 or more: financial statements accompanied by an auditor’s report In all cases, if the issuer is already a reporting issuer as defined by securities regulations, it will still be subject to any continuous disclosure obligations that already applied. CONCLUSION The Equity Crowdfunding Prospectus Exemption will open up markets to investors big and small, and allow them to build valuable relationships with startups early on. It will be interesting to see if the Equity Crowdfunding Prospectus Exemption will generate sufficient lead investors for equity crowdfunding syndicates to be put into place, as they have been in the United States.

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  • The Canada Public Sector Pension Investment Board launches a lawsuit against Saba Capital: Lessons for Fund managers when valuing illiquid securities

    On September 25, 2015 the Public Sector Pension Investment Board (the “PSP Investment Board”) filed a lawsuit before the New York State Supreme Court against Saba Capital, the hedge fund managed by Boaz Weinstein (the former co-chief of the credit business at Deutsche Bank AG), for allegedly “manipulating the value” of certain of Saba Capital’s investments. The alleged manipulations occurred in the context of a request of PSP Investment Board for redemption of its entire interest in Saba Capital. This litigation highlights certain inherent risks for hedge fund and private equity fund managers when valuing certain types of illiquid securities. THE SABA CAPITAL LAWSUIT Saba Capital Offshore Fund, Ltd. (the “Saba Capital Fund”), a hedge fund created under the laws of the Cayman Islands, was formed in 2009. In February 2012 and June 2013, PSP Investment Board invested a total of US$500 million in Saba Capital Fund, making it the largest investor in the fund. Following a substantial decrease in the summer of 2014 in the net asset value (“NAV”) reported by Saba Capital Fund, in early 2015, PSP Investment Board decided to request a redemption of 100% of its interest in Saba Capital Fund as allowed by the organizational documents of Saba Capital Fund. At the time, PSP Investment Board’s interest in Saba Capital Fund represented approximately 55% of its NAV. In its complaint, PSP Investment Board alleges that in calculating the redemption price of PSP Investment Board’s interest in Saba Capital Fund, Saba Capital Management, L.P. (“Saba Capital Management”) marked-down inappropriately the value of fixed income securities issued by The McClatchy Company (NYSE:MNI) held by the Saba Capital Fund (the “MNI Bonds”). This mark-down had the effect of reducing the NAV of the fund as at March 31, 2015, resulting in a lower redemption price for PSP Investment Board’s Class A shares. According to PSP Investment Board’s complaint, the valuation method used by Saba Capital Management for the March 31, 2015 valuation differed substantially from the methods previously used. Further, according to PSP Investment Board less than one month later, Saba Capital reverted back to its previous valuation method, marking-up the value of the same MNI Bonds from their March 31, 2015 valuation. PSP Investment Board also alleges that Saba Capital Management made these abrupt changes in its valuation methods in order to artificially materially depress the value of the MNI Bonds in the calculation of the redemption price of PSP Investment Board’s interest in Saba Capital Fund. The MNI Bonds are illiquid securities. They are neither listed on a national securities exchange nor quoted on the NASDAQ, but are, however, traded over the counter (pink sheets). The lack of a liquid market for a particular type of security makes its valuation very difficult. In this situation, funds will typically rely on prices made readily available by external pricing sources, such as independent pricing services and dealer quotations from market makers or financial institutions regularly engaged in the practice of trading or pricing that security. In its proceedings before the New York State Supreme Court, PSP Investment Board states that in order to value the MNI Bonds, Saba Capital Management had always relied on the pricing provided by these external pricing sources. However, a different method was used in connection with the redemption of the Class A shares of PSP Investment Board. In this latter case, it rather initiated a bids-wanted-in-competition (“BWIC”) process, whereby the MNI Bonds held by Saba Capital Fund were listed with various securities dealers who, in turn, were allowed to makes various bids on them. This process led to depressed bids reflecting a significant liquidity discount from the values previously arrived at under the valuation methods previously used by Saba Capital Fund. The bids obtained by Saba Capital Management were used to value its MNI Bonds, although Saba Capital Fund did not accept any of these bids. As a result, according to PSP Investment Board, the MNI Bonds that were previously valued to 60 cents on the dollar at the end of the 1st quarter of 2015 were valued at 31 cents on the dollar as of March 31, 2015. As a result, the NAV of PSP Investment Board’s Class A shares was reduced (the amount of the reduction is not disclosed in the proceedings) and so was the redemption price paid to it. PSP Investment Board seeks compensatory damages from defendants for an amount to be determined at trial. LESSONS FOR PRIVATE HEDGE FUNDS AND PRIVATE EQUITY FUNDS MANAGERS TARGETING CONSISTENCY IN THE VALUATION METHODS PRIOR TO REDEMPTIONS Hedge funds’ organizational documents will generally require the manager to perform periodic, usually monthly or, in certain instances, quarterly, valuations of the fund’s assets and liabilities. Managers of open-ended private equity funds will usually also be required to produce quarterly valuations of their fund’s assets and liabilities. A fund’s manager’s compensation will typically be structured so as to foster an alignment of the manager’s interest with the interest of all other investors through the carried interest or performance fee it is entitled to receive. However, in the context of a contemplated redemption of interests in the fund, the interest of the manager and the redeeming partner may significantly differ in that while the redeeming partner’s interest is to maximize its short-term redemption price, the manager’s interest will be to maximize its long-term carried interest or performance fee. The required valuation of the fund’s assets and liabilities to determine the price payable to the redeeming partner will have a direct impact on the proceeds received by the redeeming partner, as was the case with PSP Investment Board. This conflict and, consequently, the risk of ensuing litigation is exacerbated by the fact that the valuation of the fund’s assets and liabilities is carried out as a going concern, without the fund being actually liquidated. For this reason, fund managers should try to avoid, as much as possible, using a method of valuation for the purpose of determining the price to be paid to the redeeming investors that is different from the method ordinarily used in the past. It will be difficult for a redeeming investor to assert that the manager has been manipulating the valuation of the fund’s assets for the purpose of reducing the redemption price of its interest if the valuation method used by the manager has been used consistently and reported periodically to the investors without any issue. A liquidity shock caused by the sudden request for redemption of an important investor or other particular circumstances (such as the acquisition of newly-created instruments) may, however, prevent the manager, in order for it to be fair and equitable to all investors, to continue using the valuation methods employed in the past. In cases where conditions supporting previous valuations have changed, the manager should engage with investors to ensure consensus on the fairest valuation method in the new circumstances. This may however not be possible or even desirable after receipt of a redemption request as the immediate pecuniary interest of the redeeming investors may make a consensus impossible to achieve. ADOPTING A SEPARATE VALUATION POLICY The valuation methods intended to be followed by the manager of an hedge fund or private equity fund will typically be described in organizational documents and the offering or private placement memoranda of such hedge fund or private equity fund. However, they will generally be limited to a high level overview of how the manager intends to actually proceed to value the fund’s assets and liabilities. While this level of flexibility is welcomed by managers to prevent having to amend organizational or offering documents frequently (which can involve significant costs), it can lead to conflicts such as the one between PSP Investment Board and Saba Capital Management, especially if the procedure followed by the manager varies over time with respect to a certain type of assets. Having a formal valuation policy in place (separate from the organizational and offering documents so that it can be amended without requiring significant costs for the fund and the investors) providing for a more detailed description of the valuation procedures followed by the manager would therefore be a best practice for hedge fund and open-ended private equity fund managers. This valuation policy should remain available for review by existing and potential investors. The disclosure on valuation contained in the offering documents should cross-reference the policy to ensure that all investors are aware of its existence. It should further specify that a copy can be obtained upon request. The manager should also review the valuation policy periodically to ensure that it still adequately reflects the process currently followed by the manager. The valuation policy should describe in details the valuation methods that the manager will use for each type of instrument or securities. The policy should also state the external pricing sources intended to be used by the manager, if any, the hierarchy between these pricing sources and, if possible, the accepted tolerance levels for any discrepancies between different pricing sources. It should further clarify how exceptions, if any, will be managed. Moreover, if the manager intends to use certain unusual types of valuation practices, they should be specifically provided in the organizational documents. For example, in order to prevent potential lawsuits from the fund’s investors, if the manager intends to “side-pocket” certain illiquid or hard to value securities, it should be allowed do so only if its use is specifically authorized by the fund’s organizational documents. A simple reference to “side-pocketing” in the valuation policy may not offer a sufficient protection. CONCLUSION The above recommendations are only a few of the best practices that can be put in place in connection with the valuation of illiquid securities and, in any event, do not guarantee that investors will not challenge, by litigation if necessary, the manager’s valuation of these securities. Indeed, in PSP Investment Board’s case, Saba Capital Management filed a motion to dismiss alleging that “[T]he valuation process PSP describes in its complaint is entirely consistent with the governing documents—indeed, they required it under the circumstances”. As the case was referred to mandatory mediation by the New York Supreme Court in early October 2015, Saba Capital’s motion to dismiss has not yet been decided. Nevertheless, following the above recommendations should decrease the risk of litigation relating to the valuation of certain type of securities and offer significant protection in case of litigation.

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  • Intellectual property due diligence in an investment context

    A due diligence analysis of intellectual property rights is an important step when acquiring or making a significant investment in a business. It is particularly important in the case of a technology business, where IP rights are assets that account for almost all the value in a business. A due diligence analysis provides a more accurate picture of those assets and of any potential problems associated with them. Various types of intellectual property can be the object of a due diligence analysis. Most often it is trademarks, patents and trade secrets that are assessed, although copyrights can be involved as well, such as when a business has rights to the source codes of a computer program. However, it should be kept in mind that all forms of intellectual property require careful consideration. In Canada, trademarks can be assigned under the Trade-marks Act1, whether they are registered or not. It is therefore important to trace the trademark’s chain of title back to when it was first used. If the trademark is registered, it will also be important to determine whether the goods and services declared at the time of registration adequately match the operational reality of the business as well as whether the reported date of first use is correct. In fact, a registration can be invalidated if the actual date of first use is found to be later than the date that was declared. With respect to patents, a distinction must be made between pending applications and patents actually granted. If a patent application is pending, it is important to review any correspondence received from the patent offices, notably for any indication that the patent will not be granted or that its scope will be restricted. If the application was filed under the Patent Cooperation Treaty (PCT), it is advisable to analyse any preliminary opinions issued under the framework of this treaty. Since a patent application is predominately a technical document, it might be necessary to ask an expert in the field for his or her opinion concerning the scope of the invention. While a patent that has been issued is presumed valid, it remains essential to assess its scope in relation to the invention the business is exploiting commercially. Patent rights generally belong to the inventors, unless a written agreement provides otherwise. In consequence, any agreements signed with the inventors should be examined.2 In this regard, there are two situations that should be avoided. The first one is the situation where various inventors have assigned their rights to more than one business, thereby putting those businesses in a co-ownership situation that is difficult to manage. The second one is the situation where the inventors declared to governmental authorities that they are not, in fact, the true inventors. A patent obtained without designating the correct inventors could be impossible to enforce or perhaps even invalid altogether.3Lastly, if the patent or patent application is the subject of successive assignments, one must make sure that each assignment has been made in writing in accordance with the requirements of the Patent Act.4. The Copyright Act5 contains a presumption that any work (including source codes for computer programs) made in the course of employment are the property of the employer. However, there is no such presumption if the work was made by a subcontractor or a consultant, so more extensive verification is needed in such cases. In a noteworthy decision, the Ontario Court of Appeal recognized that an arrangement of computer program elements can be copyrighted even if the elements themselves cannot be protected individually.6 Furthermore, although it is not mandatory to register a copyright, any assignment of copyright or any licence granting an interest in a copyright will only be valid if made in writing by the copyright owner, which should also be subject to verification. As for trade secrets, a business cannot derive any economic benefit from the information unless it is truly secret. Hence the importance of verifying any confidentiality and non-competition agreements as part of the due diligence process. It could also be essential to verify which measures are in place to protect the secrets. Such measures can include IT restrictions that prevent employees who are not involved in a project from accessing certain files, or “need to know” restrictions that partition knowledge between various divisions or business units. Lastly, the purchaser or investor will need to verify that there are no administrative or judicial proceedings which could affect any intellectual property rights and that there are no third party infringement claims that have been made either verbally or in writing. At times the due diligence analysis might lead to the abandonment of the investment project altogether. In other cases, the due diligence allows for corrective measures which the vendor of the business will need to implement in order for the sale to proceed, or which the buyer of the business will want to put in place in order to protect its investment in the long term. 1 R.S.C. 1985, c. T-13. 2 For example, see Élomari c. Agence spatiale canadienne, 2004 CanLII 39806 (QC CS). 3 For example, see Ethicon, Inc. v. United States Surgical Corp. 135 F.3d 1456 (U.S. Fed. Cir. 1998) and Pannu v. Iolab Corp., 155 F.3d 1344, 1351 (U.S. Fed. Cir. 1998). 4 R.S.C. 1985, c. P-4. 5 R.S.C. 1985, c. C-42. 6 Delrina Corp. v. Triolet Systems Inc., 2002 CanLII 11389 (ON CA).

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  • Major changes enable registered charitable organizations to invest in limited partnership units

    The federal budget presented on April 21, 2015 (the “Budget”) contains important measures enabling registered charitable organizations and private and public foundations (hereinafter collectively referred to as “Registered Organizations”) to invest their funds in units of a limited partnership. Prior to announcing these measures, the Income Tax Act (Canada) (“ITA”) prohibited such investments by Registered Organizations because, by investing in a limited partnership, they were considered to be operating the limited partnership’s business. The consequence of making such a prohibited investment was that the Registered Organization’s registration could be revoked and, thus, that they could lose their income tax exemption and their ability to issue receipts for donations. According to the measures announced in the Budget, the ITA will be amended to provide that Registered Organizations are not considered to be operating the business of a limited partnership because they have invested in the units of such an entity. These changes will apply to any investment made by a Registered Organization in a limited partnership on or after April 21, 2015. It is important to note that the proposed changes only apply when a Registered Organization becomes a member of a limited partnership if the following conditions are met: The enabling legislation governing the limited partnership provides that the liability of members of the partnership is limited; The member deals at arm’s length with the general partner; and The total fair market value of the interests held by the member and by any persons or partnerships with whom it is not dealing at arm’s length, does not exceed 20% of the fair market value of all the interests held by all of the members of the partnership. --> 1. The enabling legislation governing the limited partnership provides that the liability of members of the partnership is limited; 2. The member deals at arm’s length with the general partner; and 3. The total fair market value of the interests held by the member and by any persons or partnerships with whom it is not dealing at arm’s length, does not exceed 20% of the fair market value of all the interests held by all of the members of the partnership. These changes will give Registered Organizations greater flexibility in the range of investments they can make.

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  • Proposal for new TSX listing requirements for ETFs, closed-end funds and structured products: codification of existing practices

    On January 15, the Toronto Stock Exchange (the “Exchange”) published proposed amendments to the Toronto Stock Exchange Company Manual (the “Manual”). More specifically, a completely new section will be added to the Manual (Part XI) for determining the minimum listing requirements to be met by non-corporate issuers, i.e. exchange traded products (ETPs), closed-end funds and structured products. ENTITIES COVERED BY THIS PROPOSAL In their current version, the rules proposed by the Exchange provide definitions for the non-corporate issuers covered by these rules. However, the Exchange has given itself some level of discretion to decide that issuers not covered by this definition may still be subject to the obligations of non-corporate issuers. The three groups of issuers covered by these new rules are as follows: Exchange traded products, i.e. redeemable equity securities (“Exchange Traded Funds” or “ETFs”) and redeemable debt securities (“Exchange Traded Notes” or “ETNs”) offered on a continuous basis under a prospectus which give an investor exposure to the performance of specific index, sectors, managed portfolios or commodities through a single type of securities Closed-end funds, i.e. investment funds, mutual funds, split share corporations, capital trusts or other similar entities that are managed in accordance with specific investment goals and strategies Structured products, i.e. securities generally issued by a financial institution (or similar entity) under a base shelf prospectus and pricing supplement where an investor’s return is contingent on, or highly sensitive to, changes in the value of underlying assets, index, interest rates or cash flows. Structured products include securities such as non-convertible notes, principal or capital protected notes, index or equity linked notes, tracker certificates and barrier certificates --> 1) Exchange traded products, i.e. redeemable equity securities (“Exchange Traded Funds” or “ETFs”) and redeemable debt securities (“Exchange Traded Notes” or “ETNs”) offered on a continuous basis under a prospectus which give an investor exposure to the performance of specific index, sectors, managed portfolios or commodities through a single type of securities 2) Closed-end funds, i.e. investment funds, mutual funds, split share corporations, capital trusts or other similar entities that are managed in accordance with specific investment goals and strategies 3) Structured products, i.e. securities generally issued by a financial institution (or similar entity) under a base shelf prospectus and pricing supplement where an investor’s return is contingent on, or highly sensitive to, changes in the value of underlying assets, index, interest rates or cash flows. Structured products include securities such as non-convertible notes, principal or capital protected notes, index or equity linked notes, tracker certificates and barrier certificates RATIONALE FOR THIS PROPOSAL The Manual sets out the requirements enforced by the Exchange to all issuers as part of its mission to ensure a transparent, fair and orderly market for listed securities. These requirements were designed to recognize the specific features of various classes of issuers. However, the current version of the Manual does not take into account the specific features of ETFs and closed-end funds, which have become much more common in the Canadian market over the past 10 years. Indeed, according to the data provided by the Exchange, while there were only three ETF providers offering 84 products listed on the Exchange at the end of 2008, by October 31, 2014, there were nine providers offering 335 ETFs. In addition, every year over the past five years, an average of 35 closed-end investment funds have been listed on the Exchange, representing a market value of more than $26B. In the course of the elaboration of these proposed rules, the Exchange reviewed the listing requirements used by various recognized stock markets, including the New York Stock Exchange, NASDAQ, London Stock Exchange and, closer to home, the brand new Aequitas NEO Exchange. According to the Exchange’s analysis, the products listed on NASDAQ and NYSE are the most comparable to those listed on the TSX. PROPOSED MINIMUM LISTING REQUIREMENTS In the proposed amendments, the Exchange intends to set the minimum market capitalization to be met by non-corporate issuers wishing to be listed on the TSX, as follows: Exchange traded products must have a minimum market capitalization of $1 million Closed-end funds must have a minimum market capitalization of $20 million Structured products must have a minimum market capitalization of $1 million --> 1) Exchange traded products must have a minimum market capitalization of $1 million 2) Closed-end funds must have a minimum market capitalization of $20 million 3) Structured products must have a minimum market capitalization of $1 million In addition to the minimum market capitalization requirement, closed-end funds must also have issued a minimum of one million (1,000,000) freely tradeable securities held by at least 300 board lot holders. The Exchange also provides for certain requirements for calculating net asset value, as well as for governance. The net asset value must be calculated daily for exchange traded products and weekly for closed-end funds and structured products. In all cases, the net asset value must be posted on the issuer’s website. With respect to governance, as the Exchange does for issuers of other classes, it will assess the integrity of the directors and officers of non-corporate issuers. Issuers or managers of exchange traded products, closed-end funds and structured products must have a CEO, CFO, secretary, as well as an independent review committee (for exchange traded products and closed-end funds) or two independent directors (for structured products). However, this obligation does not apply to exchange traded products and structured products issued by financial institutions. REQUIREMENTS FOR MAINTAINING A LISTING Securities of a closed-end fund may be suspended or delisted if the market value of the securities listed on the Exchange is less than $3 million ($3,000,000) for 30 consecutive trading days, the fund has less than 500,000 freely-tradeable securities, or the number of security holders is less than 150. As for the securities of exchange traded products and closed-end funds, they will be delisted if maintaining their listing affects market efficiency. To do so, the Exchange will, among other things, consider the degree of liquidity and market value of the securities. CONCLUSION The proposed amendments were subject to a period of comments extending from last January 15 to March 16. The coming into force of these rules also remains subject to approval by the Ontario Securities Commission. As usual, if you are considering applying for a listing of your products on the Exchange, it is always preferable to obtain a preliminary opinion on eligibility for listing by filing an application to this effect with the Exchange.

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  • FATCA for investment funds – Be ready for May 1, 2015!

    The Foreign Account Tax Compliance Act, or FATCA, has been an integral part of Canada’s tax system for over a year. Originally legislated under U.S. law, FATCA allowed the Internal Revenue Service (“IRS”) to obtain information from financial institutions about the financial accounts of U.S. citizens and residents. This U.S. regime was introduced into Canada through the Intergovernmental Agreement for the Enhanced Exchange of Tax Information under the Canada-U.S. Tax Convention (“IGA”) and then through the enactment of Part XVIII of the Income Tax Act. Under Canada’s FATCA regime, Canadian financial institutions, including several investment funds, are required to file their first report on their U.S. reportable accounts by May 1, 2015. STATUS Under the FATCA, only Canadian financial institutions can have obligations to register and report the U.S. reportable accounts they maintain. Investment funds are generally considered a Canadian financial institution. An investment fund, its general partner, fund manager and holding companies are usually required to report under the FATCA rules. A fund’s limited partners may also have their own FATCA obligations. Most Canadian investment funds have addressed the issue of their FATCA status and obtained a global intermediary identification number (or “GIIN”) from the IRS. However, there is still some uncertainty which can cause market players to put off analyzing their obligations or registering. There are several reasons for this, including the fact that the rules are relatively new, the lack of formal administrative positions regarding their application, qualification and exception issues, etc. For an investment fund, these issues require an in-depth analysis of all entities forming part of its structure in order to come to an adequate determination. It should be noted that an investment fund that determines that it does not qualify as a financial institution for the purpose of FATCA could be considered a passive non-financial foreign entity and be required to report such information at the request of a financial institution and disclose more information about its beneficiaries in order to determine their status. DUE DILIGENCE A reporting Canadian financial institution is required to determine whether the financial accounts it maintains for its clients contain U.S. indicia (residence and citizenship of account holder, place of birth, mailing address, telephone number, etc.). This verification includes a review of available information about the account by the financial institution and a mechanism for requesting information. Such a request may be in the form of an IRS Form W-8, an official IRS document, or an equivalent document prepared by the financial institution, to be filled out by the account holder. A financial institution is required to collect this information for existing accounts and any new account it opens for a client. The financial institution’s verification obligations may be more or less strict depending on the account, the date it was opened and its value. REPORTING Canadian financial institutions are required to file an electronic report on their U.S. reportable accounts with the Canada Revenue Agency (“CRA”). The first such report covers financial accounts held by financial institutions as of December 31, 2014 and must be filed by May 1, 2015. Financial institutions must also complete, by June 30, 2015, a review of their high-value financial accounts, i.e. those worth one million dollars ($1M) or more, held as of June 30, 2014. After that, financial institutions will be required to file annual reports. EVOLUTION The FATCA rules are the precursor of a broad, evolving trend toward the exchange of information about taxpayers’ assets among the tax authorities of different countries. The United Kingdom has set up a similar although less wide-sweeping regime than the U.S. China is also looking at the possibility of setting up its own regime but has not released any details so far. The Organisation for Economic Co-operation and Development (“OECD”) has also set up a common standard for the automatic exchange of information regarding financial accounts, which Canada has committed to implement by 2018. This standard is expected to be similar to FATCA but involve all countries that have signed agreements involving the automatic exchange of information. In future we will certainly see greater transparency and increased reporting requirements regarding information about financial accounts to be provided to the tax authorities. Since investment funds are directly affected by these rules, they should make sure they have the tools they need to meet these requirements.

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  • Private equity fund economics in Canada: An overview of the essentials

    Private equity fund economics play an important role in attracting investors to a given fund. Indeed, investors want to know how expenses will be shared, what fees are applicable and how profits will be allocated. The summary below provides a brief overview of the most common fund arrangements with respect to such considerations. That being said, no two funds are the same and a fund’s organizational documents can be tailored to take into account a wide array of particularities unique to a given fund. CONTRIBUTIONS, DISTRIBUTIONS AND ALLOCATIONS THE GENERAL PARTNER CONTRIBUTION Investors expect that either the private equity fund sponsor1 (the “General Partner”) or one of its affiliates will have a vested interest in the success of the fund. In most cases, investors expect that the General Partner, its affiliates or key executives will make an investment representing anywhere between 1% to 5% of the total capital contributions made by investors. This contribution is significant to investors as it ensures that the interests of the fund’s management team are aligned with their own and also reduces the incentive for the General Partner to incur excessive risk in an attempt to generate greater returns for itself. This is one reason why the Institutional Limited Partners Association recommends that the General Partner itself be required to make a financial contribution to the capital of the private equity fund2. DISTRIBUTION WATERFALLS AND PROFIT-TAKING A fund’s basic economic structure will most often be set out in the “distribution waterfall” — a mechanism which dictates how profits are to be allocated and in what priority such payouts will be made. All distributions made are net of any fund expenses, liabilities and cash reserves and are done on a pro rata share basis among the investors according to their respective capital contributions to a given investment. Each tier must be satisfied in full before proceeding to the next priority tier. The following is an example of a basic distribution waterfall that a fund may have in place: First Tier: Return of Capital Contribution to Investors The first distribution provides that investors are entitled to recuperate any capital contributed with respect to a given investment before any other distributions may be made. Second Tier: Preferred Return to Investors The next distribution also flows to investors until they have received an amount equal to the preferred return on their capital contributions. The preferred return, often referred to as the “hurdle rate” with respect to the investment in the fund, provides investors with a determined rate of return (often between 5% and 9% on any capital contributed by an investor to a given investment) before the General Partner is entitled to receive any of the proceeds of the fund’s investments. Third Tier: Catch-up Tier Once investors have seen their capital contributions repaid and their preferred return paid out, the General Partner will benefit from a “catch-up” tier. At this stage, the General Partner will be entitled to share in the profits generated by the fund until it has received an amount equal to the carried interest split (discussed below) it would have otherwise been entitled to as part of the first and second tiers. Fourth Tier: Carried Interest Split The fourth tier entitles both investors and the General Partner to receive fund profits. At this stage, the investors and the General Partner split the pool of any remaining distribution funds payable according to the carried interest split stipulated in the fund’s operating agreement (an 80/20 carried interest split whereby investors receive 80% of the distribution payable and the General Partner receives 20% is commonplace, although this range may vary significantly depending on market conditions and industry standards). CLAWBACK A fund’s operating agreement may also include a “clawback” provision relating to the General Partner’s carried interest. Such a provision, which may include a built-in escrow procedure, serves as an adjustment mechanism which requires the General Partner to hold back a certain percentage of its carried interest profit participation to guard against overpayment in the event that any given investment does not prove to be profitable. For example, a clawback may be triggered when, upon calculating the fund’s aggregate returns from any such given investment, the investors have been distributed an amount of the profits that is less than the hurdle rate. In such instances, the General Partner will have to return any excess profits to the fund for re-distribution to investors. FUND FEES AND EXPENSES MANAGEMENT FEES In connection with the establishment of a private equity fund, the General Partner will often either create an affiliated entity or appoint a third-party investment adviser or management company to provide investment advice with respect to the management of the fund. Such arrangements can be crystallized in the form of an advertisement advisory agreement or management services agreement, which will describe exactly which duties and responsibilities are delegated to the appointed entity. The General Partner, or any manager or investment adviser appointed to act on behalf of the fund, will generally receive a management fee based on the aggregate capital committed to the fund (typically about 2%). Occasionally, the management fee will contain two components: one that is based on the capital committed but not yet invested, and the other that is based on the capital that has been invested by the fund. However, it is not uncommon to see a “flat” fee applied to all aggregate committed capital. The management fee is used by the General Partner (or any appointed entity) to employ investment professionals, cover costs associated with the daily functioning of the fund and evaluate potential investment opportunities. Such fees and expenses are borne by the fund (and therefore its investors) and are most often payable on a quarterly or semi-annual basis. In addition to the fund economics, sales tax considerations and applicable dealer registration requirements in any given jurisdiction are considerations that must be taken into account when implementing any particular fee structure3. ORGANIZATIONAL OR ESTABLISHMENT COSTS Those fees associated with creating and setting up the fund are most often paid for by the fund, but are also usually capped at an amount indicated in the fund’s operating agreement. Occasionally, an operating agreement may instead provide that the General Partner will cover establishment costs up to an agreed upon amount. Such expenses include professional fees such as legal and accounting services, as well as administrative and marketing costs incurred at fund formation. Establishment costs will vary greatly depending on the complexity of the fund being created, and on whether any associated feeder funds, alternative investment vehicles or associated entities are being created simultaneously. OPERATING EXPENSES The fund will also be responsible for those fees and expenses related to the proper functioning and operation of the fund. Such fees may include ongoing professional or consultancy fees, administrative costs, any applicable taxes or regulatory fees, as well as the management fees payable to the General Partner, investment adviser or management company and any expenses incurred by such persons in carrying on their activities on behalf of the fund. 1 As a general rule, the promoter of private equity and venture capital funds is the general partner. Private equity and venture capital funds are most frequently created in the form of a limited partnership with a predetermined term. 2 See «Private Equity Principles», (version 2.0), Institutional Limited Partners Association (available at: http://ilpa.org/index.php?file=/wp-content/uploads/2011/01/ILPA-Private-Equity-Principles-version-2.pdf&ref=http://ilpa.org/principles-version-2-0/&t=1426810053). 3 For more information on this subject, please see our article entitled “Registration Requirements of Venture Capital and Private Equity Fund Managers in Canada : A Favourable Regulatory Framework” published in the May 2014 Lavery Capital newsletter.

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  • Rules on mark-to-market properties — A pitfall to avoid

    The Income Tax Act (Canada) contains specific rules which apply to certain properties held by financial institutions known as the mark-to-market properties rules (hereinafter “MTMP”). These complex rules are often poorly understood and can result in unexpected tax consequences in various situations and, in particular, in the context of project financing involving the issuance of units in a limited partnership. Generally when the MTMP rules apply, a financial institution must declare as income any increase in value not realized at the end of the taxation year on the MTMP held by such financial institution, whether or not such property was the subject of an actual disposition. The expression “financial institution” is specifically defined for purposes of the MTMP rules and includes not only banks but insurance companies and entities controlled by insurance companies, as well as partnerships in which more than 50% of the fair market value of its interests are held by one or more financial institutions. In such a case, the partnership would automatically become subject to the MTMP rules to the extent that it holds MTMP. Such a partnership must therefore declare an income for the taxation year in question in respect of any increase in the value of the MTMP held by it, and allocate such income to all its unitholders, regardless of whether or not they are financial institutions. Corporate shares will be considered to be MTMP where a financial institution holds less than 10% of the fair market value of the corporation’s shares or of the voting rights attached to such shares. In addition, the definition of MTMP includes various other types of property the fair market value of which is attributable to MTMP. For example, mutual fund units, units in a limited partnership, insurance policies or other derivative financial instruments may be regarded as MTMP to the extent that the value of such investments is primarily attributable (more than 50%) to MTMP. However, it should be noted that the ownership of shares of an “eligible small business corporation” (defined for purposes of the MTMP rules as being a corporation whose assets have a carrying value which does not exceed $50,000,000 and which employs 500 persons or less) will not be considered to be MTMP. The MTMP rules apply to financial institutions such as banks and insurance companies or any entity controlled by such financial institutions. However, as noted above, because of the broad definition of “financial institution” in the context of the application of the MTMP rules, other entities may also inadvertently be considered to be financial institutions if the percentage of their unit or share ownership is held by one or more financial institutions. In this regard and specifically in the context of the formation of a limited partnership which may eventually make investments which could be considered MTMP, it is important to provide for a clause limiting the ownership of units by financial institutions so as to ensure that the limited partnership will not be considered to be a financial institution under the MTMP rules. In the event that such a restriction is not desirable, the limited partnership agreement and the limited parntership’s investment policies should provide that the investments to be made by the limited partnership must not consist of MTMP. Thus, even if the limited partnership itself were considered to be a financial institution, the MTMP rules would have no impact since no investment made by the limited partnership would meet the definition of MTMP. In conclusion, the MTMP rules must be taken into consideration in any major structured investment project, particularly in connection with a limited partnership in which financial institutions are likely to acquire a substantial interest.

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  • Establishment of a new $375 million venture capital fund and recapitalization of the Anges Québec Capital fund

    The Budget Plan unveiled by the Quebec Government as part of the Budget Speech of last June 4 includes many initiatives to increase venture capital financing. The 2014 2015 Budget presented by the Minister of Finance, Carlos Leitão, provides for several measures to make $560 million available to finance businesses and venture capital funds, including the establishment of a $375 million fund to invest in venture capital funds. The capitalization of this new fund, which will have an overall target size of $375 million, will be financed by the Quebec Government, which will invest $62.5 million, the Fonds de solidarité FTQ and the Caisse de dépôt et placement du Québec, which will each invest $50 million, and by the Federal Government through its Venture Capital Action Plan and private sector partners who will assume the difference.This new venture capital fund, which will be headquartered in Quebec, will be a fund of funds which will focus on investment opportunities in a number of sectors, but with an emphasis on the life sciences sector. The Minister of Finance of Quebec and the Minister of Finance of Canada will shortly unveil all details concerning this new fund.The new Quebec budget also provides for financial support to angel investors for the purpose of recapitalizing the Anges Québec Capital fund while increasing support for the private equity industry in cooperation with Investissement Québec. Quebec undertakes to maintain its financial support by contributing $25 million to Anges Québec Capital, to which will be added $25 million and $15 million to be invested respectively by the Caisse de dépôt et placement du Québec and the Fonds de solidarité FTQ.By adding to the above amounts an amount of $20 million already invested by the Quebec Government as part of the 2011 2012 Budget and the amounts to be invested by other potential partners, the Anges Québec Capital fund should be able to reach the capitalization objective of $100 million.These additional amounts devoted to venture capital funds will greatly contribute to increasing the number of Quebec start-ups, which will benefit from a further diversified venture capital financing offer.

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  • What precautions should a proposed director take prior to accepting to act as a corporate director? / What are the duties of a member of a board of directors?

    This Need to Know Express is part of a series of newsletters which each answers one or several questions in a practical and concrete way. These bulletins have been or will be published over the next few weeks. In addition, a consolidated version of all the Need to Know Express newsletters published on this topic will be available upon request.These various newsletters, as well as others published on the subject of governance, are or will be available on our website (Lavery.ca/publications – André Laurin). 3. WHAT PRECAUTIONS SHOULD A PROPOSED DIRECTOR TAKE PRIOR TO ACCEPTING TO ACT AS A CORPORATE DIRECTOR? A person who is invited or wishes to become a director should clearly make some prior verifications, including: his interest for the organization and its objectives; the requirements of the position as to time and efforts and his availability in that respect; the actual possibility to make a significant contribution, therefore resulting in added value for the legal person; the quality of incumbent directors, who will be his colleagues if he accepts to act as a director; the receptivity of management respecting sound governance and the help provided by management to directors to enable them to discharge their duties and play their full role; the quality of the existing corporate governance; the financial health of the legal person; the existence of actual or threatened significant proceedings against the legal person; the compliance by the organization with laws and contracts; the existence of adequate directors’ and officers’ liability insurance coverage; the availability of an indemnification undertaking by the legal person in favour of the director; the existence of recent director resignations and the reason thereof; the proportionality of compensation relative to the liability risks (mainly in the case of reporting issuers).Preliminary discussions with the chief executive officer, the chairman of the board and some current and former directors may be helpful in obtaining adequate confirmations in respect of many of these items. However, these discussions should be completed by reviewing documents such as the financial statements, court records, minutes...).A person who is an officer, director or employee of a corporation must also ensure that the new office as director is acceptable to the first corporation. The new office may in fact contravene a policy of the corporation, the contract between the individual and the corporation or the interest of the corporation.The risks to reputation related to accepting to act as director with some legal persons are not to be neglected either. We have recently seen that the reputation of high quality persons who had accepted on a pro bono basis to act as directors of not-for-profit organizations suffered as a result. The media, politicians and even auditors general sometimes draw quick, ill-founded conclusions as to the proper discharge of their duties by directors.4. WHAT ARE THE DUTIES OF A MEMBER OF A BOARD OF DIRECTORS?Incorporating statutes, particularly the Canada Business Corporations Act1 and the Business Corporations Act2 (Quebec), as well as the Civil Code of Québec3 all stipulate two general duties which directors are subject to, that is, the duty of care and the duty of loyalty. The Canada Business Corporations Act stipulates these duties as follows:“122. (1) [Duty of care of directors and officers] Every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interests of the corporation; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”In addition to these general duties, a director is also subject to many statutory obligations or presumptions of liability or guilt under various statutes, particularly for unpaid salaries and remittance of deductions at source and GST/QST. It is important for directors to be aware of all the statutory obligations and presumptions and know how to recognize them, ensure that the legal person takes appropriate measures in this respect and that the board supervises such measures. _________________________________________1 Canada Business Corporations Act, R.S.C. 1985, c. C-44.2 Business Corporations Act, C.Q.L.R., c. S-31.1 art. 119.3 Civil Code of Québec, L.R.Q., c. C-1991, articles 321 and following.

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  • Proposed General Anti-treaty Shopping Rule : Private Investment Funds Will Need to Play it Safe

    LAVERY: A LEADER IN MONTREAL IN THE PRIVATE EQUITY, VENTURE CAPITAL AND INVESTMENT MANAGEMENT INDUSTRY Creating and setting up private equity and venture capital funds are complex initiatives requiring specialized legal resources. There are very few law firms offering such services in Quebec. Lavery has developed enviable expertise in this industry by working closely with promoters to set up such structures in Canada and, in some cases, the United States and Europe, in conjunction with local firms. Through Lavery’s strong record of achievements, the firm sets itself apart in the legal services market by actively supporting promoters, managers, investors, businesses and other partners involved in the various stages of the implementation and deployment of private equity and venture capital initiatives. Following the recent public consultations held by the federal government on the issue of treaty shopping, the 2014 Budget proposes to implement in the Canadian domestic law a general anti-treaty shopping rule (“GATSR”) which private investment funds investing in Canada (“Funds”) may have to deal with.Treaty shopping refers to a situation where, for example, a non-resident person who is not entitled to benefits under a Canadian tax treaty uses an entity in a country with which Canada has concluded a tax treaty and, to obtain Canadian tax benefits, earns or realizes income sourced in Canada indirectly through that entity.The GATSR would probably be integrated into the Income Tax Conventions Interpretation Act. Its application would result in denying in whole or in part the benefits claimed pursuant to a tax treaty.The GATSR provisions would provide for the following items: Main purpose provision: Subject to the relieving provision, the purpose of the GATSR would be to deny the benefit of a tax treaty to a person where it is reasonable to conclude that one of the main purposes of the transaction or series of transactions is to allow that person to obtain the benefit. Conduit entity’s rebuttable presumption: It would be presumed that one of the main purposes of the transaction or series of transactions is to obtain a benefit pursuant to such a treaty if the income in question is primarily used to pay, directly or indirectly, an amount to another person (such as a limited partner of a Fund) who would not have been entitled to an equivalent or more favourable benefit had that person received directly the income in question. Safe harbour’s rebuttable presumption:Subject to the rebuttable presumption of use of a conduit entity, it would be presumed that none of the main purposes for undertaking a transaction was for someone to obtain a benefit under a tax treaty if, as the case may be: the person carries on an active business, other than managing investments, in the foreign treaty country and, where the income in question is derived from a related person in Canada, the active business is substantial compared to the activity carried on in Canada by such related person; the person is not controlled, de jure or de facto, by another person who would not have been entitled to the benefit had that person directly received the income in question; the person is a corporation or trust listed on a recognized stock exchange. Relieving provision: The Minister of National Revenue (“Minister”) would, at his discretion, allow the grant of the benefit, in whole or in part, when circumstances reasonably justify it. Some examples of application of the GATSR suggest that a Fund may be targeted by the new rule. A fund which is set up as a limited partnership generally relies on a holding corporation which may be considered by the Minister as a conduit corporation pursuant to the GATSR. Funds should not assume that the legislator will provide relieving transitional rules for current structures, but rather consider right now the implementation of mechanisms to avoid or reduce the effects of the GATSR.

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  • Is a director required to be a shareholder or member of the legal person? / Who is eligible to become a director?

    This Need to Know Express is part of a series of newsletters which each answers one or several questions in a practical and concrete way. These bulletins have been or will be published over the next few weeks. In addition, a consolidated version of all the Need to Know Express newsletters published on this topic will be available upon request.These various newsletters, as well as others published on the subject of governance, are or will be available on our website (Lavery.ca/publications – André Laurin).1. IS A DIRECTOR REQUIRED TO BE A SHAREHOLDER OR MEMBER OF THE LEGAL PERSON?Subject to the following, the answer to this question is no.However, the governing statute, articles of incorporation, internal or administrative by-law or unanimous shareholder agreement may stipulate specific eligibility conditions.For example, as a non-exhaustive list of examples: the incorporating statute or the by-law of a not-for-profit organization (NFPO), professional corporation or some other legal persons may stipulate requirements as to membership, residence, citizenship, etc.; the articles of incorporation of a corporation or a unanimous shareholder agreement may confer on a shareholder the authority to appoint one or several directors or provide that a director must also be a shareholder.2. WHO IS ELIGIBLE TO BECOME A DIRECTOR?The eligibility conditions are mainly found either in the Civil Code of Québec1 for legal persons governed by it or in the incorporating statute of the legal person, as completed in both cases by the internal or administrative by-law duly adopted by the legal person or a unanimous shareholder agreement.Under all relevant statutes, a director must be a natural person. A legal person cannot be a member of the board of directors of another legal person.Article 327 of the Civil Code of Québec2 stipulates that “Minors, persons of full age under tutorship or curatorship, bankrupts and persons prohibited by the court from holding such office” are disqualified for office as directors. Exclusions which are similar in whole or in part are to be found in most incorporating statutes of legal persons.Most incorporating statutes do not require directors to be shareholders or, in the case of a NFPO, a member of the legal person.Moreover, some incorporating statutes prescribe eligibility conditions, such as citizenship or residence.Some statutes other than the incorporating statutes or some regulations or decisions of regulatory authorities establish prohibitions from acting as a director generally or, in other circumstances, from acting as a director of specific legal persons.In another publication entitled “May a director be removed by the board of directors during his term of office?”3 we discussed some additional eligibility conditions which may be prescribed by the internal or administrative by-law. Some legal person may, for example, wish to impose as an eligibility condition the absence of criminal record to avoid having to file an application with the court under article 329 of the Civil Code of Québec4 to obtain the removal of a director who has been found guilty of an offence pursuant to the Criminal Code.Failure to meet the conditions of eligibility and the loss of eligibility should, in our opinion, result in most cases and for most purposes, in the automatic disqualification of a natural person as a director.Any person who is invited to become a director of a legal person and the legal person itself must therefore verify that the applicable eligibility conditions are met. _________________________________________1 Civil Code of Québec, CQLR, c. C-1991.2 Civil Code of Québec, CQLR, c. C-1991.3 Lavery website - Publications - André Laurin - “The Corporate Director’s Q & A”, “20. May a director be removed by the board during his term of office?”.4 Civil Code of Québec, CQLR, c. C-1991.

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