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Law For Business Students
Lazar Sarna

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Lazar Sarna

Law for the Business Student

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ISBN 978-87-403-0070-3

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1 General

8

1
...
3

Constitutional jurisdiction

10

1
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5

Appointment and removal of directors

10

1
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7 Shareholders

16

1
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1

Directors’ and officers’ fiduciary duties

24

2
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3

Directiors’ good faith reliance

25

2
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com/Mitas
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1

Corporate Contracts: Corporate Agents

29

4

The business plan

31

4
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2 Contents

33

5 
Raising funds: Private placements and going public

46

5
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2

Private placements

50

6

Corporate operations

53

6
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2

Management and employees

54

6
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4

Product marketing

56

6
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job
...
dk

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1 Introduction

65

7
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3

Term of employment

65

7
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1 Introduction

73

8
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3

Domestic use

76

8
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Working globally—
often in remote and challenging
locations—we invent, design,
engineer, and apply technology
to help our customers find and
produce oil and gas safely
...


What will you be?

careers
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Copyright © 2013 Schlumberger
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Put another way,
starting up and operating a business requires financing, manpower, product and the possibility of making a profit
...
Corporations
are established to avoid the personal liability of the persons operating the corporation and to gain tax advantages such as
low corporate tax rates
...

Legal structures and concepts not only give form to business, but also lay down guidance
...


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1 General
A corporation is a legal person, meaning that it has all the rights and duties of a natural physical person, save for those
disqualifications and disabilities arising for its incorporeal nature
...
Salomon & Co Ltd [1897] AC 22, which held that the founder, shareholder
or director of a corporation may be a secured creditor of the same corporation, since the corporation is a separate and
distinct person
...
Nor are the subscribers as
members liable, in any shape or form, except to the extent and in the manner provided by the Act
...
If the view of the learned judge were sound, it would follow that no common law partnership
could register as a company limited by shares without remaining subject to unlimited liability
...
” That is a taking nickname, but it does not help
one much in the way of argument
...

A related rule is that a shareholder cannot claim from a third party monies or rights that belong to the corporation
...

The legal rationale behind the Foss v
...
v
...
(No
...
R
...
367], as follows:

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Harbottle] is the consequence of the fact that a corporation is a separate legal entity
...
The company is liable for its contracts and torts; the shareholder
has no such liability
...
No cause of action vests in the shareholder
...
The law confers on him
the right to ensure that the company observes the limitations of its memorandum of association and the right to
ensure that other shareholders observe the rule, imposed on them by the articles of association
...

However, there is a limit to the notion that a corporation is separate and distinct from its directors and shareholders
...


1
...

The basc information necessary to permit incorporation includes:
1
...
The territory where the registered office is situated
3
...
Restrictions, if any, on share transfers
5
...
Restrictions, if any, on the business the corporation may carry on
The corporation consists of a number of actors, namely, the shareholders, officers and directors
...
In return for capital, the shareholder acquires a share and indirect input in management
by electing directors and ratifying decisions of the board of directors
...
The board provides direction to corporate activities by appointing officers
and receiving their reports of operations
...

An enterprise incorporates for one or two fundamental reasons: limitation of liability and tax reduction
...
The
corporation therefore acts as a shield or a corporate veil, against personal liability of the shareholder
...


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They are exceptionally liable for
corporate debts if they have used the corporate entity to advance their personal purposes in a manner tantamount to fraud
...
In these cases, it is said that the corporate veil shielding the corporate participants is lifted
...
In order to stimulate business through the vehicle which has the most capital accumulation,
governments tax corporations, depending on their size and industry, at rates substantial less than personal rates
...

Once incorporated, the corporation must be operated by physical persons who sign and transact in the name of the
company
...

The internal structure is defined by the general by-laws of the corporation
...


1
...


1
...
The director is a natural person, who may or may not be a shareholder, charged with
the power of carrying on the business of the corporation, alone or in concert with a minimum number of co‑directors,
together called a board and acting as the agent or representative body of the corporate entity
...

Directors as a group or board are agents or mandataries of the corporation requiring no special authorization beyond
that conferred by the constituting instrument or statute to act on behalf or manage the corporation
...


1
...
The major disqualifications of directors are based on age, mental competence, solvency and
residency, even though no such disqualifications generally apply to shareholders
...
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10

Law for the Business Student

Corporate Structure

In most jurisdictions, no person less than eighteen years old may assume the office of director; no maximum age limit is
prescribed
...

No person who has been found by a court to be of unsound mind is entitled to act as a director
...
Of course, an action to disqualify the director, or disqualification
raised as a collateral issue would lead to a judicial declaration as to mental competence
...
The office
of director is personal in nature, and cannot be filled by a party that has no physical presence
...

The director while in office cannot have the status of a bankrupt
...
The discharge of a person from bankruptcy restores his qualifications for directorship
...
In addition, such directors must be shareholders to
qualify for office
...
6 Management
In general, the bylaws of a corporation will provide that directors assume office by way of election by the shareholders
at their general meetings, in accordance with the prescription of statute and the formalities set out in the by-laws
...

Directors may be elected for staggered terms
...
A director
may also be appointed by the board of directors to fill a vacancy
...
A director must accept, expressly or implicitly, the office of director
...

Directors are removable, by death, resignation and disqualification, although the question of the appropriate avenue for
removal remains to be discussed
...
Only that category of shareholder which was entitled to elect the director is entitled to remove him, and
only on a cumulative vote basis where a cumulative voting election took place
...
Where however the director
has also acted in another capacity, offering managerial or professional services on a contract basis, the vote for removal
may also constitute a vote to unlawfully terminate that contract
...


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Directors have the duty to manage the business and affairs of the corporation
...
Day-to-day management of
corporate operations is performed by officers and other employees of the corporation appointed by the board
...
Both officers and directors must fulfill their duties to the corporation
with reasonable care, diligence and skill
...
The directors have almost
innumerable powers within their right to manage
...


www
...
se/master

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Those powers associated with decisionmaking and internal management include:
l) appoint or remove managers, secretaries, treasurers, officers, clerks and agents for permanent, temporary or
special services, as they from time to time think fit, and to determine their powers and duties, and fix their
remuneration;
m) make and repeal regulations for the management of the business of the corporation, its officers and
employees;
n) provide for the management of the affairs of the corporation at home and abroad, and in particular to
appoint any persons to be the attorneys or agents with such powers and upon such terms as they may think
fit;
o) accept a surrender of shares or any part thereof;
p) appoint any person to accept and hold in trust any property belonging to the corporation, or in which it is
interested, to execute and do all such deeds and things as may be requisite in relation to any such trust, and
provide for the remuneration of any such trustee
...

The bylaws accordingly will determine that meetings of the board must be held at such place and time and on such day as
any two or three directors may determine
...
Each newly elected board may without notice hold its first meeting
for the purposes of organization and the appointment of officers immediately following the meeting of shareholders at
which such board was elected
...


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The larger the board, the wider
the diffusion of responsibility and greater effort in reporting, feed-back and decision-making
...
As the company grows, and may be the object
of a first or second round of private investment, the board will grow to encompass senior managers or employees, as
well as investor representatives and a business leader
...
The
bylaws therefore specify that contracts, documents or instruments in writing requiring execution by the corporation must
be signed by any number of officers or directors
...
The board is authorized from time to time by resolution to appoint any officer
or officers or any other person or persons on behalf of the Corporation to sign and deliver either contracts, documents
or instruments in writing generally or to sign either manually or by facsimile signature and deliver specific contracts,
documents or instruments in writing
...

Furthermore, banking business is transacted with those banks, trust companies or other financial institutions which
the board designates, from time to time by resolution
...

Given the risk to the director and officer that the corporate veil will be lifted and personal liability imposed, the bylaws
stipulate that the corporation will indemnify them, a former director or officer or a person who acts or acted at the request
of the corporation, as a director or officer of a body corporate of which the corporation is or was a shareholder or creditor,
and their heirs and legal representatives
...
This arises from the fact that he is or was an employee or agent of the
corporation, or is or was serving at the request of the corporation as a director, officer, employee, agent of or participant
in any other enterprise
...
The termination of any action, suit or proceeding
by judgment, order, settlement or conviction does not, of itself, create a presumption that the person did not act honestly
and in good faith with a view to the best interests of the corporation and, with respect to any criminal or administrative
action or proceeding that is enforced by a monetary penalty, had no reasonable grounds for believing that his conduct
was lawful
...
If any director or officer of the corporation is employed by
or performs services for the corporation otherwise than as a director or officer, the fact of his being a director or officer
of the corporation does not disentitle such director or officer from receiving proper remuneration for such services
...
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14

Law for the Business Student

Corporate Structure

Finally, in regard to dealing with conflict of interest situations, the bylaws may provide that no director or officer is
disqualified by his office from contracting with the corporation nor shall any contract or arrangement entered into by
or on behalf of the corporation with any director or officer or in which any director or officer is in any way interested
be liable to be voided; and the person who has such an interest is not liable to account to the corporation for any profit
realized by any contract or arrangement by reason of holding that office, provided that the director or officer has made
full, timely and material disclosure, and has not voted on the contract
...

In each applicable jurisdiction, the officer will be so defined by the governing statute, and by designation of the by-laws
or resolutions
...

Officers may be appointed for terms longer then those of the directors who appoint them
...


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...
His duties may include the following
presiding at meetings of shareholders, supervising the co-officers, receiving and executing the instructions of
the directors
...

b) Vice-President
The vice-president acts in the absence of the president in fulfillment of his duties
...

c) Treasurer
The treasurer deals with the accounts, funds and securities of the corporation
...


1
...
This is so even if it is a one-man company where
the shareholder and director are one and the same
...
The shareholder is not a company creditor
...
The shareholder’s
basic rights are to vote for directors, and receive a share of the net assets upon the liquidation of the company
...
Preferred shares give the
holder a number of different rights, which may include the right to preferential distribution of net assets upon liquidation,
or a right to dividends, or a right of redemption, or a right to cumulate dividends
...

For the most part, the general bylaws will detail the holding of special and annual shareholder meetings, quorum, proxies,
share subscriptions and share conditions
...
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Law for the Business Student

1
...
1

Corporate Structure

Unanimous Shareholders Agreements

To protect their respective interests, and clarify how they will ensure the running of the business of the company,
shareholders enter into an agreement to which all of the shareholders are party
...
Furthermore, the company
is also a party because the parties stipulate the performance of corporate acts which the company must undertake to do
...
For example: the Corporation will at all times carry out the provisions of the Agreement; the Shareholders or
their nominees will act and vote as directors to ensure that the purpose, intent and provisions of the agreement are carried
out so long as they are directors of the Corporation and to the extent that they are permitted by law; the Corporation
confirms its knowledge of the agreement and undertakes to carry out and be bound by its provisions to the full extent
of its capacity and power to do so
...
As to governance, the parties must stipulate as to the composition of the
Board of Directors, namely, that directors of the corporation are elected by vote of the shareholders, and that the names,
titles and duties assigned to each officer are also clearly set out
...
A clause may also be included to the effect that
the shareholders may exempt the corporation from appointing an auditor in any financial year
...
This may be especially true where the researcher
finds himself overruled by a majority of constituents who represent the venture capital investors
...
We would therefore expect to find clear limitations and
specifications with respect to the powers of the board of directors:
These might include prescriptions concerning what constitutes an acceptable number of directors to make a decision; or
a statement to the effect that no action is to be taken in the absence of the Chief Operating Officer
...
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17

Law for the Business Student

Corporate Structure

i
...
They determine anything
from quorum and procedural matters to governance
...
Accordingly, a measure
of permanency must be assured through a conservative process of change
...
Changes in the authorized or issued capital of the corporation
One way of reducing the value of the individual share is increase the value of the authorized capital
...
The effect of an increase in shares is to dilute
or reduce the value of the individual share; and in some cases wrest control away from a shareholding group
...
When
the authorized capital is increased to $200, the board can issue another hundred shares, each at $1
...

In order to avoid the problem, a procedural barrier is erected to impede the process of dilution
...
Entering into any agreement, making any offer or granting any right capable of becoming an agreement to allot
or issue any shares of the Corporation
The shareholders wish to control the allotment of the shares for the same reason they would seek to regulate
the increase in authorised capital
...


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Law for the Business Student

Corporate Structure

iv
...
To
lightly permit a change in business means that the company either no longer believes in the value of the product
or service, feels it cannot attain appropriate market share, or considers another opportunity to be more lucrative
...

v
...
If management wishes to enter into agreements which go
beyond the ordinary course of business, this indicates the company is preparing for insolvency, or is taking a
risk into new areas of business
...

vi
...
The
failure to respect the limit is grounds for removal of management; and cause for concern for the corporate lender
...
Taking steps to wind-up or terminate the existence of the Corporation;
Action toward winding-up or corporate termination is a fundamental corporate change which jeopardizes the
investment of the shareholders, and consequently requires their reasoned approval
...
elling, leasing, exchanging or disposing of the entire undertaking or property or assets of the Corporation or any
S
substantial part of it;
Action directed toward alienating or charging or disposing of the corporate substructure is a fundamental
corporate change which jeopardizes the investment of the shareholders, and consequently requires their
reasoned approval
...
Directly or indirectly making loans or advances to any person or giving security for or guaranteeing the debts of
any person;
A corporation other than a lending or insuring institution is not in the business of lending money or putting
up security for the debts of another
...
Most corporate statutes impose personal liability upon the directors who voted for loans and
guarantees which render the company insolvent
...
Declaring or paying any dividends
There is a time and art to declaring dividends
...
Some shareholders may want dividends distributed, while others may prefer
to use the net profits to cover operating costs, including the repayment of loans or coverage of contingencies
...
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Law for the Business Student

Corporate Structure

xi
...
In any case, it may involve a fundamental change in the company business
which must be scrutinized
...
Entering into a partnership or arranging for the sharing of profits, union of interests, joint venture or reciprocal
concession with any person;
Action toward entering into a partnership or arranging for the sharing of profits, union of interests, or joint
venture may mean a drive for expansion, a quest to eliminate competition, or a taking in payment of a debt
...

xiii
...
It is a fundamental
change in the company business
...
For actions that by law require the approval of the directors only: if all the required directors are present
...
For actions that by law require the approval of the shareholders: at any meeting of shareholders duly called
for the purpose of considering the proposed action, a specified percentage of the votes are cast in favour of
the action
...
The exception
is if the other Shareholders have given their prior consent
...
For instance:
“The shares represented by this certificate are subject to all the terms and conditions of an agreement made as of
(date of signature of the Agreement) a copy of which is on file at the registered office of the Corporation
...
They state that if one of the shareholders makes an assignment for the benefit of creditors or is the subject
of any proceedings under any bankruptcy or insolvency law, the others have the automatic right to acquire his shares by
paying a sum equivalent to the purchase price
...
The provision would normally require that the lending bank or financial institution acknowledge in writing
that the pledge, charge, mortgage or encumbrance of the shares will continue to be subject to all the terms and conditions
of the agreement and that the acknowledgement includes all clauses prohibiting pledging, charging or mortgaging or
otherwise encumbering the shares without the consent of the other shareholder
...
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Law for the Business Student

Corporate Structure

It is expected to find the shareholders stipulating that they will not engage in business with another entity either similar
to or competitive with the business carried on by the corporation without prior written consent of other shareholders
...
The shareholders confirm that the restrictions are reasonable and valid and waive all defenses to their
strict enforcement
...
The remaining shareholders rarely want to deal with the heirs or trustees of the
shareholder either at a board meeting or at a shareholders meeting
...


1
...
2

Buy-sell or shotgun clause

Of greatest interest is the so-called shot-gun clause which contains a clever mechanism for permitting share acquisitions
...
The target of the offer has the choice of either accepting the offer or of turning the tables and offering
to buy the acquirer’s shares for the same price
...


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...

A shareholders’ agreement may be declared invalid if it fundamentally interferes with the functions of the directors in
the orderly management of the corporation
...
8

Employee stock options

The expectation of high earnings in a start-up company is not limited to the administration
...
To compensate for
that risk, and to top off their remuneration, employees usually demand a share of the company equity
...

The most orderly way of distributing equity to employees is through a stock option plan
...
Once the
company is publicly listed on a stock exchange, regulation will limit the amount of shares available to employees through
such a plan to a fixed percentage (in the range of 10 to 20%)
...


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...
The total number of shares available for option is defined reserved and may consist
of either authorized and un-issued shares or treasury shares
...
Since the employee is acquiring the shares
at a discount, the options should not be transferable; and should be exercisable only during his lifetime
...
No shares of Stock will be delivered to the
Employee until all such amounts have been paid
...
The Employee
will be responsible for all brokerage commissions, interest and other expenses, if any
...

d) In the event of the death of a Employee during the Exercise Period, the estate of such Employee, or other
person designated by the Employee, will be entitled to exercise any Stock Option awarded to Employee to
the same extent as a Employee who remains in active employment with the company
...

f) Nothing in the Plan or in any Stock Option granted under the Plan will confer upon any Employee or his
executors,

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...
1

Directors’ and officers’ fiduciary duties

There are two distinct duties to be discharged by directors and officers in managing, or supervising the management of,
the corporation:
Every director and officer of a corporation in exercising their powers and discharging their duties must
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
...
This duty requires directors and officers
to act honestly and in good faith with a view to the best interests of the corporation
...


2
...
They must respect the
trust and confidence that have been reposed in them to manage the assets of the corporation in pursuit of the realization of the
objects of the corporation
...
They must maintain the confidentiality of information they acquire by virtue of their position
...
v
...
C
...

592, at pp
...
Yet there may be situations where a profit must be disgorged,
although not gained at the expense of the company, on the ground that a director must not be allowed to use
his position as such to make a profit even if it was not open to the company, as for example, by reason of legal
disability, to participate in the transaction
...
Boardman [[1967] 2 A
...
46], which also supports the view that
liability to account does not depend on proof of an actual conflict of duty and self-interest
...
v
...
R
...
There, the managing director, who
was allowed to resign his position on a false assertion of ill health, subsequently got the contract for himself
...

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...
3

Corporate management

Directiors’ good faith reliance

Directors are and cannot be experts in all aspects of corporate finance, structure and operations, As lay people, they rely on
professional advice within the company or on outsourced counsel, be it that of a lawyer, accountant, engineer, or appraiser
...


2
...
4
...
4
...
1 Director defined
A director has no responsibilities of office unless that person has assumed the role of director
...
In Pereira v
...
In that case, the corporate exhibits established that it was the shareholders who must elect the
directors; and the provisional shareholders must meet to elect a Board of Directors and appoint an accounting firm
...
The liability
directors face in assuming such a role establishes the requirement of personal knowledge by that director of his election
or nomination to that role
...



...
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Law for the Business Student

2
...
2

Corporate management

Nature of Fiduciary Duty

The law is laid down in Regal (Hastings) v
...
R
...
The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed
to enter into engagements in which he has or can have a personal interest conflicting with the interests of
those whom he is bound to protect
...
”
A breach of trust under which a secret profit is obtained constitutes a fraud in equity against the cestui que trust, and it
matters not whether the person guilty of the breach of trust believed that he was entitled at law to retain the profit except
perhaps as to the question of whether any punitive or exemplary damages are to be granted
...
4
...
1 Personal liability of director
There are circumstances in which the oppression remedy might be applied to find a director personally liable for the
actions of a corporate defendant
...

The decided cases in which employees and officers of companies have been found personally liable for actions ostensibly
carried out under a corporate name are fact specific
...
Those cases in which the corporate veil has been pierced
usually involve transactions where the use of the corporate structure was a sham from the outset or was an afterthought
to a deal which had gone sour
...

Absent allegations which fit within the categories described above, officers or employees of limited companies are protected
from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or
interest from that of the company so as to make the act or conduct complained of their own
...

This does not mean, however, that if the actions of the directing minds are found wanting, that personal liability will flow
through the corporation to those who caused it to act as it did
...


2
...
3

Conflict of Interest

2
...
3
...


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...
In one decision, the court
cited the pertinent by-laws:
1
...

2
...
A Director shall not vote in respect of any such contract or transaction with the Company in which he is
interested and if he shall do so his vote shall not be counted, but he shall be counted in the quorum present
at the meeting at which such vote is taken
...


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...


2
...
4
2
...
4
...
A director accused to appropriating corporate assets cannot be accused
of appropriating assets of the shareholder
...

Directors will not generally owe any duty of faithfulness to the shareholders or to the creditors of their companies
...


2
...
4
...
His participation in these corporations, however, was thwarted by the
oppression of the respondents
...


2
...
5

Duty Owed to Employees

The concept of fiduciary duty is sufficiently broad to allow for a finding of such a duty between corporate directors and
officers and the employees where warranted by the facts
...
4
...
1

Customer lists

Where the defendant’s corporate officer acknowledged that he knew that the plaintiff ’s former employees had taken
customer lists from the plaintiff and admitted that the lists were used to target the plaintiff ’s customers, the court determined
the defendant was vicariously liable for the conduct of its employees in using the customer lists
...


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...
1

Corporate Contracts: Corporate Agents

3
...
1 
Corporate contracts / Notion of corporate agent / The court will look at what an outsider thought
an agent was authorized to do / Illustration
“An “actual” authority is a legal relationship between principal and agent created by a consensual agreement to which they
alone are parties
...

To this agreement the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part of
the agent
...
It may be that this rule relating to “undisclosed principals,”
which is peculiar to English law, can be rationalized as avoiding circuity of action, for the principal could in equity compel
the agent to lend his name in an action to enforce the contract against the contractor, and would at common law be liable
to indemnify the agent in respect of the performance of the obligations assumed by the agent under the contract
...

To the relationship so created the agent is a stranger
...
The representation, when acted
upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from
asserting that he is not bound by the contract
...
”: Freeman and Lockyer v
...
, [1964] 2 Q
...
480, [1964] 1 All E
...
630 (Eng
...
1
...
That has been done in
the judgments of this court in Freeman & Lockyer v
...
1
...
It is express when it is given by express words, such as when a board of directors
passes a resolution which authorizes two of their number to sign cheques
...
They thereby impliedly authorize him to do all such things as fall within the usual scope of that office
...


1



[1964] 2Q
...
480; [1964] 2 W
...
R
...
630, C
...


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...
It often coincides with actual authority
...
Other people
who see him acting as managing director are entitled to assume that he has the usual authority of a managing director
...
For instance, when the board appoints the managing director,
they may expressly limit his authority by saying he is not to order goods worth more than £500 without the sanction of the
board
...
The company is bound by his ostensible authority in his dealings with those who do
not know of the limitation
...
” Thus, if he orders goods worth £1,000 and signs himself
“Managing Director for and on behalf of the company,” the company is bound to the other party who does not know of
the £500 limitation, see British Thomson-Houston Co
...
v
...
2 which was quoted for this
purpose by Pearson L
...
in Freeman & Lockyer3
...
”: Hely-Hutchinson v
...
, [1968] 1 Q
...
549
...
B
...
A
...
B
...


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30

25/04/14 10:23

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Law for the Business Student

The business plan

4 The business plan
4
...

Once the investor has read the plan, the latter should be in an appropriate position to make a preliminary decision as
to interest and investment, subject to due diligence
...

There is no standard format prescribed by law or convention, except that the business plan of course should be written
...

a) The plan should not make representations about product readiness, actual sales and revenues, and future
markets which are tantamount to a guarantee
...

b) The business plan is a mere explanation of the business opportunity
...
If the plan is deemed to be an offer for shares in the company, it will be construed as an offering
memorandum or prospectus, and will require compliance, conformity and registration with the securities
commission having jurisdiction over the offer
...
It is distributed on a confidential
basis to those persons who have requested it
...

Before making an investment decision, investors should consider carefully the information set forth in this Business
Plan
...

There is no representation that there is a secondary market for the shares purchased through the investment
...
com

31

Law for the Business Student

The business plan

There can be no guarantee that patent rights will be obtained with respect to technologies researched and created
by the company, or that third parties will not independently develop the same or superior technologies or other
proprietary rights
...

The company expects to incur significant development stage and marketing costs in the early phases, which will not
necessarily yield off-setting revenues within the short-run
...

The contents of this document are not to be construed as investment, legal or tax advice
...
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Law for the Business Student

The business plan

4
...
General
The business plan, sometimes referred to as a commercial plan, should touch on all or most of the areas contained in the
following checklist:
a) Product or process overview [what is it about; in what field and market]
b) Status [has it reached beyond mere theory; is there a working prototype; are there sales]
c) Title [is it encumbered; protected; available]
d) Plan of approach to market [sale; licensing]
e) Development and funding history
f) Commercial proof of principle
g) Market:
[Market analysis
Market size, market segment(s)
Value of market in dollars
Market share percentage
Competition
Market trends and competition analysis and drivers
Pricing requirements
Distribution channels
Market entry requirements
Key selling points
Product definition
User needs assessment
Requirements definition
Product line development scheme
Production factors
Product qualification/certification
Product liability exposure
Overall competitive advantage]
h) Future intellectual property
i) Royalty potential
j) Potential deal structure
k) Product or process timetable [of availability; distribution; inventory]
l) Management [identify managers and shareholders]
m) Time schedules (milestones, formal reviews, criteria for “killing” the project )
n) Technology dependencies
o) Supporting technologies
p) Competition

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...
g
...


Decision-making structure

bb
...

dd
...

ff
...

hh
...

jj
...


Capital formation characteristics
Regulatory drivers
Life cycles
Market buying characteristics, requirements
Industry/government relationships
Pricing policies and required returns on investments
Commercial deployment analysis
List of existing and potential partners
P
 artnership requirements for each application [industrial partnerships required to complete technical
development and commercial deployment (types of partners, types of agreements)]

ll
...
A summary is necessary for a number of reasons: from the point
of view of the author, it permits a concentration and assimilation of the ideas spread widely over a turgid document,
into a few paragraphs
...

From the point of view of the investor, the summary gives a bottom-line insight into the nature of the product or service
and the quality of the investment
...

If the venture falls within the biotechnology sector for example, the executive summary will say something positive about
the field, often quoting from a recognized source
...
com

34

Law for the Business Student

The business plan

‘What is biotechnology and why is it likely to have such a dramatic impact? Biotechnology is the application
of DNA technology to the production of therapeutic and diagnostic products and processes
...

With four hundred drugs accounting for $16 billion of drug sales scheduled to lose patent protection, acquisition
of innovative advances and new therapies for a wide range of illnesses is seen as critical to this industry
...
Unlocking the secrets of the genome is allowing genes
to be tailored for specific tasks, such as the making of proteins that serve as hormones and other signalling
molecules in the body
...
Gene therapy and DNA vaccination
are examples of treatments based upon our growing understanding of the genetic code
...
A useful and
up-to-date US Federal source of information about biotechnology is the National Biotechnology Information
Facility, which can be accessed at http://www
...
org/
...
’

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Law for the Business Student

The business plan

Going from the general field to the specific place of the venture company in that field, the summary discusses the structural
profile of the company, its management team and the product or service line
...
Henry Jones’ on-going research
activities in the areas of DNA, and exploit its platform of DNA technologies as it moves into the area of gene
analysis, and gene therapy
...

The quality and experience of the company’s management and scientific team will be critical to the success of
GenX
...
Jones, a leading
biomedical researcher at the major university biotech facilities with over 20 years of laboratory experience
...
He is the author of a ‘Citation Classic’ scientific article
describing a method for gene isolation that is used throughout the scientific world
...
Jones will provide
scientific leadership as well as a suite of products and inventions from his own laboratory
...
D
...
and various research
and biotech companies
...
GenX will attract leading scientists
from Canada and the U
...
A
...
’
The description of the products or services should be limited to identification of function and field of use, with a statement
as to uniqueness, and intellectual property protection
...


Business Strategy

The business plan describes our model company GenX as a start-up biotech company built around a portfolio of products:
‘Some products in the portfolio are market-ready and others are near market-ready
...
The revenues from these products will help to support GenX’s
Research and Development program into gene therapy pharmaceuticals
...
Where
appropriate, it will contract out to reputable university research institutes and clinical research organizations
in the public and private sector
...
Capital investment will be used to support its R&D program and to create
laboratory and small-scale production facilities
...
In addition, the investment will be used for market development as its products become
market-ready
...


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...
Its R&D laboratory will be at the Regional Biotech
Centre
...

GenX will establish a Scientific Advisory Board that will include academic and industrial representatives in the
fields of genetic research, clinical medicine, pathology and microbiology
...
’
The plan should also discuss regulatory support or intervention in the marketing of the product
...
In Reach M
...
Inc
...
Pharmaceutical Manufacturers Association of Canada 2003-05-29, C32896 (Ont
...
A
...
In the late
1980s the appellant, Reach M
...
Inc
...
D
...
In March 1990 and again in August 1990, PMAC told its members
that advertising in the calendar contravened the Association’s Code of Marketing Practices (the “Code”)
...

The increasing cost of prescription drugs in Canada has given rise to criticism of the marketing practices of the
pharmaceutical industry
...
Many
viewed these items as frivolous
...
In the wake of this criticism and scrutiny,
PMAC became concerned that the government might attempt to regulate the prices and practices of its members
...
In February 1988, it introduced a revised Code
...

A PMAC committee - the Marketing Practices Review Committee - administered the Code
...
1 of the Code
authorized the Committee to review and adjudicate written complaints concerning the marketing activities of PMAC
members
...
4 made adherence to the Committee’s decisions a condition of continued membership in PMAC
...
1 - critical on this appeal - stipulated that “member companies shall refrain from distributing service-oriented
items”
...
Word then spread through the industry that the Committee might begin
to apply the Code to “multi-sponsored items”, such as Herman M
...
As a result of PMAC’s interference, Reach obviously
suffered economic loss
...
Within a couple of
years, Herman M
...
could no longer survive
...


Download free eBooks at bookboon
...


The business plan

Corporate Structure

The investor will want to know the form in which the intellectual property has been encapsulated, whether by corporation,
partnership or otherwise
...
In most cases, the IP will be the property of a corporation
...
A sample checklist used by many investors includes the following
questions:
a) is the company formally incorporated
b) where
c) examine the incorporating documents
d) have shares been issues
e) of what classes
f) who are the shareholders
g) are the shares subject to liens or charges
h) is there a unanimous shareholders agreement
i) examine the agreement
j) have options been issued or promised
k) how many and to whom
l) are there restrictions on share transfers

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Law for the Business Student

The business plan

m) are there shot-gun or buy-out provisions
n) is there a voting trust
o) who are the directors
p) are there restrictions on the nomination and number of directors
q) does the company have title to the intellectual property
r) examine the title documents
s) is the company indebted
t) does the company owe taxes
The items are designed to determine the freedom of movement within the company of the investor and the security of
the investment
...

It owns the rights to a number of innovative materials used in the research and biomedical fields
...

The shareholdings are distributed on the following basis:
Common and Preferred
50% shares

Dr
...
Jones

25% shares

Bob Smith

25% shares

Larry Sands

The shareholders are subject to a Unanimous Shareholders Agreement that obliges new
shareholders to comply with its terms
...

The President of the company is Dr
...
Dr
...
He has over 20 years of experience in basic and applied medically related research and is the
author of over 50 scientific papers (see appendix)
...

Dr
...
His current research activities are in the development of new biotechnology
techniques
...


Download free eBooks at bookboon
...
Mr
...
For the past ten years, Mr
...
He has extensive experience in the financing of
intellectual property in the bio-medical and bio-technology fields and the development of start-up companies
...
He has been Vice President of InvestorsFund, a multi-national
mutual fund
...
Smith has been involved in commercial investment for the past twenty years and brings with
him many years of experience and corporate contacts in the investment field
...


Dr
...


The company will establish a Scientific Advisory Board to assist management
...
Compensation for members of the SAB will be established
by the company
The members of the SAB, who will be appointed on the basis of their scientific competence and prestige, shall have
scientific backgrounds and an interest in the company product lines
...
There are no sales or revenue as of this date
...


Use of proceeds

The plan should state that the funds raised as a result of the investment will be used in areas directly related to operations,
and to advance and refine the product
...


F
...
On the other hand, since the business plan floats from hand
to hand, it should not convey secrets which are not subject to intellectual property protection
...
com

40

Law for the Business Student

G
...
It is chemically stable and is simple and relatively inexpensive to produce
...


H
...
These are important
because they immediately translate into dollar figures the concepts earlier dealt with narratively
...

Where the venture company is a start-up without pre-existing activity, revenue or assets, it will not have a financial
statement, nor a financial statement worthy of display
...

The investor will see at a glance how long it will take to realize a profit, and what the return on the investment will be,
assuming all the figures materialize
...


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...


Financial Projections
(Unaudited - in $000)
Income Statement

Year 1

Year 2

Year 3

Year 4

Year 5

Revenue

470

3,000

9,000

10,500

12,800

Cost of Goods Sold

250

1,350

4,000

4,200

5,100

Gross Margin

220

1,650

5,000

6,300

7,700

R&D (net of grants)

525

860

1,400

2,475

2,600

General & Admin

420

780

1,200

1,200

1,350

Amortization

165

780

780

780

780

1110

2420

3380

4455

4730

(890)

(770)

1,620

1,845

2,970

Income (Loss)

Balance Sheet

Year 1

Year 2

Year 3

Year 4

Year 5

Cash

9,775

7,585

9,560

12,300

16,200

Accounts receivable

90

350

1,000

2,000

2,000

Inventory

50

150

470

750

1,000

9,915

8,085

11,030

15,050

19,200

Capital assets

9,335

10,555

9,775

8,575

7,375

Total Assets

19,250

18,640

20,805

23,625

26,575

140

300

765

1,740

1,720

20,000

20,000

20,000

20,000

20,000

(890)

(1,660)

40

1,885

4,855

19,250

18,640

20,805

23,625

26,575

Liabilities
Capital
Retained earnings
Total Liabilities & Equity

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...
Revenues
In the biotech model, sales in the current period show moderate growth from the earlier periods
...

The projected revenues ($000) by product are as follows:
Year 1

Year 2

Year 3

Year 4

Year 5

Product 1

300

700

950

1,500

2,050

Product 2

1000

3,000

10,500

15,000

20,000

Product 3

60

120

400

400

400

Other products

40

60

400

1000

19000

2
...
Although
substantial costs are incurred during a the research and development phase, the bulk of the revenue flows
through to the bottom line once those costs have been covered
...
General and Administrative Expenses
The general and administrative expenses represent senior management salaries, marketing and other overhead
expenses not directly attributable to production or R&D
...
come
...
dk

science

Download free eBooks at bookboon
...
R&D Expenses
Sufficient R&D expenditures are critical to the success of any biotechnology company
...
In this model, the venture company proposes that approximately 20% of
revenues be invested in research to further advance its products
...
Income taxes
The investor may prefer to invest in partnership units rather than shares, or in a subsidiary rather than the
principal company
...

6
...

Given that the start-up is a development-stage biotech firm with no substantial earnings in the early periods, the
company seek three years of cash on hand to fund operations at the anticipated “burn rate,” or the consumption
of cash to fund the research and development (“R&D”) activities
...

7
...

8
...

9
...

10
...

11
...

12
...
com

44

Law for the Business Student

The business plan

13
...
is a development-stage biotechnology entity involved in genetic research as well as the manufacturing
of developed or acquired products
...
The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements
...

14
...
Building and equipment are amortized 20% and 5%, straight-line respectively
...
Revenue
Revenues are recognized at the time of product shipment
...
Research and development expenditures
Research and development costs are expensed as incurred unless they meet generally accepted accounting
criteria for deferral and amortization
...
Research costs are expensed
as incurred
...

17
...
Therefore, this is the context in which
the financial business plan has been prepared for GenX
...
com

45

Law for the Business Student

Raising funds: Private placements and going publi

5 
Raising funds: Private placements
and going public
5
...
They include private placements, asset sales, secured borrowing, and public placements
...
It is therefore of prime importance that an appropriate capital
source and strategy be established in advance of operations
...
Unless the use of capital is targeted for a use which will increase return, as opposed to simply
paying off accumulated debt, there is no incentive for an investor to make a placement
...
Already today, SKF’s innovative knowhow is crucial to running a large proportion of the
world’s wind turbines
...
These can be reduced dramatically thanks to our
systems for on-line condition monitoring and automatic
lubrication
...

By sharing our experience, expertise, and creativity,
industries can boost performance beyond expectations
...

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...
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...
1
...
It is therefore necessary to call upon an outside broker to beat
the financial bushes for some interest
...
Registered stock brokerage houses also perform an investment
introduction service on a larger scale
...
Since the relationship is performance-driven, the broker should be entitled to
solicit expressions of interest on a non-exclusive basis for a period of six to nine months
...
It is understood that if funds are raised, the investors participate on an
equity basis in the company and the other shareholders must then arrange their affairs in such a manner as to
best reflect their respective contributions
...

The broker must be entitled to use the description of the research prepared by the researcher as the basis of its business plan
for submission to investors
...

In this vein, the parties co-operate on a timely basis and work on open disclosure to each other of their activities
...
Since there is a cash payment to the broker which the company can only pay out of
the investment funds, the investors must be advised in advance that part of the proceeds will be used in this manner
...
com

47

Law for the Business Student

5
...
2

Raising funds: Private placements and going publi

Secured borrowing

The venture raises money by borrowing, a traditional source of operational and capital funding
...


5
...
3

Asset sale

Raising capital can be achieved by the sale of a division or a part of the enterprise
...
The form will usually be dictated by tax considerations related to capital gains or losses, or
cost base of acquisition, and so on
...

The acquirer is purchasing the business of the company or division either for the purposes of expansion, resale, ramping
up of technologies or elimination of competition
...
These may include all or some of:
• Cash Cash, bank balances, moneys in possession of banks and other depositaries, term or time deposits
and similar cash items of, owned or held by or for the account of the vendor;
• Leases The rights of the vendor in leases and the premises subject thereto, and the vendor’s interest in all
leasehold improvements and leasehold premises, and in fixtures located in, on or about such leasehold
premises;
• Inventories

The rights of the vendor in the inventories of product and accessories, including packaging;

• Contracts and Equipment Contracts

All rights of the vendor in, to and under the supply and

equipment contracts and the full benefit of all service contracts relating to any equipment or other assets
covered and options to purchase;
• Fixed Assets, Equipment Fixed assets, machines, machinery, equipment, fixtures, furniture, furnishings,
vehicles, material handling equipment, implements, parts, tools, jigs, discs, moulds, patterns and tooling
owned or held by the Vendor, including any which are in storage, and other tangible property and facilities
used in the business whether located in or on the premises of the vendor;
• Goodwill of Business

The goodwill of the business, including the right of the purchaser to represent

itself as carrying on the business in succession to the vendor and all right, title and interest of the vendor in
respect of the name and telephone numbers of customers and any other trade names used in the business;
• Prepaid Expenses

Prepaid expenses including without limitation, prepaid catalogue expenses,

prepayments on merchandise, prepaid taxes, rents and telephone but excluding income or other taxes which
are personal to the Vendor or not incurred in connection with the Business;
• Accounts Receivable

Accounts receivable and other amounts due, owing or accruing due to the Vendor

in connection with the Business, but excluding any such accounts, notes or moneys due or owning from any
affiliate of the Vendor or from any present or former shareholder, director, officer or employee of the Vendor
or any affiliate of the Vendor;
• Deposits

Deposits with any public utility or any municipal, governmental or other public authority;

• Warranty Rights The full benefit of all warranties and warranty rights (implied, express or otherwise) against
manufacturers or sellers which apply to any of the purchased assets;
• Computer Software Computer software related to the business;
Download free eBooks at bookboon
...

In return for the consideration for the assets or shares, the vendor must be prepared to give some far-reaching warranties
...
The vendor must also warrant the accuracy of the
financial statements shown to the vendor, upon which reliance has been placed
...
Finally, the vendor must warrant that it is the
exclusive registered and beneficial owner of all rights in the intellectual property which is free and clear of any claim,
option, charge or encumbrance of any kind
...
The chief scientist of the vendor may in fact become a permanent employee of the purchaser if
the need and opportunity arises
...


– You have to be proactive and open-minded as a
newcomer and make it clear to your colleagues what
you are able to cope
...
But busy as they are, most of my colleagues
find the time to teach me, and they also trust me
...


Inés Aréizaga Esteva (Spain), 25 years old
Education: Chemical Engineer

NNE Pharmaplan is the world’s leading engineering and consultancy company
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...

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...
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Law for the Business Student

5
...
When a solicitation of
funds results in private investment, the financing is called a private placement
...
On the simplest level, any person who puts money into a venture is a private investor in
a private placement
...

a) Offering Memorandum
Where an offering memorandum is drafted and circulated, it does take the place of or fulfills the function of
a prospectus, which is a formal and full-disclosure description of the investment
...
If a

partnership, the investor acquires a partnership share or unit in the structure that is managed by a managing
partner
...
The partnership also may flow-through liability,
which is a risk the investor may or may not be interested in taking
...
Profits are distributed
through dividends calculated according to the number of units
...
On the other hand, flow-through of tax benefits to shareholders is limited, if at all possible
...

• Name of the venture

The venture must have a name to identify its business, and to confirm that it,

and not another entity, is the recipient of the investment
...

• Business of the venture The managers of the venture must identify the business which the venture will
exploit; and commit to remaining in that field of business
...

• Number of outstanding shares or units and number of shares or units available to the investor The number of
shares or units offered and outstanding multiplied by the par value of each share or unit gives the investor an
idea of the value of the venture; but more importantly, it shows the investor what proportion of the venture
he has been allocated
...
com

50

Law for the Business Student

Raising funds: Private placements and going publi

• Share or unit conditions The investors want to know what they are getting for their money
...
These conditions as well as restrictions are further detailed
in the unanimous shareholders agreement or the partnership agreement
...
The
effect of the restriction is to provide a measure of stability to the shareholding body, and consequently
the management which it appoints
...

• Market for the shares or units

Private shares have no ready market for resale
...
Beyond
them, the investor will have to convince another buyer that the company is an appropriate investment risk,
in spite of the lack of liquidity of the shares or units
...
The text should indicate that before making an investment decision, investors should consider
carefully the information set forth in the business plan
...
There should be no representation that
there is a secondary market for the units purchased through the investment
...
The success of the enterprise will be dependent upon key scientists
and managers, the loss of any of whom could have a material adverse effect if the company cannot take the
necessary back-up measures to minimize such problems
...
If additional financing is required, there is no assurance of such additional financing, and no obligation
is imposed on first-round investors to provide such additional financing
...

Each investor is warned that the contents of the business plan, offering memorandum or term sheet are not
to be construed as impartial investment, legal or tax advice, and each is urged too seek independent advice
...
The term sheet sets out the parameters of the investment, rather than dealing
with the merits of the business operations
...
com

51

Law for the Business Student

Raising funds: Private placements and going publi

We see in the sample term sheet the detail of the stock issue including the minimum number of units required
for closing, the closing date, and the modalities of subscription and payment
...
The contents constitute representations to the investor, which are the basis of the
reliance which he places in order to enter into the deal
...
com

52

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Law for the Business Student

Corporate operations

6 Corporate operations
6
...
The company must be in a position to appeal to consumer needs, create
an identity different from if not superior to the competition, seek consumer satisfaction even in the face of technological
change, and create a corporate infrastructure of dedicated employees and management for long-term continuity
...
Name
2
...
g
...
Service Type
1
...
Internal/ external: Internally provided service or a service sourced from an external service supplier
4
...
Customers currently using this service
6
...
e
...
contact details of the responsible Service Level Manager
2
...
Description/ desired customer outcome
1
...
Business processes/ activities on the customer side supported by the service
3
...
Desired outcome in terms of warranty (example: “Access is facilitated worldwide in a secure and
reliable manner”)
8
...
e
...
different Service Level packages on offer
2
...
g
...
e
...
different coverage of geographical regions
9
...
Available pricing schemes for the service provision
2
...
com

53

Law for the Business Student

Corporate operations

10
...
Services
1
...
Supported services (other services which depend on this service)
2
...
Planned changes to the service (if any)
1
...
g
...
Business case/ cost-benefit analysis
3
...
Risks associated with the envisaged change
5
...
References to further documents
13
...
2

Management and employees

With the rupture of relations between the spin-off and the institution where the intellectual property had been created, the
company is forced to look in the marketplace for management and employees
...

A common mistake the promoters of a start-up often commit is to engage as senior officers and employees the individuals
who left the institution with or without the principal researcher to work in private industry
...
An employee who leaves an institution, and is prepared to risk the instability of a start-up venture either
has strong commitments to the science and its development or has been waiting for the opportunity to leave working
conditions which may have grown sour
...
Reduced to common terms, an employee in a fresh company where
the expectation is that work will be harder, longer, more demanding and less sometimes less rewarding in regard to basic
remuneration, is seeking an incentive to join, remain and contribute
...
There is a tendency to
be generous with share give-aways, simply because the distribution of currently valueless shares or options do not impair
capital or operations
...


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...
If shares or options are offered,
they should vest gradually with years of service
...
In short, the purpose of the incentive is to keep the employee fresh, creative
and loyal
...

Accordingly, incentive packages should stipulate forfeiture or reduction of acquired incentives if a certain number of years
have not been attained prior to departure, or if the employee was terminated for cause
...
The stock should
be common non-voting shares
...
They should also stipulate that the shareholder because a party
to the unanimous shareholders agreement by the acquisition of the shares
...

The ideal share incentive, from the point of view of the company, is in the form of share options which are convertible into
common shares upon the happening of one of several events, including the public listing of the shares, and the take-over
of the company by share or asset purchase
...


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...
Many questions arise as to the nature of the
programs as a share distribution
...
v
...
They were officers of the company and they got the shares under
an “employee stock option plan” of the company
...
However, the company agreed to lend them
the money (also under the “option” plan)
...
Furthermore, the “option” plan said that
loans would only last five years
...
Each loan was secured against the shares of the individual concerned, but there
was to be no personal recourse beyond the shares

6
...
Cause is any act which fundamentally interferes with the diligent
and faithful performance of an employee of the job function
...
Failure to establish cause will result in a damage liability on the part of the employer
...
4

Product marketing
a) Evaluation and Development
The company knows its product has reached market stage on the basis of two touchstones: meeting of
specifications and meeting market demand
...
The fact that the laboratory confirms
that genetic material is now pure or that a chemical catalyst works at the desired temperature does not mean
that the product will find a profitable place in the market
...
A test run in the market
may be achieved by establishing a beta site test inside the business facilities of a prototypical customer
...

Establishing a beta site requires the cooperation of the host; and specifically requires a demonstration of the
possible benefits to the host over the inconvenience of adapting workers and facilities to an untested product
...


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...
This involves a transfer of materials or software to the host or
prospect who undertakes to conduct an evaluation on the basis of the specifications for use
...
Accordingly, the host must use the product solely for the purpose of evaluation and cannot allow any
third party or itself to use it for any other purpose
...

If there are problems with the product, the owner may decide to contract out to a third party for a topping
off, especially if internal resources are not equipped to take a fresh look at solutions
...

b) Licensing Arrangements
A license is an authorization to a licensee to use the intellectual property of the licensor
...

Licenses are granted in situations where the owner is not capable of or not willing to sell directly to the consumer
...

• The more the licensee does on behalf of the licensor, the more it will cost the licensor
...

The licensee may act as a distributor, or may further sub-license to an entity which does the distribution
...
Preferably, the
licensee has had experience in the field with its own products or those of other licensees
...
Since the
territory in which the former operates may be foreign, the licensee is responsible for compliance with applicable
international, national, state, regional and local laws and regulations governing its activities
...
com

57

Law for the Business Student

Corporate operations

It should be noted that in law, the license is not an agency or mandate or power of attorney
...
The license permits the grantee the right to
represent that it is authorized to market the product under the name and get-up under which it is sold
...

As is the case of a distributor, the license should provide for a number of crucial elements:
1
...

The term should reflect the start-up time necessary to get the product distributed, and to permit the recovery
of costs and attainment of profit
...
Limitation on product
The licensee is only granted the rights to a product that is defined by the grant
...
If the product involves software or formulae, the license should not only refer to the trade name,
but also the generic name as well but exclude all accessories as separate products, such as codes, algorithms,
logic, techniques, software tools, formats, designs, concepts, methods, processes, and any related improvements,
corrections, modifications, updates, enhancements and new releases
...


Sharp Minds - Bright Ideas!
The Family owned FOSS group is

Employees at FOSS Analytical A/S are living proof of the company value - First - using
new inventions to make dedicated solutions for our customers
...
It is
reflected in the fact that more than 200 of the 1200 employees in FOSS work with Research & Development in Scandinavia and USA
...
e
...


tion of agricultural, food, pharmaceutical and chemical products
...
The products are

We offer
A challenging job in an international and innovative company that is leading in its field
...

Read more about FOSS at www
...
dk - or go directly to our student site www
...
dk/sharpminds where
you can learn more about your possibilities of working together with us on projects, your thesis etc
...
In line with
the corevalue to be ‘First’, the
company intends to expand
its market position
...
+45 70103370

www
...
dk
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...
Territory
The failure to define the territory of the license creates the presumption that the territory is the world
...
Furthermore,
the greater the territory, the greater the profit opportunity for the licensee, and hence the greater the royalty
payable to the licensor
...

4
...

The argument in favour of exclusivity proposes that if the licensee must not only contend with outside competitors
but also competing licensees in the same territory, there is little chance of a stellar sales performance
...
The royalty rate payable to the licensor will be considerably smaller in a non-exclusive arrangement
...
At the same time, there should be a reservation of right at any time and
without liability to the licensee, to change the product
5
...
Remuneration
The licensor receives a royalty generally based on a sliding scale of volume as a percentage of gross revenue
minus charges, namely a net amount
...


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...
Trademarks
The licensee is authorized and required to use the licensor’s trademarks in connection with advertisement,
promotion and distribution
...
Use does not entitle the licensee to any interest in any of them
...

8
...
Basically, the VAR becomes the communications interface between the end-user and the
licensor
...

The VAR supports the product by selling to end-users who are capable of paying the fees imposed under the
license the maintenance agreement
...
It must acquire, at the expense of the VAR, a demonstration system for conducting
demonstrations and performance benchmarks of the products
...

To do so, the VAR acquires copies of the product to be distributed to end-users from the licensor, or makes
copies if the VAR has acquired the source code for transfer to licensed end-users
...

9
...
Since the software
is highly mobile, the arrangement made with the end-user is in the form of a sale with conditions, known as
an end-user license
...
No rights to sub-license or market the software are granted
...
com

60

Law for the Business Student

Corporate operations

Furthermore, there are restrictions on the internal use of the product
...
Although the customer
may make a copy for backup, archiving, or security, the copyright or proprietary notices in the original must
be included in such copy
...
This is confirmed by the acknowledgment of the end-user
that the intellectual property in he software belongs to the licensor, and no rights other than restricted use is
granted by the purchase
...
License Checklist
For both the licensor and licensee, there are a number of issues both expect to be dealt with in the license
agreement
...
com

61

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Law for the Business Student

Corporate operations

Product
• Is the licensee require to purchase or manufacture product
• Is there a trial or opening inventory of product?
Credit and Financing
• Does the licensor offer credit, waiver or financing in any form, or offer help in finding financing?
• Are there any deferred balances and on what terms?
• Are there periodic royalties? If so, how much are they and how are they determined?
Reporting
• How are sales and royalties reported?
• What are bookkeeping, accounting and reporting requirements, and who assumes the cost?
Licensor’s obligations
• What services are provided by the licensor?
• Are accounting/bookkeeping services included?
• How are advertising and promotion costs divided?
• Is a specified amount of working capital required of the licensee to cover operating costs until profits can be
made?
• Is there provision for independent appraisal?
• Is any credit given to good will or equity for the purpose of establishing performance?

Intellectual Property
• Is there an inventory of the licensor’s intellectual property (patents, trademarks and copyright)?
• Is the intellectual property identifiable and distinct, and are they clear of any possible interference or
cancellation owing to any pending litigation?
• Is the life of the intellectual property coterminous with the license?
• If the licensor creates upgrades or improvements or related intellectual property, can the licensee
automatically use it?
• If the licensee creates upgrades or improvements to the licensor’s intellectual property, does the licensee or
licensor automatically own it?
Operations
• To what extent and under what specific conditions must the licensee personally participate in operations?
• Is delegation and sub-delegation permitted?
• What degree of supervision and control does the licensor have over operations?
• What continuing management aid, training and assistance will be provided by the licensor, and are these
covered by the service or royalty fee?
• Is there provision for local or national advertising?
• Who assumes the cost of advertising?
Download free eBooks at bookboon
...
5

Auditors’ professional liability

The professional liability must be determined based on the conduct of a similar professional, acting reasonably
...

A plaintiff must demonstrate that the auditors’ fault is the logical, direct and immediate cause of the damages claimed
...
com

63

Law for the Business Student

Corporate operations

The auditor’s negligence will not be considered the cause of the loss if a plaintiff cannot prove actual reliance on the
professional opinions: for example, when the decision to invest was made before the professional opinions were provided
to him, the investments were made before the professional opinions were issued, and when the plaintiff does not prove
that proper disclosure by the professionals would have changed his or her decision to invest
...
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6JG FGUKIP QH GEQHTKGPFN[ OCTKPG RQYGT CPF RTQRWNUKQP UQNWVKQPU KU ETWEKCN HQT /#0 &KGUGN

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2QYGT EQORGVGPEKGU CTG QHHGTGF YKVJ VJG YQTNFoU NCTIGUV GPIKPG RTQITCOOG s JCXKPI QWVRWVU URCPPKPI
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...
1 Introduction
The employment contract expresses the obligation of the employee to perform the services described and any other
services and functions which the employer may assign
...
If the term is fixed, there may be an option of renewal by the employer, or a strict dictum that
prohibits renewal
...
A summary
checklist of items should include:
1
...
What provisions are being made for severance ?
3
...
Should severance be rolled into retirement savings plans of old management ?
5
...
If old management continues in short term, what is that term, what are its powers, and who is responsible
supervisor ?
7
...
2

Confidentiality issues

Corporate assets must be protected from within as well as from without
...


7
...

It is possible to have a fixed term contract for the life of an employee
...

Salary is determined on the basis of an annual gross, as are the payment terms
...


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...
4

Labour matters

Pension and retirement issues

Funds paid or attributed as paid to a corporate employer are deemed to form part of the latter’s assets and fall into
the bankruptcy estate in the event of the application of bankruptcy legislation
...
However, to the extent such funds are keep separate and distinct
from the corporate assets, and are ascertainable and identifiable, they would constitute trust funds which do not fall into
the bankruptcy estate
...


7
...
1

Form of employment agreement

THIS AGREEMENT made as of the _______________, day of _______________ , ____

BETWEEN:

ABC INDUSTRIES LIMITED, a corporation incorporated under the laws of Canada



(hereinafter referred to as the “Company”)

AND:

Mr
...
00), now
paid by each of the parties hereto to the other, (the receipt and sufficiency of which is hereby acknowledged by each of
them) and, the mutual covenants and agreements herein set forth, the parties hereto agree as follows:
1
...


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...
DUTIES
Subject to the provisions of Section 1 hereof, during the Term the Executive shall:
a) use his best efforts to undertake and faithfully perform such lawful duties and exercise such powers in
relation to the Company and its subsidiaries and their respective businesses as the Board of directors of the
Company (the “Board”), the President or such other appropriate officer of the Company shall from time to
time assign or vest in
...

The Executive shall not be required, without his consent, to relocate outside of Toronto
...
We have extensive
experience in training technical and engineering staff and
have trained people in organisations such as General
Motors, Shell, Siemens, BHP and Honeywell to name a few
...
Our workshops are all comprehensive hands-on learning
MECHANICAL
experiences with ample time given to practical sessions and
ENGINEERING
demonstrations
...

INDUSTRIAL
We run onsite training all year round and hold the workshops on
DATA COMMS
your premises or a venue of your choice for your convenience
...
com or visit our website
for more information: www
...
com/onsite/
Phone: +61 8 9321 1702
Email: training@idc-online
...
idc-online
...
com

67

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Law for the Business Student

Labour matters

3
...

4
...
Thus, if the Executive’s contract is not renewed at the end of the Term, he would receive $60,000
...
BENEFIT
The Executive shall be entitled, at the cost of the Company, to participate in all of the perks and benefit plans
generally available to senior executives of the Company from time to time
...
The parties acknowledge that a car is required to be supplied by the Executive to perform the
services required hereunder and car expenses are to be reimbursed in accordance with the Company’s policy
...

6
...
Such vacation time
shall be taken at a time or times acceptable to the Company having regard to its operations
...
OUT-OF-POCKET EXPENSES
The Company shall reimburse the Executive for all reasonable out-of-pocket expenses which he may properly
incur in and about the discharge of his duties hereunder on behalf of the Company according to the Company’s
standard policies applicable to senior executives regarding reimbursement of expenses
...
TERMINATION
8
...
com

68

Law for the Business Student

Labour matters

d) inability of the Executive, by reason of illness or mental or physical disability or incapacity, to perform the
duties and responsibilities required to be performed by him on behalf of the Company for an aggregate
period of three (3) months in any calendar year provided that the Executive is receiving benefits under the
long‑term disability policy of the Company
...

Upon the occurrence of any of the events set out in this Subsection 8
...
1, this Agreement and the employment of the Executive
hereunder shall be wholly terminated subject to the payment to the Executive of any salary, emoluments or
other amounts owing to him as at the date of such termination
...
2 In addition to the Company’s right to terminate this Agreement pursuant to Subsection 8
...
If
the Company terminates the Executive’s employment pursuant to this Subsection 8
...
If
the Executive terminates this Agreement pursuant to the provisions of this Subsection 8
...

8
...

9
...
1 Except in the performance of his duties hereunder, the Executive shall not, prior to the termination of this
Agreement and for a period of one year thereafter:
a) engage or have any interest, either directly or indirectly, in any capacity, in any business or occupation
whatsoever (except as a holder of securities listed on any stock exchange or traded over-the-counter and
then only so long as those securities do not represent more than five (5) percent of the issued securities of
any class of any such company other than securities of the Company or any of its subsidiaries) provided
that investments may be made by the Executive in investments which do not interfere with the performance
of his duties hereunder and are not competitive with the business of the Company, its parent or any of its
subsidiaries on the date such investments are made; or
b) solicit or hire the services of an employee of the Company or any of its subsidiaries for his own purposes or
for any other person or persons, partnership, firm, association, syndicate, company or corporation engaged
in or concerned with or interested in a business similar to that conducted by the Company or any of its
subsidiaries
...
com

69

Law for the Business Student

Labour matters

1
...
For
purposes hereof, ‘clients” shall be deemed to include all existing clients of the Company and its subsidiaries
at the date of such termination and any persons generally known or specifically identified as potential clients
by the Company as at the termination date
...

1
...

10
...
1 here used herein “Confidential Information” shall mean any and all of the formulations, products, designs
W
and secret processes, trade secrets, know‑how, techniques, production, processing, methods, lists which relate to
the business and operations carried on by the Company or any of its subsidiaries at any time during the Term,
which are treated by the Company or any of its subsidiaries as confidential and are not in the public domain
...
2 e Executive shall not (either during the continuance of his employment or at any time thereafter):
Th
a) disclose any Confidential Information to any person whatsoever other than for the Company’s
purposes of the Company or any of its subsidiaries; and
b) use for his own purposes or for any purposes other than those of the Company or any of its
subsidiaries any Confidential Information that he may acquire or become privy to in relation to the
business of the Company or any of its subsidiaries
...
ASSIGNMENT
This agreement may not be assigned by the Executive
...
com

70

Law for the Business Student

Labour matters

12
...
X
_______________________________
_______________________________
or such other address as may be given by either of them to the other in writing
...

13
...

14
...

15
...

16
...


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...
ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties and supersedes any prior agreement or
understanding relating to the subject matter hereof
...

IN WITNESS WHEREOF the Company and the Executive have executed this Agreement as of the date first
written above
...
X
____________________________________
Witness

I joined MITAS because
I wanted real responsibili�
I joined MITAS because
I wanted real responsibili�

Real work
International
Internationa opportunities
al
�ree wo placements
work
or

�e Graduate Programme
for Engineers and Geoscientists

Maersk
...
discovermitas
...
com

72

�
for Engin

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Law for the Business Student

International trade

8 International trade
8
...
The letter of credit is not a creature of the law
in the same sense as land registration or the corporation
...
The commercial world is understandably under the impression that the commercial per­ eption of the
c
various facets of the credit mechanism has a firm and supportive basis in law
...

On the other hand, the law is a force divided by tradition, jurisdiction and degrees of stagnation or innovation
...
In those
jurisdictions where legislative innovation has not developed specific rules respecting the contract of commercial credits,
one is forced to rely on basic contract theory in order to flesh out legally the commercial perceptions of the letter of credit
transaction
...
This exercise of legal
categorization is at the same time both academic and necessary
...
For example, many issuing banks of standing will continue to
honour their credits notwithstanding the theo­retical defences against payment available against beneficiaries
...
The extent of the obligations and rights of the parties to the transaction and the duration of
those rights must be determined, as well as the validity of the claims of parties extraneous to the immediate transaction,
such as assignees and trustees in bankruptcy
...
L
...
297; McCurdy, “Commercial Letters
See
of Credit” (1922), 35 Harv
...
R
...


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...
There is little point in debating whether established commercial practice should or should not take
precedence over the law where the law itself fails to recognize the specific institution of the letter of credit
...
Furthermore, since the law between the parties is the contract itself many letters of credit do make express
reference to the incorporation of the Uniform Customs
...
However, to the extent that those local rules differ
from the Uniform Customs, progress toward uniform regulation of letters of credit is impeded
...

The task, therefore, of the jurist who seeks a consistent approach to the understanding of the letter of credit transaction,
must balance the exigencies of the Uniform Customs, the local law and developing commercial practice, as well as conflict
of laws situations
...
One must also make
mention of the advising bank, which is sometimes included in the transaction to disburse funds for the account of the
issuing bank
...

The relationship between the issuing bank and the advising bank may for the moment be classified as one of agency
...
The remaining link, that
between the issuing bank and the beneficiary, is the subject of extensive query and controversy
...


8
...
An importer
places an order for the purchase and shipment of goods with a foreign seller
...
com

74

Law for the Business Student

International trade

The practical effect of financing the underlying contract by way of letter of credit is beneficial for all parties concerned
...
Subject to the problem of fraud and subterfuge, the importer is assured that
payment will only be made if the foreign seller strictly complies with the terms of the credit
...
From the point of view of the issuer, it is paid
a remuneration for the opening of the credit and retains the bills of lading and other shipping documents presented with
demand of payment as security for reimbursement by the customer of the amount of credit extended and paid
...
He may, of course, guard it as assurance for payment if and
when complete shipment is effected
...
He may use the credit as a backing or security for the issuance of a letter of credit as
his own request in favour of his suppliers
...
If the account of the importer is a continuing one, the exporter will either rely on cumulated credits
in the account or obtain a bond or advance deposit as partial or full security for ultimate payment on the shipment
...
simply withhold shipping and clearance documents Until the importer has made payment
...
The
importer or exporter, depending on the contractual arrangements, will suffer the inconvenience and expense of charges
for demurrage, insurance, and other charges relating to the late taking of possession
...
The service usually requires the exporter to forward to the bank a remittance letter
from the exporter enclosing bills of lading, insurance certificates, invoices and other documents relating to the shipment
...
The collecting bank, usually chosen by the importer,
receives the documentation from the exporter by airmail, and notifies the importer of the arrival of the document
...
Upon maturity, the collecting bank demands payment
of the bill of exchange after having financed the exporter up to the date of maturity
...
5
It may occur that documents are forwarded by a remitting bank to the issuer with unclear instructions: the covering
letter may refer to the letter of credit serial number, allude to the application of the Uniform Customs and Practice for
Documentary Credits, and yet instruct the issuer to remit the documents, against payment or acceptance of a draft, to a
designated party
...


5 Publication 522
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...

The documents against payment (D/P) or documents on payment (DOP or D/P) are the documents attached to the draft
drawn by the exporter and needed to obtain goods are deliverable to the importer only after payment of the draft
...

Protest is the legal action to be undertaken by the collecting bank, at the instructions of the exporter, in case the importer
does not pay a sight draft, or does not accept a term draft or does not pay an accepted draft on maturity
...
”

8
...
A claimant or plaintiff required to
post a large amount of money as security for costs may resort to a letter of credit describing the defendant as beneficiary
and payable upon production of a final judgment dismissing the suit and condemning the claimant to pay court costs
...
should the defendant choose to deliver a letter of credit pursuant to subparagraph I (ii) then the letter of credit shall
include the following terms:
i) the plaintiff
...


...


6 Meade v
...
W
...
S
...
J
...
3‑5
...
com

76

Law for the Business Student

International trade


...

An example of a letter of credit used to bolster the personal guarantee of a director for a corporate debt is found in a
number of instances
...
8
Letters of credit may play a decisive role in film financing
...
In return for placing the credit, the applicant May be assigned the proceeds of the
sales it guarantees up to the total amount drawn on the letters of credit
...
The guarantor would seek to determine that pre‑sales or orders for the film made prior to its completion in the
relevant market was approximately equal to the amounts that it was to guarantee, and that the pre‑sales contracts are with
subdistributors with good track records and unlikely to default
...
9

8
...

The obligation stands irrespective of any dispute between the customer and beneficiary as to partial or full execution of
the underlying contract, or between the bank and the customer
...
C
...
v
...
, 2005 CarswellBC 1016, 31 R
...
R
...
612829 B
...
Ltd
...
Hobbs

& Leigh) 212 B
...
A
...
40, (sub nom
...
C
...
v
...
A
...
40, 2005 BCCA 246 (B
...
C
...
), regarding
the benefit of certain letters of credit that had been posted with the city pursuant to a development permit respecting the property
...
The purchaser took the position that it was for the vendor to assure it would have the benefit
of the letters of credit
...
Nimkish Ventures Ltd
...
C
...


8

In McLennan v
...
P
...
(4th) 139, 169 O
...
C
...
C
...
Ramaseder, B
...
of Executive Comp
...


9 Sports Pool Distributors Inc
...
Dangerfield, 2008 CarswelIBC 8, 2008 BCSC 9, 12 P
...
S
...
C
...
C
...
C
...
com

77

Law for the Business Student

International trade

The notion of autonomy has long been accepted as the very basis of the letter of credit system, permitting both assurance
and immediacy of pay­ ent
...
J
...
Br
...
Indust
...
:
m
We were referred to several authorities, and it seems to be plain that the opening of a confirmed letter of
credit constitutes a bargain between the banker and the vendor of the goods, which imposes on the banker an
absolute obligation to pay, irrespective of any dispute which there may be between the parties on the question
of whether the goods are up to contract or not
...
It has also to be remembered that a vendor
of goods selling against a confirmed letter of credit is selling under the assurance that nothing will prevent
him from receiving the price
...
Furthermore, vendors are often reselling goods bought from third parties…
...
10
Accordingly, the courts have refused to interfere in impeding the payment of the beneficiary by the issuer, or have refused
to declare illegal such Payment where the first shipment of steel rods were below contract quality,11 where records and
cassettes shipped represented a minor percentage of titles actually ordered,12 or where there was a dispute on financing
for which the letter of credit was used as mortgage insurance
...
A letter of credit may be read, in restricted circumstances, as being conditional or in substitution of
another credit
...
For example,
one American court has determined that a letter of credit was not revocable in nature by referring to the underlying facts
and contracts which led the, applicant to request the issuance of the credit
...
R
...
A
...
CL B
...
, [1977] C
...
993, on the effect (of a letter of guarantee;
Uzinterimpex v
...
, 3
...

11 Ibid
...
v
...
R
...
D
...
Fund v
...
Supp
...
See generally O’Meara Co
...
Nat
...
Y
...
A
...
Inc
...
Bankers’ Trust Co
...
2d 836 (2nd Cit
...
v
...
Bank of Memphis, 550 F
...
State Streets Bank & Trust Co
...
2d 230 (1st
Cir
...
Steyr‑Forsttechnik Ges M
...
H
...
Kamloops 17319 (B
...
S
...

15 West Virginia Housing Dev
...
Sroka, supra, note 4
...
com

78

Law for the Business Student

International trade

The notion of the autonomy of the credit transaction is confirmed in the Uniform Customs, 2007 Revision, article 4:
a) A credit by its nature is a separate transaction from the sale or other contract on which it may be based
...
Consequently, the undertaking of a bank to honour, to negotiate or to fulfil any
other obligation under the credit is not subject to claims or defences by the applicant resulting from its
relationships with the issuing bank or the beneficiary
...

b) An issuing bank should discourage any attempt by the applicant to include, as an integral part of the credit,
copies of the underlying contract, proforma invoice and the like
...
C
...
(1995) 5-103(d): codifies the same notion of autonomy in declaring at section 5-114:
d) Rights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit are
independent of the existence, performance, or nonperformance of a contractor arrangement out of which
the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and
the applicant and between the applicant and the beneficiary
...
06 (a) and (c) define the standby as independent: accordingly, the enforcement of an issuer’s obligations
does not depend on:
“iv
...
”
A corollary of the autonomy rule is that the beneficiary of a credit cannot avail himself of the contractual relationship
existing between banks or between the applicant for the credit and the issuing bank
...
17
For example, an agreement between the beneficiary and customer to delay presentation of drafts under the letter of credit
is of no concern to the issuing bank as long as no consent has been given by the latter in the form of an amendment to
the credit
...
Bellhouse, Dillon & Co
...
K
...
413 (C
...
); Urquart Lindsay & Co
...
Eastern Bank
Ltd
...
B
...

17 Uniform Customs, 2007 Revision, art
...

18 CO‑OP
...
v
...
(1969),7 D
...
R
...
Q
...


79



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