I frequently encounter a misconception that non-voting shares in British Columbia companies do not have a right to vote.  Unfortunately, this is not the case as, in certain circumstances, non-voting shares DO have voting rights.

The obvious circumstances where non-voting shareholders can exercise a right to vote are, for example, alterations to company articles that impact rights held by non-voting shareholders or a company’s decision to amalgamate.

The often forgotten voting right held by all shareholders, including non-voting shareholders, is the annual right to vote on whether the company appoints an auditor and, separately, whether the company produces and publishes annual financial statements.  This vote can be made through a consent resolution (by all shareholders) or through a majority vote at the company’s AGM.   Barring a Shareholders’ Agreement or other voting trust that takes control of how each non-voting share votes, your company will need to seek the approval of non-voting shareholders on an annual basis.

When you sell non-voting shares it is important to understand that these non-voting shareholders do have certain, limited, voting rights to exercise in relation to the company, its structure and direction.  Therein, contrary to the mistaken belief of some founders, the non-voting share class is not entirely passive and can, in fact, take a limited active role in the company.

I frequently encounter early-stage startups with too many share classes.  If you have read previous posts, you know that I advocate for a simple share structure for early-stage companies (usually common and, if needed, non-voting common).  If more complex structures are required in the future, they can be created then.

When you are considering your startup’s share structure, consider creating only those share classes that you know you need now or will need.  To that end, ask the following questions before creating any share class:

1.  What is the share class to be used for?  You need to understand the purpose served by each share class.  Don’t create share classes because a third party tells you to or because you see other companies with similar structures.  Each share class should have a reason for existing.

2.  When is the share class to be used?  If the share class is to be used at some point in the future, consider whether that class will 100% be suited to that hypothetical future event or will it need to be modified to suit that future event?  Further, what is the likelihood of the future event occurring?  If it seems unlikely the shares will be used in the future, consider not creating that class.  For example, I question the value in creating preferred shares to be used for future investors as you currently do not know what terms those hypothetical investors will want on the preferred share class.

3.  Will your share structure agitate investors?  Perhaps you do have a future use for 4 share classes but what is the impact of this share structure on your capital raising activities?  Will startup investors, used to seeing common share structures (and maybe a non-voting common), take issue with your complex share structure?  This especially could be the case where you can’t explain the reason for the structure.  Always consider how outsiders will view your share structure.

In sum: don’t create share classes without a reason – even if your lawyer says so!  A founder should know their company structure and why it was created that way.

Your company may be a foreign company.  Where your company, for example, has operations or makes sales, outside of its home jurisdiction it may be required to register as a foreign corporation in those other jurisdictions.

The most common situation I encounter is a federally (Canada) incorporated company operating in any Canadian province or territory.  While federal incorporation involves listing the company’s head office, the company is still required to register extra provincially where it is doing business.  For example, a federal corporation with a head office in BC would register extra provincially in B.C.

On the U.S. side, the same applies to a Delaware corporation that has a head offices in another state, for example California, and requiring the company to register as a foreign corporation in that other state.  As such, all Delaware incorporated startups based in California are (or should be!) registered foreign corporations in California.

Each jurisdiction has different rules defining when your company has to register as a foreign corporation.  A head office is only one way to be considered a foreign corporation.  As a founder, it’s less important to understand the exact requirements (that’s the lawyers job) than to understand that doing business in jurisdictions outside of where you are incorporated may require the company to register as a foreign corporation.

While many agreements are entered into online, some online companies continue to operate partially offline.  Challenges arise when offline contracts require agreement to an additional online contract, such as a Terms of Service.  This is not to say that offline contracts can’t incorporate online contracts, rather, the online contract must be properly presented to the user signing offline to be enforceable.

When integrating an online contract into the terms of an offline contract, include a clear call-to-action on the part of the signatory.  This is a statement that signing the contract indicates acceptance of the online contract OR to only sign the contract if the signatory agrees to the online contract as well.  Ultimately, you want the signatory to indicate acceptance of the online contract clearly and in an informed fashion.

What calls-to-action don’t work?  A recent U.S. court case considered a link, above the signature line, to the terms and conditions (“Download Terms and Conditions”) and determined that this was insufficient to establish acceptance of the online contract.  As such, the mere existence of a hyperlink, without anything more to draw attention to the link, does not establish acceptance of an online contract.

Admittedly, while this post is more technical than most we put online, our goal is to remind our readers that caution should be exercised when trying to incorporate online contracts into the acceptance of an offline agreement.  While not impossible, contract language is pivotal to ensure enforceability of the online contract.