Spreading like weeds: alternative cannabis products are on the way!

As we have previously discussed, Canada has positioned itself as a global leader in the cannabis space. That trend is set to continue on October 17, 2019, when it is expected that alternative cannabis products, which include edibles, infused beverages and topicals containing cannabis and cannabis concentrates will be legalized in Canada. The sale of a new and wider range of products will create valuable opportunities to tap into a growing market of consumers – particularly, those less comfortable with traditional cannabis consumption methods. According to a recent report published by Deloitte, it estimated that the Canadian market for these new products may be worth C$2.7 billion annually. Clearly, this has the potential to generate significant profits for cannabis retailers beyond products that are currently legal.

Although it is expected that edibles will likely account for approximately half of the increase in the market growth, there will be significant opportunity in capsules, topicals and cannabis-infused beverages. The global market for edibles and these other products is estimated to nearly double over the next five years to US$194 billion. Deloitte notes that the growth in the cannabis market with the introduction of these new products will continue to drive mergers and acquisition activity in this industry.

With the introduction of cannabis-infused beverages, alcohol companies and producers will want to avoid losing market share to competing cannabis products, thus paving the way for these companies to continue to search for growth potential in the cannabis industry through mergers and acquisitions, partnerships and joint ventures with existing cannabis companies. New products are likely to attract more pharmaceutical companies to this industry, which will be looking to draw consumers to their own Cannabidiol (CBD) products to manage various health issues.

M&A activity within the cannabis space has continued at a fast pace. Last year, there were over 700 transactions completed in the cannabis sector alone. The total value of these transactions was more than US$12 billion, with Canadian licensed producers being the most active. Currently, Canadian cannabis companies have some advantages over US companies, such as government support, access to capital markets and a supportive banking system. However, this could be changing. In December 2018, the Agriculture Improvement Act of 2018 (also known as the Farm Bill) was signed into law by Congress, thereby removing hemp as a controlled substance in the US. Hemp growers in the US will now also have access to similar advantages as their Canadian counterparts.

The new Canadian regulatory framework for alternative cannabis products will undoubtedly continue to progress and develop in the lead up to October 2019. As the cannabis industry changes, Canadian companies will need to maintain their competitive advantage through continual innovation, scientific research and working together with government regulators to expand into new markets, both locally and globally.

The author would like to thank Kevin Acuna, summer student, for his assistance in preparing this legal update.

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Global payments industry: frantic M&A activity not slowing down

A payments industry that was stagnant and stale for decades has recently entered a transformational and disruptive period of innovation, with seemingly boundless growth ahead.

Payments players have engaged in record-setting levels of global mergers and acquisitions (M&A) activity over the course of the past few years, but 2019 is poised to be yet another banner year for deal-making in the payments space. Rather than showing signs of plateau, this crescendo is set to continue beyond the immediate future.

The frenetic pace of M&A activity in the payments space recently has grown out of a confluence of factors. Private equity firms have entered the fray, accounting for many acquisitions of payments companies in recent times, in particular by making significant investments in fintech companies, which are often: valued at attractive multiples; generally asset-light; and able to generate significant free cash flow.

For example, global private equity firm Advent International has entered into over 30 payment company acquisitions in recent years. Also, consumer behaviour, attitudes and expectations have shifted, transforming the way they pay for products. Payments providers are pivoting in order to meet those demands and relying on M&A to do so. Technological capabilities, too, are improving at seemingly warp speed. Payments players have been capturing market share through inorganic growth by snapping up agile, innovative technology companies, thereby broadening their suite of offerings.

Global payments deal-making is likely to further accelerate due to a combination of the following:

  • Growth. Some estimates peg current global payments revenues in excess of $2 trillion per year, and increasing. The overall number of payments transactions is also increasing rapidly. A burgeoning market will continue to lead acquirers to circle, with a view of monetizing those growth opportunities;
  • Untapped markets. Realizing value in emerging markets, where the number of digital payment users is growing, will lead payments players to pursue M&A opportunities in developing economies. Where there is room for e-commerce and digital payments penetration, wider adoption is sure to follow;
  • Synergistic opportunities. Cost-cutting, cross-selling opportunities, gains in pricing power and better operating margins await global payments companies that snap up market share through business combinations;
  • Continuous innovation. While smaller, more nimble and agile companies innovate and pioneer new technologies, large payments players may ultimately need to resort to growth by acquisition to keep up with customer demands for enhanced technological capabilities, expanded range of services and a broad suite of product offerings; and
  • Battling fraud. One method of combating sophisticated fraud may be through acquiring specialized cybersecurity companies.

Scale and consolidation

The payments industry can largely be organized into two categories:

  1.  Front-end customer-facing products; and
  2.  Back-end infrastructure that is facilitative of payments transactions.

While payments M&A activity is likely to accelerate, the nature of deals may change. At this juncture, it appears as though the market is entering a consolidation phase where large-scale payments players are turning their attention away from smaller-market technology and software companies and eyeing up one another as targets.

In order to own the digital commerce payments track from start to finish, with end-to-end capability that spans the entire value chain and provides true full-service capability, large-scale payments players may resort to consolidating or vertical integration. Preliminary signs in 2019 are already demonstrative of this trend. For example, the purchase of Worldpay by Fidelity National Information Services Inc. (FIS) in March, for US$43 billion inclusive of debt, is the biggest ever transaction in the payments industry, by deal value.

Payments sector M&A activity engages numerous key areas for advisers and M&A lawyers, including:

  • Regulatory frameworks, compliance and oversight. New technologies are evolving constantly. Such shifting capabilities, in many cases, require appropriate levels of transparency and oversight to ensure compliance with applicable laws. Cybersecurity and anti-money laundering concerns are two sensitive areas that payments players should take into account in the context of M&A transactions.
  • Data protection, ownership and security. Global initiatives including open banking such as PSD2 and GDPR may be engaged by payments sector M&A activity. Issues relating to ownership, sharing and security of data are particularly relevant and should form the basis of governance models and decision making as it relates to pre-transaction and post-transaction planning.
  • Cross-border considerations. Funds flow and e-commerce matters often involve currency traversing international borders. A complex web of payments has fuelled the need for cross-border advice. Cross-border and cross-currency payments will require particular foresight and consideration.

Growth in the payments sector has repeatedly smashed estimates. Attendant M&A activity, in Canada and globally, is likely to flourish in pursuit of such growth. The movement away from cash by consumers and toward the electronification of payments, is gathering steam. Continued consolidation and healthy M&A activity is likely to naturally follow.

This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.

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Venture capital investments take off in the first quarter of 2019

The Canadian Venture Capital & Private Equity Association (the CVCA) has recently provided insights into Canadian investment trends for the first quarter of 2019 (Q1 2019). The CVCA has indicated that Private Equity (PE) deals have slowed in Q1 compared to their Venture Capital (VC) counterparts. VC investments have almost doubled since Q1 2018, whereas PE investments have declined by more than half. The CVCA has examined this trend by breaking down the latest developments from Q1 2019.

1. Overall trends in the number of deals and amount of funding

The value of VC deals in 2019 was higher than any other first quarter report since 2015. A significant factor for this increase is the number of mega-deals (worth CAD $50M+). The first three months of 2019 have already accumulated CAD $1B across 142 deals, with seven being mega-deals. These seven mega-deals made up 57% of the total amount of VC dollars invested so far this year, constituting a major departure from 2018 in which had 3 mega-deals accounted for a 34% share of the total investment in the quarter.

The majority (62%) of disclosed PE deals were for values below CAD $25M. While the average PE debt deal was 1.5 times greater than last year’s quarter, the total dollar amount of all PE investments for 2019 has never been lower for a first quarter report going back as far as 2014. The amount of PE dollars invested in 2019 has dropped significantly (by 72%) since Q1 2018. The largest disclosed deal for PE investments this year was for debt financing worth CAD $100M.

2. Investments by development stages

Companies in their later developmental stages (i.e., those with a product or service that is commercially available and generating revenue) received the majority of VC investments at approximately CAD $493M. Early-stage companies also received a significant portion of VC funding (CAD $362M), followed by growth equity (CAD $138M). Although companies in their later stages were more frequently part of mega-deals, one of the highest-valued deals (worth CAD $115M) involved a company in its growth equity financing stage.

3. Most active investments by jurisdiction

Ontario-based companies are maintaining their historical trend of attracting the most funding (CAD $481M ) and number of VC deals (54). Quebec is a close second in its number of VC deals (51) but not funding (CAD $198M). Five of the top disclosed deals were with Ontario-based companies. British Columbia had fewer deals (18), but these deals were larger in size compared to deals involving Quebec-based companies. With only 18 deals compared to Quebec’s 51, the discrepancy in funding was CAD $25M.

Toronto was the primary city for deal activity. Toronto had 47 VC deals worth CAD $416M, followed by Montreal (35 deals totalling CAD $146M) and Vancouver (13 deals totalling CAD $67M). PE deals followed a reverse trend where Montreal-based companies received 19% of the total funding (CAD $840M) and Toronto 15% (CAD $314M).

4. Sector hot spots

The concentration of VC investments is in the Information and Communication Technologies (ICT) (CAD $619M), Cleantech (CAD $201M) and Life Sciences (CAD $145M) sectors. The primary concentration of PE investments are also in the ICT sector (CAD $929M), with Industrial & Manufacturing (CAD $88M) and Consumer & Retail (CAD $474M) following suit.

The number and total value of VC investments continue to maintain their upward trend while their PE counterparts have been experiencing a decrease. The CVCA remains optimistic that “private equity activity will rebound in subsequent quarters.” High valuation is a possible explanation for slow PE activity in Q1, which is subject to change in a fluctuating investment environment.

The author would like to thank Tiana Corovic, summer student, for her contribution to the article.

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Bill C-97 amendments to the CBCA: broadening the scope of management considerations

The 2019 budget implementation bill (Bill C-97) contains significant amendments to the Canadian Business Corporations Act (CBCA), which should be noted by organizations wishing to acquire Canadian targets. On April 30, 2019, Bill C-97 passed its second reading and was referred to Committee in the House of Commons. The amendments to the CBCA create the following new considerations and/or obligations for the management of corporations governed under the CBCA.

“Best Interests of the Corporation” – more than solely shareholder interests

Bill C-97 aims to consolidate the law on the fiduciary duty of directors and officers by codifying the Supreme Court’s findings in BCE Inc. v. 1976 Debentureholders (BCE). Section 122 of the CBCA sets out that all directors and officer’s must “act honestly and in good faith with a view to the best interests of the corporation.” Historically, the “best interests of the corporation” was generally understood to be solely the interests of shareholders. However, in 2008, the Supreme Court in BCE found that the best interests of the corporation are not limited to any particular stakeholder and that “directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions.” The Bill amends the CBCA to comply with this broader interpretation. The amendments state, “when acting with a view to the best interests of the corporation … the directors and officers of the corporation may consider, but are not limited to, the following factors:

  1. the interests of: shareholders, employees, retirees and pensioners, creditors, consumers, and governments;
  2. the environment; and
  3. the long-term interests of the corporation.”

A broader conception of the interests of the corporation expands the scope of factors directors can be expected to consider when making managing decisions. This may affect not only the day-to-day operations of corporations but when and why management can implement defensive tactics in order to delay or prevent a hostile takeover bid.

“Say on Pay” – shareholder review of executive compensation

The new amendments will increase shareholder scrutiny of compensation allocated to the senior management of CBCA corporations. Under the amendments, prescribed corporations must formally develop an approach on the compensation of senior management. A report outlining this approach must then be provided to shareholders at each annual meeting for a non-binding vote. The results of this vote must then be disclosed to all shareholders. In spite of the non-binding nature of the vote, these amendments will increase transparency and shareholder involvement in setting executive compensation.

New disclosure requirements

Bill C-97’s amendments create a number of disclosure requirements for the directors of a CBCA corporation. These amendments are meant to increase the transparency and accountability of directors as Parliament recognized the diverse interests of shareholders. At each annual meeting the directors of a prescribed corporation will have to provide shareholders with information regarding:

  • the diversity among the directors and members of the senior management;
  • the well-being of employees, retirees and pensioners; and
  • the recovery of incentive benefits or other benefits paid to senior management. (Note that recovery of incentive benefits usually occurs when there has been an overpayment of compensation because prior financial statements were corrected or there was wrongdoing by senior management.)

The specifics of each of these disclosure requirements will be determined by the upcoming regulations associated with Bill C-97.

Implementation

While Bill C-97’s definition of “the best interests of the corporation” will come into effect upon Royal Assent, the “Say on Pay” provisions and other disclosure requirements are likely to come into force after the enactment of the associated regulations.

It will be important for prospective acquirers of CBCA corporations to stay aware of the progress of Bill C-97 and the associated regulations and their impact on the obligations of senior management.

The author would like to thank Arron Chahal, summer student, for his contribution to the article.

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Ready to rock! 2019 may see increased M&A activity among Canadian mining companies

2018 was a difficult year for Canadian mining companies. The aggregate valuation of TSX-listed miners declined by 12.7%, while equity capital raised by these companies declined by 36% from the previous year’s total. In this environment, new financings and deals have been scarce, but there is reason to believe that this trend might change in 2019, according to a recent publication by PwC.

A number of factors support the general prediction of increased M&A activity among TSX-listed mining companies. These factors include:

  • Increasing commodities prices. Spot prices for based and precious metals decreased across the board in 2018. However, according to PwC, “prices for several base metals, including copper, zinc and nickel, have shown significant gains in the first few months of 2019.”
  • Stronger balance sheets. Among the top 25 TSX-listed mining companies by market capitalization, cash flows from operations improved in 2018. Many of the companies opted to spend this cash on dividends, share buybacks, and paying down debt. The group’s debt-to-equity ratio decreased by almost 5% over 2018.
  • The re-emergence of the mega-deal. 2018 and 2019 have seen a number of deals that are noteworthy not just for their size, but for their implications to the mining landscape. Among these deals were the merger of Potash Corp. of Saskatchewan Inc. and Agrium Inc., the purchase of Randgold Resources Inc. by Barrick Gold Corp., the purchase of Goldcorp Inc. by Newmont Mining Corp., and Lundin Mining Corp.’s acquisition of Yamana Gold Inc.

PwC’s prediction regarding mega-deals could have a cascading effect. Newly consolidated senior companies will quickly move to discard non-core assets, which will be attractive acquisition prospects for mid-sized miners who may in turn seek to consolidate or form joint ventures in an effort to remain competitive. With miners sitting on strong balance sheets and commodity prices bolstering management confidence, there appears to be ample kindling to fuel the “mania” over mergers in the mining space. PwC concludes by noting that although this renewed excitement presents significant opportunity, “overall growth outlook is uncertain” and the industry still faces key challenges including exploration and development and cost control. In this context, identifying the right opportunity and unlocking its value through execution and innovation is more important than ever.

The author would like to thank Eric Vice, articling student, for his contribution to the article.

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Understanding landlord consents in share and asset purchase transactions

Transactions, whether share or asset purchase, may involve the transfer of real property interests. Some important considerations when drafting agreements for these transactions are:

  • Are there any leases that are a part of the transferred assets?
  • If so, is landlord consent required for assignment or change of control under these leases?
  • Are the leases material, such that failure to maintain or transfer the lease on closing will materially adversely impact the deal?

Landlord consents are a crucial aspect of such deals and proper drafting of the agreement and interpretation of landlord consent provisions in leases can save time and undue stress. Careful attention must be paid to the wording of assignment and transfer clauses in subject lease agreements.

For example, in share purchase transactions, attention must be paid to change of control provisions, which may or not be considered a transfer or assignment under the terms of the lease. If the transaction falls under the definition of transfer / assignment, or change of control, landlord consent will likely be required. That being said, what if it is not clear on the face of the lease whether the transaction is such that landlord consent is required? Similarly, if it is not clear whether consent is required, should a landlord consent request be sent in any event?

The urge must be resisted to provide landlord consent requests where landlord consent is not required under the terms of the lease. Providing a landlord consent where one is not required under the terms of the lease may suggest to the landlord that their consent is required, and could end up providing the landlord with more rights than they were originally granted under the terms of the lease. Furthermore, the landlord may object to the terms of the consent or transaction, but having provided them with same, it may be difficult to take such agreement back without wasting client time and money on an issue that was not an issue to begin with.

Lastly, most consent provisions will state that the landlord will not unreasonably withhold or delay consent. This is a covenant of the landlord under the terms of the lease agreement, but it can leave ambiguity as to when and how to determine whether a landlord is unreasonably withholding their consent. While there is no bright line test for determining when a landlord is unreasonably withholding consent, the general rule is whether in the circumstances a reasonable person in the landlord’s position would be entitled to withhold consent. While some leases may outline when it is reasonable to withhold consent, but where no such provisions are included, withholding consent must be in good faith and can be based on whatever facts and arguments would lead a reasonable person in the same circumstances to conclude the same.

Parties should turn their attention to issues surrounding obtaining landlord consent early on in the transaction, to avoid undue delays in receiving same, and should always be mindful of requesting consent when no consent is required.

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Health Canada changes cannabis licensing process

On May 8, 2019, Health Canada announced that it is introducing changes to its cannabis licensing process, effective immediately. Before the change, an applicant can apply for a cannabis license by submitting paper application to Health Canada without having to build a facility first. Now, a new applicant for licence to cultivate, process or sell cannabis for medical purposes must have fully built a cannabis facility that meets all the regulatory requirements under the Cannabis Regulations at the time of submitting an application.

This change came about after Health Canada reviewed its existing licensing regime, which revealed that a major amount of resources were spent on reviewing applications from companies that were not ready to begin operations, thereby prolonging the wait time and preventing more mature applicants from entering into the market sooner. For instance, Health Canada identified that more than 70 per cent of the applicants who successfully passed the initial paper-based review over the past three years have no yet submitted evidence package to the government agency, showing that they have built their proposed site that satisfies the regulatory requirements. As such, the changes in process aim to correct the inefficient allocation of government resources and alleviating the licensing bottleneck.

Along with new criteria for new applicants, Health Canada in its statement promised to provide more support to all applicants by publishing additional guidance on the licence application process and regulatory requirements with respect to Good Production Practices and physical security measures. Furthermore, the government agency is committed to increasing predictability for applicants by creating service standards for its review and supporting micro-class applicants by implementing additional measures.

For existing applications currently in queue, Health Canada will first conduct a high-level review of the paper application submitted. If this review is successful, the applicant will receive what is known as a status update letter, specifying that there are no issues with the proposal. A more detailed review will be conducted once the applicant has a completed site that satisfies the regulatory requirements.

On the market side, private cannabis companies are driving up cannabis M&A activities. According to Marijuana Business Daily’s weekly deal watch, compared to a similar time period last year, the number of M&A transactions in the cannabis industry increased by nearly 40 per cent year-to-date over 2018, from 94 to 130.

More specifically, deals involving private cannabis companies almost tripled from 15 in 2018 to 43 by the week ending May 3, 2019. With a growing number of applicants and changes to the licensing process that will hopefully reduce wait time, one can expect to see more cannabis operators entering into an expanding and maturing legal cannabis market, which may further accelerate M&A activities in the cannabis space.

The author would like to thank Coco Chen, articling student, for her contribution to this article.

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Non-resident employees: withhold on worldwide income?

ITA regulation 102 requires employers to withhold tax on remuneration paid to non-resident employees who are employed in Canada. This requirement can be avoided by seeking a treaty-based waiver (regulation 102 waiver) or certification as a qualifying non-resident employer. However, often there is not sufficient time to do this before the employment is to begin, or there is a lack of awareness of the rules. Where the employer must withhold tax, should the amount be based on the non-resident employee’s Canadian income or worldwide income? Clarification from the CRA would be appreciated.

Specifically, regulation 102 imposes withholding on “any payment of remuneration . . . made to an employee in his taxation year. . . .” The definition of “remuneration” under regulation 100(1) does not specify that the remuneration is only in respect of Canadian employment. Accordingly, a cross-border non-resident employee who is employed in Canada for 5 percent of his or her workdays could technically be subject to Canadian withholding tax on all worldwide remuneration, in addition to withholding tax in his or her country of residence. Of course, this excess Canadian withholding would be refunded after the employee files a T1 tax return.

Subparagraph 115(1)(a)(i) specifically limits the taxable employment income of a non-resident person earned in Canada to “incomes from the duties of offices and employments performed by the non-resident person in Canada.” Thus, the person is not liable for tax on non-Canadian income. One might extend this argument to withholding and therefore not withhold tax on such income, on the basis that the regulations should be interpreted in the entire context of the scheme and object of the Act. Thus, in practice, the withholding amount is generally calculated in accordance with this principle by multiplying the non-resident employee’s annual remuneration by the number of days worked in Canada divided by the total number of working days that year. Commentators have generally recommended this approach; see, for example, “Regulations 102 and 105 and Cross-Border Compliance Issues” in the Canadian Tax Foundation’s 2013 annual conference report.

The difficulty is that the CRA has not explicitly endorsed this approach, except in narrow circumstances. Guide T4001, the “Employers’ Guide—Payroll Deductions and Remittances,” suggests that non-resident directors who attend meetings in Canada are subject to Canadian income tax and withholding based on the number of working days they spend in Canada in relation to the total days they worked overall. Similarly, in respect of a non-resident employee stock option plan, the CRA suggests calculating an employee’s taxable Canadian income by multiplying the total benefit derived by the proportion of working days spent in Canada over the total number of working days that year (CRA document no. 2012-0440741I7, July 6, 2012).

Employers looking to avoid being assessed penalties for underwithholding would appreciate more general assurance that only Canadian income of non-resident employees is subject to withholding.

The author would like to thank Travis Bertrand, articling student, for his contribution to this article.

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Reprinted from Canadian Tax Focus, May 2019, by permission of the Canadian Tax Foundation.

A-I Captain! Know the legal risks of buying an AI company… or go down with the ship

On February 21, 2019, Blackberry completed its acquisition of Cylance, a privately-held artificial intelligence (AI) and cybersecurity company. Acquisitions of AI companies like Cylance are becoming increasingly common as businesses seek to realize the opportunities in offering much-improved products or services to their customers. Canada, in particular, has become a hotspot for activity in the AI industry.

Acquiring an AI company is not always smooth sailing. There are common risks that buyers must be aware of prior to embarking on an acquisition.

Know where the data comes from

An AI derives its value from data sets used to train the AI. A common phrase in the AI industry is “garbage in, garbage out” – meaning, an AI is only as good as the data that has been used in its training. Canada regulates the commercial use of personal information through the Personal Information Protection and Electronic Documents Act (PIPEDA). PIPEDA requires consent of individuals before a company collects, uses or discloses their personal information during commercial activities.

Where the AI has been trained using personal information or uses this data in the course of its operation, PIPEDA requirements will be triggered. As such, during the due diligence process, the buyer must be wary of the consents the target has received from its customers. Often, these will be included in the standard terms of use on which the target engages its customers.

IP owner-“ship”

As with purchasing any technology company, reviewing intellectual property (IP) ownership will be a key part of the due diligence process. Often the sole value of the AI company will be derived from its IP.

In connection with traditional IP ownership issues, buyers must be cognizant that many companies in the AI space are not actually creating their own free standing AI systems but are instead leveraging those created by established AI providers such as IBM or Google. Purchasers must be sure to differentiate the IP owned by the target (i.e., those possibly created through using the AI created by the provider) from the IP that will remain with the provider post-acquisition. This is largely dependent upon the contractual relationships the target has with its customers and the AI provider.

Regulatory landscape

The Canadian government has been committed to providing significant monetary support to the AI industry. In the 2017 Federal Budget, the Government committed $125 million to develop the Canadian AI industry through the ‘Pan-Canadian Artificial Intelligence Strategy’.

However, despite this financial contribution, Canada has not created a comprehensive AI policy framework. There are many common legal questions that arise with AI: who owns the copyright of a painting created by an AI? Who is responsible when an AI driven car causes injury? The legislative framework to answer these questions is remains sparse.

The Canadian government will be expected to fill in the regulatory landscape affecting the AI industry in the coming decade as it attempts to navigate these stormy waters. The changing of regulations governing any given industry will cause associated risks to those companies operating in the field. Fortunately, the government’s stated dedication to becoming a world-leader in AI indicates that these changes will mostly be positive for the industry. However, when making investments in AI companies, buyers should be aware of the legislative and regulatory tenor regarding the AI industry as a whole.

The author would like to thank William Chalmers, articling student, for his contribution to this article.

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Electronic documents and signatures: a legal overview

In our increasingly digitized world, it is important to know the rules regarding electronic documents and signatures. Each Canadian province and territory has adopted its own electronic commerce legislation, which are very similar to one another and largely permissive in regards to the use of electronic documents and signatures. Alberta’s e-commerce legislation is called the Electronic Transactions Act (the ETA). Section 10 states that information or a record to which the ETA applies must not be denied legal effect or enforceability solely by reason that it is in electronic form.

The “functional equivalency rules” of the ETA provide the criteria for the use of electronic documents and signatures.

Writing rule

A legal requirement that information or a record be in writing is satisfied if the information or record is in electronic form and accessible for future reference.

Production, retention and examination rules

  • A legal requirement that a person provide information or a record (1) in writing to another person is satisfied if it is provided in electronic form and is retainable and later accessible by the other person, or (2) in a specified non-electronic form to another person is satisfied if it is provided in electronic form and is (i) organized in at least substantially the same manner as the non-electronic form and (ii) retainable and later accessible by the other person.
  • A legal requirement that a person provide, retain, or examine an original record is satisfied by doing so electronically if (1) the integrity of the information contained in the record is reliably assured and (2) where the legal requirement is to provide an original record, the electronic record is retainable and later accessible by the recipient.
  • A legal requirement to retain a record that is originally created, sent or received in writing or electronically is satisfied by the retention of an electronic record if (1) the electronic record is retained in the same format as the original record or in a form that accurately represents the information in the original record, (2) the information in the electronic record is later accessible by any person with the requisite authority, and (3) where the original record was in electronic form and was sent or received, any information identifying its origin, destination, and date and time it was sent or received, is also retained.

Electronic signature rules

A legal requirement that a record be signed is satisfied by an electronic signature only if in light of all the circumstances (1) the electronic signature is reliable to identify the person, and (2) the association of the electronic signature with the relevant record is reliable for the purpose for which the record was created.

The ETA also includes a number of rules regarding the formation of electronic contracts, the time at which electronic records and information will be considered sent or received, and several other matters.

Exceptions and Special Considerations

The functional equivalency rules above do not apply equally to all situations. Section 7 states that the ETA does not apply to wills, powers of attorney, negotiable instruments, records creating or transferring an interest in land, guarantees under the Guarantees Acknowledgement Act and a number of other documents. This list of exceptions is similar for nearly every province but is notably absent from New Brunswick’s legislation. Sections 19 through 24 of the ETA provide additional requirements for when the recipient is a public body. The Alberta Rules of Court allow for the use electronic methods for service except with “commencement documents”, such as statements of claim, originating applications, and so on (see Part 11, Division 3).

As for federal legislation, Part 2 of the Personal Information Protection and Electronic Documents Act and Sections 31.1 through 31.5 of the Canada Evidence Act provide special rules for electronic documents. Finally, while courts have commented on Canadian e-commerce legislation rather sparingly, the Alberta Court of Queen’s Bench in 2015 interpreted Section 8 of the ETA – which says that nothing in this legislation requires a person to use, provide or accept information or a record in electronic form without the person’s consent – to mean that consent, either explicit or inferred, is necessary in order to provide or accept information or a record in electronic form. On this basis, the court found that because the two parties in the case had signed an agreement with very clear notice provisions that did not contemplate the use of email, the court could not infer consent for the use of this type of communication. Thus, the defendant’s use of email for notice of termination of the contract was deficient.

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