Comparative Venture Capital Governance. Private versus Labour Sponsored Venture Capital Funds

Private independent limited partnership venture capital funds receive capital from institutional investors, without tax incentives. Limited partnership investment activities are governed by restrictive covenants that are determined by negotiated contract between the fund managers (general partners) and the institutional investors (limited partners). By contrast, Canadian Labour Sponsored Venture Capital Corporations (LSVCCs) receive capital only from individual investors who receive tax breaks on capital contributions of up to CAN$5,000. LSVCC investment activities are governed by statutory restrictions. This chapter contrasts the governance of LSVCCs to limited partnerships. We also summarize Canadian evidence on the impact of LSVCC governance and tax incentives: (1) on the distribution of venture capital funding between private and LSVCC funds; (2) on the unusually large overhang of uninvested capital in the Canadian venture capital industry; (3) the portfolio size (i.e. number of investee firms per fund) of private funds versus LSVCCs; and (4) the performance of LSVCCs relative to other types of venture capital organiziations and other comparable investments for individual investors.venture capital, Canada, tax, government, crowding out, portfolio size, governance

Minority Shareholder Rights in Canada and England: 1860-1987

This article reviews the changing relationship between majority and minority shareholders over approximately the past century and a quarter. In the last century and the early part of this century, company law in Canada and England was built on a foundation of majoritarianism, which was sometimes applied over-zealously by the courts to the detriment of minority shareholders. This majoritarianism has slowly yielded over time, however, to a greater concern for the position of minority shareholders. It is still not clear if controlling shareholders owe fiduciary duties at common law either to the company or to other shareholders. However, the courts have impressed controlling shareholders with what amount to fiduciary duties under the statutory oppression remedy

Enforcement Issues Associated with Prospectus Exemptions in Canada

This paper examines the regime of prospectus exemptions in Canada. The focus is on the enforcement process, and to this end the article includes an empirical examination of enforcement actions by both the securities regulators and the Investment Industry Regulatory Organization of Canada (IIROC). The end in view is two-fold; to provide a description of the exempt market and enforcement efforts, and to comment on whether enforcement resources are properly deployed. The latter necessarily requires a critical examination of the nature of the various exemptions, their purposes, and whether they are appropriately crafted to achieve their desired ends. That in turn requires an analysis of which issuers use the various exemptions, what types of securities are issued, and who the buyers are. Unfortunately, the Canadian data falls far short of painting a comprehensive or reliable picture of the exempt market. This is a product of many factors. Notably, many exempt financings need not be reported to the regulators. Moreover, many small private companies do not report their exempt financings even when required to do so. The extent of the under-reporting problem (from both causes) is illustrated by data from Statistics Canada suggesting that in 2014, there were about 156,000 exempt financings across Canada. However, in that year, only about 7,125 exempt financing reports were filed with the regulators. Understanding the nature of the exempt market is also hindered by the fact that not all of the provincial regulators compile statistics relating to the use of the various exemptions, and even among regulators that provide statistics, these are not published on an annual basis. Added to this, the published statistics that we have fall far short of painting a comprehensive or picture of the exempt market. The regulators do not compile cross-tabulated statistics relating to the nature of the issuers, the types of purchasers, the amount of capital raised, and the types of securities issued. Nor do they keep statistics on redemptions of prospectus-exempt securities, thus potentially yielding a material overstatement of the net amount of prospectus exempt financings each year

The Role of Institutional and Retail Investors in Canadian Capital Markets

In recent years, the growth of the institutional portfolio (i.e., funds managed by mutual funds, insurance companies, banks, trust and loan companies, etc.) has been truly astonishing. In this article, Professor MacIntosh argues that this growth has important implications for the manner in which Canadian capital markets are regulated. In particular, institutional shareholders tend to be better monitors of corporate managers than retail shareholders. Institutional monitoring has been impeded by a number of features of the regulatory landscape. Professor MacIntosh makes a number of recommendations for changes to corporate and securities laws. Contrary to the fears expressed by some, the decline of the retail investor and the rise of the institutional investor should be accompanied by enhanced market liquidity and market efficiency. Regulatory policies premised on assuring the continued market presence of retail investors lack a solid theoretical or empirical footing. Professor MacIntosh also notes that market institutionalization has been and will continue to be associated with growth in the so-called exempt market. This will exert a brake on the extent to which regulators can regulate non-exempt market transactions, since higher levels of regulation will only drive issuers and investors into exempt markets or to other locales. Finally, Professor MacIntosh notes that the burgeoning derivatives markets present a challenge for regulators. Properly managed, the purchase of derivative securities can greatly reduce portfolio risk. Improperly managed, however, derivatives can greatly increase risk. Professor Macintosh argues that most buyers in derivatives markets are institutional, and that where such buyers dominate, a light-handed regulatory approach is indicated

Minority Shareholder Rights in Canada and England: 1860-1987

This article reviews the changing relationship between majority and minority shareholders over approximately the past century and a quarter. In the last century and the early part of this century, company law in Canada and England was built on a foundation of majoritarianism, which was sometimes applied over-zealously by the courts to the detriment of minority shareholders. This majoritarianism has slowly yielded over time, however, to a greater concern for the position of minority shareholders. It is still not clear if controlling shareholders owe fiduciary duties at common law either to the company or to other shareholders. However, the courts have impressed controlling shareholders with what amount to fiduciary duties under the statutory oppression remedy

Tantalus Unbound: Government Policy and Innovation in Canada

The future of the western industrialized economies, including Canada, depends on healthy and innovative high-tech sectors. In 2010, this realization spurred the Canadian government to commission a blue-ribbon panel charged with assessing the state of programs designed to support business and commercially oriented research and development. The resultant Jenkins Report contains many useful recommendations aimed at consolidating disparate offerings, measuring existing initiatives’ performance and fostering federal-provincial cooperation to improve programs’ impact on the tech sector. However, the Report erred in overlooking the squandering of government resources on tax subsidies to investors in Labour-Sponsored Venture Capital Corporations (LSVCCs) — union-sponsored specialized mutual funds meant to promote the development of high-growth small and mediums-sized businesses — which are far outperformed by the private sector and often waste capital better used elsewhere. It is also unduly harsh on the federal Scientific Research and Experimental Development Tax Credit, which is critical to the early-stage start-ups that give rise to high-tech giants. In judiciously assessing the Jenkins Report’s recommendations and offering alternatives, this paper serves as a much-needed corrective, offering policy makers clear guidance in securing Canada’s economic future

The Role of Institutional and Retail Investors in Canadian Capital Markets

In recent years, the growth of the institutional portfolio (i.e., funds managed by mutual funds, insurance companies, banks, trust and loan companies, etc.) has been truly astonishing. In this article, Professor MacIntosh argues that this growth has important implications for the manner in which Canadian capital markets are regulated. In particular, institutional shareholders tend to be better monitors of corporate managers than retail shareholders. Institutional monitoring has been impeded by a number of features of the regulatory landscape. Professor MacIntosh makes a number of recommendations for changes to corporate and securities laws. Contrary to the fears expressed by some, the decline of the retail investor and the rise of the institutional investor should be accompanied by enhanced market liquidity and market efficiency. Regulatory policies premised on assuring the continued market presence of retail investors lack a solid theoretical or empirical footing. Professor MacIntosh also notes that market institutionalization has been and will continue to be associated with growth in the so-called exempt market. This will exert a brake on the extent to which regulators can regulate non-exempt market transactions, since higher levels of regulation will only drive issuers and investors into exempt markets or to other locales. Finally, Professor MacIntosh notes that the burgeoning derivatives markets present a challenge for regulators. Properly managed, the purchase of derivative securities can greatly reduce portfolio risk. Improperly managed, however, derivatives can greatly increase risk. Professor Macintosh argues that most buyers in derivatives markets are institutional, and that where such buyers dominate, a light-handed regulatory approach is indicated