Share structure and shareholders

The share structure of your corporation is established in its articles. A person who owns shares in a corporation is called a shareholder.

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The share structure of your corporation

The articles are required to set out the classes and any maximum of shares that the corporation is authorized to issue.

Classes of shares

The articles can allow for one or more classes of shares. There is no limit on the number of classes of shares that can be set out in the articles. If there is more than one class, the rights, privileges, restrictions and conditions for each class must also be indicated in the articles.

If there is only one class of shares, those shares must, as a minimum, have:

  • the right to vote
  • the right to receive dividends (if the board of directors has declared any)
  • the right to receive the remaining property of the corporation after it is dissolved.

If there are more than one class of shares, each of the three rights have to be assigned to at least one class of shares, but one class does not need to have all three. Also, each right can be given to more than one class.

How to change classes of shares

If the directors wish to change the classes of shares described in the articles, or any of the rights attached to a class of shares, an amendment to the articles (see Amending your articles) of the corporation will be required.  A special resolution of the shareholders is needed. In certain circumstances involving changes to classes of shares and rights, the shareholders of each class or group may be entitle to vote separately as a class or group.

Your corporation's shareholders

A person who owns shares in your corporation is a shareholder. Shares represent an ownership interest in the corporation. They are property, much like a car or a house. Any "person" can hold shares in a corporation. In addition to an individual, a "person" can include a legal entity such as trust, a mutual fund or another corporation.

Generally speaking and unless your articles provide otherwise, each share in the corporation entitles the shareholder to one vote. The larger the number of shares a shareholder holds, the larger the number of votes the shareholder can exercise.

Note

An individual can be a shareholder, director and officer in a corporation at the same time. A shareholder who also serves as a director or officer assumes the duties and liabilities of directors and officers while acting as such.

Becoming a shareholder

A person becomes a shareholder by buying shares, either from the corporation or from an existing shareholder. Specifically, a person can:

  • purchase shares not previously issued by the corporation (referred to as "buying shares from the treasury")
  • buy shares from an existing shareholder (according to the terms set out in the articles) and have the corporation register the transfer.

Rights and responsibilities of shareholders

After paying for their shares, shareholders have the right to:

  • vote at the shareholders' meeting (if their shares have a right to vote)
  • receive a share of the profits (dividends) of the corporation
  • receive a share of the property of the corporation when the corporation is dissolved
  • be notified about shareholders' meetings and attend them
  • elect and dismiss directors
  • approve by-laws and by-law changes
  • appoint the auditor of the corporation (or waive the requirement for an auditor)
  • examine and copy corporate records, financial statements and directors' reports
  • receive the corporation's financial statements at least 21 days before each annual meeting
  • approve major or fundamental changes (such as those affecting a corporation's structure or business activities).

The shareholders' liability in a corporation is limited to the amount they paid for their shares; shareholders are usually not liable for the corporation's debts.

Ceasing to be a shareholder

A person ceases to be a shareholder once his or her shares are sold either to a third party or back to the corporation or when the corporation is dissolved.

You do not have to notify Corporations Canada when a person becomes or ceases to be a shareholder.

Transfer of shares

Share owners can transfer, that is sell their shares and the rights that go with them (also called "rights attached to the shares"). Transfers must conform to any conditions or restrictions that apply to the corporation's shares and their transfer. For example, directors could have to approval all transfers of shares.

Shareholder resolutions

Shareholders exercise most of their influence over how the corporation is run by passing resolutions at shareholders' meetings. Decisions are made by ordinary, special or unanimous resolutions.

Ordinary resolutions

Ordinary resolutions require a simple majority (50 percent plus 1) of votes cast by shareholders. For example, shareholders usually carry out the following actions by ordinary resolutions:

  • elect directors
  • appoint auditors
  • approve by-laws and by-law changes.

Special resolutions

Special resolutions must have the approval of two thirds of the votes cast. For example, shareholders usually carry out the following actions by special resolutions:

  • make fundamental changes (for ex., amending the corporation's name; amending the articles regarding such matters as the province of registered office; restrictions on share transfers; restrictions on activities; and changes involving such matters as amalgamation, dissolution and continuance)
  • sell all, or substantially all, of the corporation's assets.

Unanimous resolutions

Unanimous resolutions must have the approval of all shareholders entitled to vote. For example, where shareholders agree to not appoint an auditor, the decision must be unanimous.

Shareholders' meetings

A shareholders' meeting allows shareholders to obtain information about the corporation's business and to make appropriate decisions regarding the business.

A shareholder's right to attend and vote at a meeting depends on the rights attached to the shares that person holds (see Class of shares). As a general rule, shareholders who are entitled to vote at a meeting are entitled to attend the meeting. The Canada Business Corporations Act (CBCA) gives holders of non-voting shares the right to attend certain meetings and vote on certain fundamental issues.

A shareholder entitled to vote has the right to appoint a proxy holder to attend and vote on his or her behalf at any shareholders' meeting. If your corporation has more than 50 shareholders or is a distributing corporation, certain rules apply regarding sending a form of proxy. Consider consulting a lawyer or another professional.

Calling a shareholders' meeting

The directors must notify voting shareholders of the time and place of a shareholders' meeting. They must do so no more than 60 days and no fewer than 21 days before the meeting date. For example, if the meeting is to be held on May 20, the notice of the meeting should be sent no earlier than March 22 and no later than April 30.

Unless otherwise provided by the by-laws or the articles, this notice can be sent electronically to shareholders if they have previously consented to receiving such notices electronically and if they have designated a system for receiving them.

Annual meeting

The CBCA states that a corporation "must hold a shareholders' meeting on a date that is no later than 15 months after holding the last preceding annual meeting, but no later than six months after the end of its preceding financial year". Alternatively, shareholders can pass a resolution in lieu of a meeting.

The notice for the annual meeting must address the following issues:

  • appointing an auditor or waive the appointment of an auditor
  • electing directors
  • considering the corporation's financial statements
  • raising any other business they wish to address.

Annual meeting agenda

Annual shareholders' meetings must have on the agenda, at a minimum:

  • consideration of the financial statements
  • appointment of an auditor (or a resolution of all shareholders not to appoint an auditor)
  • election of directors.

Often, the agenda includes an additional item: "any other business". This portion of the meeting allows shareholders to raise any other issues of concern to them. If directors want shareholders to consider a matter, it should be listed in the agenda before the meeting and not raised as "any other business".

Location of the shareholders' meeting

The annual meeting can be held in Canada at a place specified in the by-laws. If the by-laws do not specify a location, the directors can choose one. An annual meeting can be held outside Canada only in cases where the corporation's articles permit it or if all voting shareholders agree.

Unless otherwise stated in the by-laws, a corporation can allow shareholders to attend the meeting electronically. The communications system used must allow all participants to communicate adequately with each other during the meeting.

Also, if the corporation's by-laws permit it, the directors of a corporation can decide that a meeting of shareholders will be held entirely by means of a telephonic, electronic or other communication medium that will allow all participants to communicate adequately with each other during the meeting. In such cases, it is the responsibility of the corporation to make these facilities available.

Special meetings

Shareholders can also be called to special meetings. The notice for a special meeting must:

  • state the time and place of the meeting
  • provide shareholders with enough information in advance so that they know what they will be asked to consider and vote on at the meeting.

Agendas for special meetings of shareholders usually deal with specific questions or issues, such as whether to approve a fundamental change proposed by the corporation's directors. A fundamental change could include amending the articles of incorporation or changing the corporation's name. Generally, a corporation's directors will call a special meeting of the shareholders when they would like to undertake a particular activity or a special issue that requires shareholder approval.

It is often convenient to combine special meetings with annual meetings. The notice for such a meeting must clearly indicate what special business will be considered.

Resolution in lieu of a shareholders' meeting

In a small corporation, where one or few individuals act as directors, officers and shareholders, shareholders' meetings may not be necessary. Shareholders in these corporations often prefer to act through written resolutions.

A resolution in lieu of a meeting is a written resolution (signed by all shareholders who are entitled to vote at the meeting) that deals with all matters that need to be addressed at a shareholders' meeting. This resolution is just as valid as it would be if passed at a meeting of shareholders.

Resolutions should be kept in the corporation's records (see Maintaining the corporation's records).

Other requirements of the shareholders' meeting

Annual and special meetings also have other requirements related to quorum, electronic voting and minutes of the meeting.

Quorum

No business that is binding on the corporation can be conducted at annual or special shareholders' meetings unless a quorum of shareholders is present or represented. Your corporation's by-laws can define a quorum. Unless the by-laws state otherwise, a quorum is present at a meeting when the holders of a majority of the shares entitled to vote at the meeting are present in person or represented by proxy, regardless of the number of persons actually present at the meeting.

Electronic voting

Unless your corporation's by-laws specifically forbid it, electronic voting is allowed. The one requirement is that the vote can be verified without knowing how each shareholder voted.

Minutes of the meeting

Your corporation must keep a written record of the meeting. This record usually includes such information as:

  • where and when the meeting was held
  • who attended
  • what resulted from any voting.

These records are commonly referred to as "minutes" of the meeting and are usually kept in a minute book and with the corporate records.

Shareholder agreements

A shareholder agreement is an agreement entered into by some, and usually all, of the shareholders of a corporation. The agreement must be in writing, and must be signed by the shareholders who are party to it. While shareholder agreements are specific to each corporation and its shareholders, most of these documents deal with the same basic issues.

The CBCA allows shareholders to enter into written agreements that restrict the powers of the directors to manage or supervise the management of the corporation in whole or in part. However, when shareholders sign an agreement to assume the rights, powers and duties of directors, they should be aware that they are also agreeing to assume the liabilities of those directors to an equal degree. These are called unanimous shareholder agreements.

The relationship among shareholders in a small corporation tends to be very much like a partnership, with each person having a say in the significant business decisions the corporation will be making. Obviously, a shareholder agreement is not necessary in a one-person corporation. However, consider entering into a shareholder agreement if you have more than one shareholder or when you want to bring in other investors as your business grows.

Management of the corporation and relations among shareholders

Under the CBCA, the board of directors has control over the management of the corporation unless there is a unanimous shareholder agreement that transfers the powers and liabilities of the directors to the shareholders. Because directors are elected by ordinary resolution of the shareholders, if one shareholder has more than 50 percent of the votes, that shareholder alone can decide who will sit on the board. If minority shareholders (those with a small stake in the corporation) in a small corporation do not feel adequately protected by a board of directors elected by a majority shareholder, they might want to negotiate a shareholder agreement that better protects their investment in the corporation.

  • Right to sit on the board: A very common shareholder agreement provision for a small corporation is one that gives all the shareholders the right to sit on the board of directors or nominate a representative for that purpose. Each shareholder agrees in the document to vote his or her shares in such a way that each one is represented on the board, thus ensuring all shareholders an equal measure of control.
  • Higher shareholder approval than the CBCA: Shareholder agreements can provide that certain significant decisions require a higher level of shareholder approval than is set out in the CBCA. For example, an agreement might provide that a decision to sell the business must be approved unanimously by all shareholders, whereas the CBCA requires only a special resolution (approval by two thirds of shareholders).
  • Future obligations: Shareholder agreements can set rules directing how the future obligations of the corporation will be shared or divided. For instance, each shareholder invests a minimal amount to get the business going, looking to bank loans or other credit for growth. The shareholders could agree that, when other means of raising funds are not available, each shareholder will contribute more funds to the corporation on a pro rata basis. This means simply that the extent of a shareholder's obligation to fund the corporation would be determined by the extent of that shareholder's ownership interest (the percentage of shares held) in the corporation. So, three equal partners starting a corporation (with equal shares held by each) might sign a shareholder agreement that each will be responsible to fund one third of any future obligations of the company through the purchase of more shares.
  • Future purchase of shares: Other rules often found in shareholder agreements govern the future purchase of shares in a corporation when no funding is needed. In such a case, the shareholders could agree to maintain the same percentage of holdings among themselves. Three equal partners could agree that no shares in the corporation will be issued without the consent of all shareholders/directors. Without such an agreement, two shareholders/directors could issue shares by an ordinary or special resolution (because they control two thirds of the votes) to themselves without including or requiring the permission of the third shareholder/director.

Restrictions on share transfers

Restrictions on share transfer are used so that shareholders can control who will become a shareholder in their corporation.

By placing such restrictions in a shareholder agreement instead of in your articles, shareholders can remove or alter them without the corporation having to file articles of amendment. Note that these restrictions are separate from the restrictions placed in your articles of incorporation as part of the non-distribution corporation restrictions.

Another provision is the right of first refusal, which basically states that any shareholder who wants to sell his or her shares must first offer those shares to the other shareholders of the company before selling them to an outside party.

Shareholder agreements can also set out rules for the transfer of shares when certain events occur, such as the death, resignation, dismissal, personal bankruptcy or divorce of a shareholder. The restrictions can include detailed plans governing when a shareholder can or must sell his or her shares, or what happens to those shares after the individual shareholder has left. The shareholder agreement, for example, could require that the shares be transferred to the remaining shareholders or to the corporation, often at fair market value.

These provisions are complex and usually set out mechanisms to manage the transfer, such as sending notices and establishing how the transfer price will be funded. Operators of small corporations who enter into agreements with this sort of exit provision sometimes purchase life insurance to fund the payment obligations of the party who will be purchasing the shares.

Other shareholder agreement provisions could include non-competition clauses, confidentiality agreements, dispute resolution mechanisms and details on how the shareholder agreement itself is to be amended or terminated.

Special agreements

The CBCA deals specifically with two particular types of shareholder agreements.

  • Pooling agreements: The CBCA provides that shareholders can, in a written agreement between two or more shareholders, agree on how, in any particular manner, their respective shares will be voted on. Shareholders could enter into an agreement solely for the purpose of determining, for instance, how they will vote their shares to elect directors. Shareholders can also decide to include a pooling provision in a larger shareholder agreement.
  • Unanimous shareholder agreements: Using these agreements, which must be in writing, the CBCA permits all of the shareholders of the corporation to transfer all or some of the powers of the directors to the shareholders. Where there is only one shareholder, that person can sign a written declaration that has the same effect as a unanimous shareholder agreement. The wording must be precise: an agreement signed by all of the shareholders does not fit the definition of a unanimous shareholder agreement if it does not deal with the transfer of powers, and the responsibilities that go along with them, from the directors to the shareholders.
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