To understand shares, you must first appreciate that the corporation is basically a separate legal ‘person’ and as such, it owns all the assets of the corporation. The ownership of the corporation itself is divided into pieces or ‘shares.’ The people who own these shares are called the shareholders.
Any ‘person’ may own a share, and this includes individuals, corporations and trusts. Shares are a form of property, and can be bought and sold. However, these rights may be subject to any limitations that may be set out in the Act, the Articles, by-laws, shareholders’ agreements, etc.
Classes of Shares
In general, there are three types of rights associated with shares: the right to vote, the right to receive dividends and the right to receive the remaining property of the corporation upon dissolution. These rights can be divided among different types or classes of shares. Normally, the Articles of Incorporation will provide that an unlimited number of shares can be issued of each class. Classes can be assigned names (eg. common, preference, non-voting) or simply be listed (eg. Class A, Class B, Class C).
Where there is only one class of shares, the rights of all shareholders are equal. Where there are more classes of shares, each class may have different rights, privileges, restrictions and conditions. The number of shares of each class is unlimited, unless there is a maximum specified in the Articles.
Most small businesses begin needing only one class of shares – often called the common shares. If there is a single proprietor, then the shares will be issued to them. If there is more than one ‘owner’, then these shares are split in the proportion agreed upon.
However, we recommend adding a second class at incorporation. We call these ‘Class B’ or non-voting shares. This type of share typically has no voting rights, and is only entitled to dividends upon the discretion of the Board of Directors. The advantage of this type of share is that you can give different dividends to this shareholder than to the common shareholders, which is conducive to income-splitting especially between spouses and/or family members. You should ask your accountant and/or financial advisor about this.
There is virtually no limit to the type of other classes of shares that can be developed. Big public corporations typically have many different kinds of shares with different rights and privileges. In general, we recommend that you keep it simple when starting up. If further classes are needed later, they can be constructed to meet the specific needs at the time. It does require an amendment to the Articles of Incorporation, for which the government charges a $150 filing fee. The cost will likely be small relative to the advantage to be gained in getting exactly what you need.
Common Types of Share Classes
Common Shares: These usually refer to the share class that gets the remaining property of the corporation if it is dissolved. Common shares also usually have the voting rights.
Non-Voting Shares: They do not carry a vote in the normal running of the corporation. They are often paid dividends but at the sole discretion of the Board of Directors.
Preferred Shares: This usually means that there’s some ‘preference’ attached to these shares, such as the right to get dividends before the holders of common shares.
Restrictions on Share Transfers
If a corporation is not offering or distributing shares to the public, certain provisions should be included in the Articles of Incorporation. The Securities Act provides that a corporation is private if the Articles restrict the right to transfer shares, limit the number of shareholders (not including employees) to 50, and prohibit any invitation to the public to buy securities.
For small businesses, share transfers are usually restricted to ensure that the corporation remains a ‘private company‘, and hence not subject to either federal or provincial securities legislation. Being subject to this legislation creates a heavy load of registration and filing requirements. Making share transfers subject to the prior consent of the Board of Directors or shareholders is typically done.
Shares and Voting
As mentioned earlier, shares can either be voting or non-voting. However, another issue must also be dealt with regarding the control of the corporation. Will each share have one vote or will each shareholder have one vote? This can make a considerable difference when the corporation must make decisions. An example may best illustrate this point.
Let us say that a corporation has 3 shareholders – A, B and C. A has 70% of the voting shares and B and C each have 15% of the shares. If the by-laws call for one vote per share, then A has effective control of the corporation. A will win every vote. If the by-laws call for one vote per shareholder, then B and C could out-vote A.
Most corporations are set up with one vote per share.