What are Shareholders?
Shareholders are the owners of the corporation. Unless they are also directors, officers or employees, they are not involved in the day to day operations of the business.
Shareholders are typically entitled to receive a dividend on their shares which are paid out of the profits of the business.
Are there residency requirements for shareholders?
Except in a few protected industries (such as telecommunications, broadcasting and financial services, there are no restrictions on foreign based individuals or corporations holding shares in a private Canadian corporation. That being said, if a corporation has foreign shareholders, it may result in the corporation losing its status as a Canadian Controlled Private Corporation (CCPC). If CCPC status is lost, the corporation may not have access to the small business deduction on active business income and dividends declared by the corporation may not be eligible for the small business dividend tax credit.
Multiple classes of shares.
When a corporation is registered, it’s required to file Articles of Incorporation which detail the shares authorized to be issued by the corporation. To provide for flexibility in the future and allow different classes of shares to be issued to different shareholders, it’s often useful to authorize a number of different classes (types) of shares with different rights at the time of incorporation. Some of the different types of shares commonly issued include the following:
- common voting shares;
- common non-voting shares;
- preferred voting shares; and
- preferred non-voting shares
Common vs. preferred shares.
The two main types of shares issued by private corporations are common and preferred shares. Each are described below.
Typically common shares do not have a fixed value. They are equity shares, meaning their value increases and decreases with the overall value of the corporation. If a corporation has a value of $100 and has 100 common shares (and no preferred shares), the common shares should be worth $1.00 per share. Common shares are usually the only type of shares issued at the time of incorporation.
Typically preferred shares are worth a fixed value, meaning, their value doesn’t change with the overall value of the corporation. Fixed value preferred shares are typically used for tax or transition planning purposes and are not usually issued at the time of incorporating a small private corporation. The word “preferred” refers to the fact that these shares are entitled to be paid out in “preference” to the common shares of the corporation in the event of a liquidation or dissolution of the corporation.
Voting vs. non-voting shares.
Although directors of a corporation are the main decision makers, shareholders may also vote in certain circumstances. The holders of voting shares are entitled to vote at annual meetings of the shareholders (or in written resolutions prepared in lieu of such a meeting), decisions to appoint or remove a director, approving financial statements, and waiving the requirement for an audit. Voting shareholders are entitled to vote on all of these decisions.
Holders of non-voting shares are not entitled to vote on the vast majority of decisions made by the corporation, but they may be entitled to vote on certain important decisions, such as the decision waive the requirement for the corporation to prepare audited financial statements each year, and to sell all or substantially all of the assets of the corporation.
If a corporation has a Unanimous Shareholder Agreement, which is usually recommend for corporations that have multiple shareholders, the agreement can add additional decisions that require shareholder consent, or the increase the amount of consent that is required over and above what is required by law.
Most small private corporations are set up as “private issuers”, meaning they are not required to comply with numerous disclosure and filing requirements (such as a prospectus) that are required of public companies. In order to maintain this “private issuer” status, the corporation must be careful not to issue shares or other securities unless one of the limited number of exemptions available under the securities rules apply.
Exemptions which may be available for a corporation to issue shares without complying with the formal filing and notice requirements of the securities regulations include:
- the “private issuer exemption”, which allows the corporation to issue shares to directors or officers, their family members, or accredited investors (all of which are strictly defined), and only so long as the corporation maintains its status as a “private issuer”;
- the “family, friends and business associates exemption”, which allows a corporation to issue shares to family members, close personal friends and close business associates of existing directors or shareholders (all of which are strictly defined); and
- the “employee, director, officer and consultant exemption”, which allows a corporation to issue shares to directors, officers, employees and consultants (all of which is strictly defined) and provided that the purchaser is buying the security “voluntarily”.
A failure to comply with the applicable securities rules can lead to significant consequences including the possibility of large fines, trading restrictions and even jail time. Securities laws vary by jurisdiction and the foregoing is only a brief description of exemptions available in some areas. Accordingly, you should seek advice from a lawyer about your specific situation prior to causing a corporation to issue shares.