Share capital plays a crucial role in the world of corporations, serving as a primary means of ownership and property rights. In Canada, share capital is regulated by the Canada Business Corporations Act (“CBCA”), which serves as a model for most Canadian jurisdictions. This blog post delves into the intricacies of share capital in Canadian corporate law, touching upon topics such as authorized capital, share classes, voting rights, dividend rights, redemption rights, dissolution rights, and share transfers.
Creation and Issuance of Corporate Shares
Corporate shares are unique to corporations and represent a form of property, much like ownership in real estate or patents. Shares are created when a corporation issues them and cease to exist upon cancellation. The Articles of Incorporation set out the maximum number of shares a corporation is authorized to issue, along with any restrictions on share issuance, transfer, or ownership. Directors have the discretion to issue shares, subject to the Articles, by-laws, and unanimous shareholder agreements. Shares must not be issued until consideration is fully paid in money, property, or past services of equal value.
Pre-emptive rights may be provided in the Articles, allowing existing shareholders to acquire new shares in proportion to their holdings. The term “authorized capital” is no longer universally applicable. Directors must act in the corporation’s best interests when issuing shares. A corporation must maintain separate stated capital accounts for each class and series of shares issued and must not reduce its stated capital except as provided in the Act.
Minimum Requirements and Share Registration
Shares require corporations with constitutions regulated by incorporating statutes. Shares must be registered, with ownership listed in a corporation-maintained registry. Canadian law has changed share transfer rules, eliminating the outdated “par value” concept. The Canadian position supports no-par value shares, as par value was deemed “utterly useless.” Abolishing par value also eradicated the “contributed surplus” concept.
Classes of Shares and Discrimination Among Shareholders
Corporate law allows corporations to discriminate among shareholders by dividing them into classes. Corporate constitutions typically authorize this, with statutes like the CBCA as models. Shares can be divided into various classes with different rights, privileges, restrictions, and conditions. Traditional terminology like “common” and “preferred” shares is no longer used in Canadian corporate statutes. Instead, constitutions must outline the details of each class. Voting rights, dividend rights, and rights to corporate property on dissolution must be distributed among the classes. The naming of share classes is a matter of preference and marketing, with the legal focus on how class separation affects shareholders’ risk, profit-sharing, participation, and dissolution rights.
Canadian corporate law traditionally entitles shareholders to vote on certain matters. Non-voting shares are controversial, and some suggest prohibiting their public trading. In Jacobsen v. United Canso Oil & Gas Ltd., the court examined a corporation limiting voting rights per person, regardless of shares held. Non-voting shares have statutory voting rights on fundamental changes. Proxy voting is detailed in Part XIII of the CBCA, allowing shareholders to appoint a proxy to vote at meetings. In Canadian Express Ltd. v. Blair, the court determined that Blair, as chairman, failed to meet the quasi-judicial standard of conduct, and Price was declared the elected director of Enfield.
The decision to declare a dividend lies within the discretion of a company’s directors, subject to any restrictions included in the Articles of Incorporation. This principle, part of the “internal management” of a company, has been long accepted at common law and is recognized in statutory regulation. The power to declare dividends is limited by law, as it must be exercised in good faith and in the best interests of the company. Dividends are considered corporate gifts, which are permissible only when they serve the company’s best interests. No obligation to pay or right to receive dividends exists until the corporation decides to pay them, and the decision generally falls within the directors’ powers to manage corporate affairs.
Redemption rights involve marketing shares as redeemable, retractable, or convertible. Redeemable shares can be repurchased by the corporation, while retractable shares give the shareholder the option to sell back. Convertible shares can be exchanged for a different class. In the U.S., redeemed shares are often held as treasury shares. The CBCA requires cancellation of redeemed shares under certain conditions, with sections 34 and 36 outlining restrictions for corporations purchasing their own shares. Directors who authorize improper redemptions may be liable for restoration of amounts paid.
When corporations dissolve, the corporate constitution acts as a will, distributing remaining property among shareholders after debts are paid. Shareholders’ rights are set in the corporate constitution. If interpretation problems arise, legal battles might ensue. Two cases, International Power Co. v. McMaster University and Montreal Trust Co. and in Re the Isle of Thanet Electricity Supply Co., exemplify differing reasoning on “preference” shares. In the first case, preference shareholders have a priority to be repaid and share in the distribution of assets. In the second case, holders of preference stock failed to show the provision wasn’t exhaustive. In Westfair Foods Ltd. v. Watt, the court disagreed with class A shareholders’ expectation of sharing in future success, stating that break-up rights should offer capital return assurance in case of failure, not profit assurance in case of success.
Series within a Class
Corporate capital structures can be subdivided into series of shares, allowing shareholder groups with common differentiations to be distinguished further. The CBCA permits series designations, giving directors significant power to manipulate capital structures. However, there are restrictions on series creation and usage. Series of shares could be advantageous in specific corporations and benefit certain stakeholders.
Shares as Property and Transferability
Shares are considered property and usually transferable. The transfer process involves a corporation issuing a share to a shareholder (X) and the shareholder transferring it to another person (Y). The exact timing of the property transfer is less significant due to reformed Canadian statutes. Transferees are interested in obligations owed by four types of persons: the transferor, corporation, subsequent transferees, and anyone else. Canada regulates obligations through statutory rules, which, when followed, allow transferees to become shareholders. The property transfer timing is mainly relevant for tax purposes.
Share Transfer Restrictions
Share transfers may be restricted by corporate constitutions. Two main issues arise: whether transfer is restricted, and if an attempted transfer is within the restriction’s scope. Shares are transferable unless restricted by statute or corporate constitution. Some Canadian statutes require a notation on the share certificate for transfer restrictions. Share transfer restrictions can include requiring board of directors’ approval. In Edmonton Country Club Ltd. v. Case, the court was divided on whether a company could give its directors unrestricted power to disapprove transfers.
Diminishing Role of Share Certificates in Canada
Traditional share certificates were instruments used to facilitate share transfers in Canada. Reformed Canadian jurisdictions enacted statutory codes in the late 20th century, making share certificates primary instruments of transfer. However, the rise of personal computers and stock exchanges led to changes in the way shares are managed. Nowadays, certificates are stored in vaults by depositaries, and issuing corporations only know about the depositary, not the individual shareholders. Depositories maintain book-entry records of trades, and provincial statutes create a new form of property called a “security entitlement.” Corporate and securities law both apply to modern corporations, with the former being facilitative and the latter restrictive.
Share capital plays a pivotal role in the governance and operation of Canadian corporations. From the creation and issuance of shares to their eventual transfer or dissolution, understanding the complexities of share capital is essential for both corporate directors and shareholders. As the landscape of corporate law continues to evolve, it is crucial for legal professionals and stakeholders to stay informed about changes in regulations and best practices to protect their interests and ensure compliance with Canadian law. By understanding the intricacies of share capital in Canada, one can better navigate the world of corporate law and make informed decisions about their investments and corporate governance.