So... You’ve started your own business and want to issue shares?

So... You’ve started your own business and want to issue shares?
Written by: Carolee Changfoot

How are Shares Issued?
Shares represent equity in a corporation.
Shares are issued by a corporation from certain classes with certain rights attached to them.
Shares must be issued for valid consideration for the issuance to represent a binding contract. Consideration is a quid pro quo, where one party accrues a right, interest, or benefit and another party undertakes a responsibility, loss, or detriment.[1] Additionally, private company shares must be issued in compliance with the Prospectus Exemption under NI 45-106.[2]
There are tax implications on the issuance of shares and dividends, either on the corporation or on the shareholder. It is recommended that a company work with a strong corporate tax account for tax planning and advice when issuing shares

What are a Shareholder’s Rights?
A company’s Articles of Incorporation will establish the classes of shares that a corporation is authorized to issue and what rights are affiliated with shares from those classes.[3]  
Some common rights are:

• Shareholder dividend rights
• Shareholder voting rights

The rights and privledge of shares between classes can vary.
Shareholders in the same class must be treated equally.[4] For example, if one shareholder is issued dividends, all shareholders of that class are entitled to dividends.

Shareholder Dividend Rights.
Profits can distributed to shareholders in the form of dividends. However, the right to dividends is not a legally enforceable right.[5]

Dividends can be paid periodically, pursuant to a contract, or as a onetime event.[6] To pay dividends, the issuing company must be “solvent” under the Alberta Business Corporations Act and the company’s Board of Directors must have voted to declare dividends.[7]  
 
The right to dividends are either cumulative or noncumulative. In a cumulative dividend, the dividend amount accumulates to the next time the corporation pays the dividend.[8] Shares with cumulative dividend rights must be paid dividends before lower ranking shares are paid dividends. [9] Noncumulative dividends do not accumulate and a shareholder does not have a right to any unpaid dividends. [10]
 
Shareholder voting rights
Shares that specifically provide for a vote at shareholder meetings can attend shareholder meetings and vote on general shareholder resolutions. These shares give the shareholder a say in the general operation of the corporation.
Non-voting shareholders do not have the right to attend or vote at a shareholder however can vote on matters that affect its share class.[11] Section 176(1) of the Alberta Business Corporations Act provide that a shareholder can vote on:

• An increase or decrease of the maximum number of shares authorized for their class
• An increase of the number of shares that have rights or privileges equal or superior to the rights or privileges attached to the shares of that class
• Effect an exchange, reclassification or cancellation of all or part of the shares of that class
• Add, change or remove the rights, privileges, restrictions or conditions attached to the shares of that class
• Creating a share class with rights or privileges equal or superior to their rights
• Matters impacting their rights to transfer shares

 
Additionally, all shareholders have a right to vote on certain special resolutions that affect that class.[12] A special resolution must receive a majority vote of not less than ⅔ of the votes cast in order to be passed.[13]  The following are examples of special resolutions that require the vote of all shareholders:

• Amending the Articles of Incorporation[14]
• Amalgamation or Merger[15]
• Extraordinary Sale, Lease or Exchange[16]
• Voluntary liquidation or dissolution[17]

Amending the Articles of Incorporation: Changing a corporation’s Articles of Incorporation requires a special resolution.[18] A corporation’s Articles of Incorporation are required to be amended in the following circusmtances:

• Changing the name of the corporation,
• Changing the business of the corporation
• Changing the maximum number of shares that the corporation is authorized to issue,
• Creating a new class of shares, changing the designation of shares,
• Changing  the shares of any class or series, dividing a class of shares,
• Canceling a class of shares, authorize the directors to divide any class of unissued shares,
• Authorize directors to change the rights/privileges attached to unissued shares,
• Increase or decrease the maximum/minimum number of directors; and
• Change restrictions on the transfer of shares.

Amalgamation or Merger: An amalgamation or merger occurs when two or more corporations combine and continue as one corporation. To complete an amalgamation or merger a corporation’s shareholders must approve of the transaction by special resolution.[19]
Extraordinary Sale, Lease or Exchange: A sale, lease or exchange of all or substantially all of a corporation’s property, other than in the ordinary court of business, requires the approval of the corporation’s shareholders by special resolution.[20]
Voluntary Liquidation and Dissolution: A director or voting shareholder may propose for the corporation’s voluntary liquidation or dissolution.[21] The proposal must be voted on by special resolution by all the shareholders.[22]

Founder Share Considerations
Dividing shares among founders is a way to reflect the experience and resources each founder brings to the corporation. Factors that are often considered in the distribution of founder shares are: relative contributions, entrepreneurial experience, and capital consideration.[23]

Investor Share Considerations
A company might distinguish a share class in its Articles of Incorporation as a “preferred share” class. Investors are typically offered preferred shares because they typically offer greater rights than the corporation’s common shares. [24] For example, the right to a cumulative dividend or a right of redemption.
A right of redemption provides the investor with the right to require the corporation to re-purchase their shares. This gives the investor an exit from the company.[25]
An investor will likely consider the rights founders shares, the rights of other shareholders (specifically if there are shareholders with greater rights than they are being offered),and how much debt the corporation has before investing.[26]
It is recommended not to provide early investors with too many rights as this may deter future investors or the corporation may need to offer future shareholders greater rights than previous investors.


[1] Terrafund Financial Inc v 569244 BC Ltd (2000), 2000 Carswell BC2739.
[2] NI 45-106, Prospectus Exemptions
[3] ABCA, s 6(1)(b).
[4] ABCA, s.26(5)
[5] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013) at 74.
[6] Glossary: Dividends, Practical Law
[7] ABCA, ss. 43. 118(3)(c), Practical Law - Board Resolutions: Declaring Cash Dividends
[8] Glossary: Cumulative Dividend, Practical Law
[9] Glossary: Cumulative Dividend, Practical Law
[10] Glossary: Cumulative Dividend, Practical Law
[11] ABCA, s,176
[12] ABCA, s 1(1)(ii); 176(1).
[13] ABCA, s 1(1)(ii).
[14] ABCA, s 173(1).
[15] ABCA, s 183(5).
[16] ABCA, s 190(6).
[17] ABCA, s.212(3),
[18] ABCA, s 1(1)(ii); 176(1).
[19] ABCA, s.183
[20] ABCA, s.190(6)
[21] ABCA, s.212(1)
[22] ABCA, s.212(3)
[23] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013)
[24] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013) at 92
[25] I Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013) at 93.
[26] Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013).