Chapter 5 - Shareholders

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A person who owns shares in a corporation is called a shareholder. Generally speaking and unless the articles of incorporation provide otherwise (Form 1, item 3), each share in the corporation entitles the holder to one vote. The larger the number of shares held, the larger the number of votes a shareholder generally can exercise.

An active company must have at least one class of shares and at least one shareholder. Shareholders have limited liability in the corporation, and generally are not liable for the company's debts. On the other hand, shareholders generally do not actively run the corporation.

TheCBCA provides shareholders with access to certain information about the corporation. For example, shareholders are entitled to inspect (and copy) the corporate records, and are entitled to receive the company's financial statements at least 21 days before each annual general meeting. Shareholders elect directors, approve by-laws and by-law changes, appoint the auditor of the corporation (or waive the audit requirement) and approve certain major or fundamental changes to the corporation, its structure and business. These changes include matters such as a sale of all or substantially all of the assets of the business, a change of name, and articles of amendment altering share rights or creating new classes of shares.
(CBCA sections 21, 106, 155, 159, 162, 163, 173)

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Chapter 5.1

Becoming and Ceasing to Be a Shareholder

A person becomes a shareholder by acquiring shares from the company or an existing shareholder. The basic ways of becoming a shareholder are:

• purchasing shares that have not previously been issued by the company (referred to as "buying shares from treasury"), either on incorporation or later
• buying shares in the company from an existing shareholder (in accordance with the terms set out in your articles) and having the company register the transfer.

A person ceases to be a shareholder once his or her shares are sold either to a third party or back to the company (all in accordance with the articles of your corporation), or when the company is dissolved.
(CBCA sections 25, 48, 49, 76, 213)

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Chapter 5.2

Shareholder Resolutions

Broadly speaking, shareholders exercise most of their influence over how the corporation is run at shareholders' meetings through resolutions.

There are two main types of shareholder resolutions:

• Ordinary resolutions: require a simple majority (50 percent plus 1) of votes cast by shareholders. Examples are decisions shareholders take on a regular basis, such as electing directors and appointing auditors.
• Special resolutions: must have the approval of two thirds of the votes cast. Examples are unusual activities such as changing the corporation name, selling all or substantially all the company's assets or changing the primary line of business (i.e. important questions that affect the company as a whole).

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Chapter 5.3

Shareholders' Meetings

Shareholders usually exercise their influence over how the corporation is run at shareholders' meetings (see also Section 4.4, Annual General Meetings of Shareholders, of this guide). TheCBCA and your company's articles and by-laws set out rules about meetings, including minimum notice periods and who can attend and vote. In order for the decisions (resolutions) taken at the meeting to be binding, these detailed requirements must be met. Specific additional rules apply for companies with 15 or more shareholders, which are not dealt with in this guide.

A shareholder's ability to attend and vote at a meeting depends on the rights attached to the class of shares that person is holding. As a general rule, shareholders entitled to vote at a meeting are entitled to attend the meeting. (While theCBCA provides holders of non-voting shares the right to attend certain meetings and vote on certain fundamental issues, a discussion of these issues is beyond the scope of this guide.)
(CBCA sections 132–135, 140)

Calling a Shareholders' Meeting

Directors have the duty to call meetings of voting shareholders and, in special circumstances, of all shareholders. Shareholders who own 5 percent of the issued voting shares of a company can require the directors to call a meeting of shareholders. Shareholders' meetings are normally called by the directors of the corporation. The board is required by theCBCA to call an annual general meeting within 15 months of the preceding one.
(CBCA sections 133, 143)

Directors must send out the notice of meetings to shareholders within the time frame set out in theCBCA or as modified by your by-laws. A shareholder can waive notice of a meeting. Attendance at the meeting is considered waiver of notice, unless the shareholder attends the meeting to complain about improper notice.

The notice for a special meeting (see next section) not only must state the time and place of the meeting, but also must provide the shareholders with enough information to know in advance what they will be asked to consider and vote on at the meeting.
(CBCA sections 2, 132–136)

Shareholders' Meeting Requirements

A quorum of shareholders must be present or represented at the meeting, or no business can be conducted that is binding on the company. A quorum is the minimum number of votes required to be represented at the meeting, which is a majority, unless your by-laws provide a lower or higher quorum.
(CBCA sections 139–141)

The company must keep a written record of the meeting. The record usually includes information such as where and when the meeting was held, who attended and the results of any voting. These records are commonly referred to as minutes and are kept in the corporation's minute book.
(CBCA sections 20, 21, 142)

Under theCBCA, there are two specific types of shareholders' meetings:

• Annual general meetings: Under theCBCA, your company must hold an annual general meeting within 18 months of its incorporation, and thereafter within 15 months of the previous annual general meeting. At an annual general meeting, the following four items must be on the agenda:
  • consideration of the financial statements
  • appointment of the auditor (unless all shareholders have agreed not to appoint an auditor)
  • election of directors
  • any other business matters that come up.
    
    

• Special meetings: Meetings of the shareholders may also be called to deal with specific questions or issues, such as whether to approve a fundamental change (e.g. change of name) that the directors of the company are proposing. Generally, the directors will call a special meeting of the shareholders when they want to take a particular activity or deal with a special issue requiring shareholder approval, such as amendments to articles.

(CBCA Section 133)

As a very general rule of thumb, ordinary resolutions are required at annual general meetings, and special resolutions are required at special meetings.

It is often convenient to combine special meetings with annual general meetings. Under theCBCA, this process is allowed, but notice of the meeting must clearly indicate that there will be special business to consider.
(CBCA sections 2, 132–136, 139, 140–142)

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Chapter 5.4

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 a party to it. While shareholder agreements are specific to each company and its shareholders, most of these documents deal with the same basic issues.

The relationship among shareholders in a small company tends to be very much like a partnership, with each person having a say in the significant business decisions the company will be making. Obviously, a shareholder agreement is not necessary in a one-person corporation. However, you may 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 Company and Relations Among Shareholders

Under theCBCA, in the absence of a shareholder agreement, the board of directors has control over the management of the company. Because directors are elected by ordinary resolution of the shareholders, if one of them has more than 50 percent of the votes, that shareholder alone can decide who will sit on the board. In a small corporation, minority shareholders (those with a small stake in the company) may not feel adequately protected by a board of directors elected by a majority shareholder and may want to negotiate a shareholder agreement to more closely protect their investment in the company.

A very common shareholder agreement provision for a small company 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.

Shareholder agreements may also provide that certain significant decisions require a higher level of shareholder approval than is set out in theCBCA. For example, an agreement might provide that a decision to sell the business must be approved unanimously by all shareholders, whereas theCBCA requires only a special resolution (approval by two thirds of shareholders).

Shareholder agreements may set rules directing how the future obligations of the company will be shared or divided. Say each shareholder invested a minimal amount to get the business going, looking to bank loans or other credit for growth. The shareholders may agree that, when other means of raising funds are not available, each shareholder will contribute more funds to the company 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 company. So, three equal partners starting a company (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.

Other rules often found in shareholder agreements govern the future purchase of shares in a company 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. In the absence of such a provision, 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 or Prohibitions on Share Transfer

Restrictions on share transfer are used to enable shareholders to control who will become a shareholder in their company.

Of course, the most effective way to ensure ownership control is a provision prohibiting share transfers entirely, or for a certain period of time (such as five years). Because this is such an extreme measure, however, it is rarely seen.

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 may 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, may 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 for the transfer, including notice and how the transfer price will be funded. Operators of small businesses 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 may include non-competition clauses, confidentiality agreements, dispute resolution mechanisms and details respecting how the shareholder agreement itself is to be amended or terminated.

Special Agreements

TheCBCA also deals specifically with two particular types of shareholder agreements:

• Pooling agreements: TheCBCA provides that shareholders may, in a written agreement between two or more shareholders, agree on how their respective shares will be voted on any particular matter. Shareholders could enter into an agreement solely for the purpose of determining, for instance, how they will vote their shares to elect directors. Shareholders may also decide to include a pooling provision in a larger shareholder agreement.

(CBCA subsection 146(1))

• Unanimous shareholder agreements: TheCBCA also permits all of the shareholders of the company, in a written agreement, to transfer all or some of the powers of the directors to the shareholders. Where there is only one shareholder, that person may sign a written declaration that has the same effect as a unanimous shareholder agreement. The wording must be very 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.

(CBCA subsection 146(2))

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