Chapter 8 - Organizing Your Corporation: The Shareholders
Previous Page | Table
of Contents | Next Page
A person who owns shares in a corporation is called a shareholder. Generally
speaking and unless the articles provide otherwise, each share in the corporation
entitles the holder to one vote. The larger the number of shares a shareholder
holds, the larger the number of votes the shareholder can exercise. The Articles
of Incorporation describe the rights attached to each category of shares.
For
more information on:
An individual may be a shareholder, director and officer in a corporation. A
shareholder who also serves as a director or officer assumes certain liabilities,
as described in Section 7.8
Duties and Liabilities of Directors and Officers.
8.1 The Shareholders
Becoming and ceasing to be a shareholder
A person becomes a shareholder by buying shares, either from the corporation
or from an existing shareholder. For example, a person may:
- purchase shares not previously issued by the corporation (referred to as
"buying shares from treasury"), either on incorporation or later;
or
- buy shares from an existing shareholder (according to the terms set out
in the Articles of Incorporation) and have the corporation 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 corporation (in accordance with the terms of
the Articles of Incorporation) or when the corporation is dissolved. Please
note that there is no need to notify Corporations Canada when a person becomes
or ceases to be a shareholder.
Rights and responsibilities of shareholders
After paying for their shares, shareholders have the right to:
- vote at the shareholders' meeting (according to the class of shares);
- share in the profits (dividends) of the corporation (according to the class
of shares);
- share in the property of the corporation upon dissolution;
- be called to and participate in shareholders' meetings;
- elect and dismiss directors;
- approve by-laws and by-law changes;
- appoint the auditor of the corporation (or waive the requirement for an
auditor);
- examine and copy corporate records, financial statements and directors'
reports;
- receive the corporation's financial statements at least 21 days before
each annual meeting; and
- approve major or fundamental changes (such as those affecting a corporation's
structure or business activities).
The shareholders' liability in a corporation is limited to the amount they
paid for their shares; shareholders are usually not liable for the corporation's
debts. At the same time, shareholders usually do not actively run the corporation.
Return to Top
8.2 Shareholder Resolutions
Shareholders exercise most of their influence over how the corporation is run
by passing resolutions at shareholders' meetings. Decisions are made by ordinary,
special or unanimous resolutions.
Ordinary resolutions require a simple majority (50 percent
plus 1) of votes cast by shareholders. For example, shareholders usually make
the following decisions by ordinary resolutions:
- elect directors;
- appoint auditors; and
- approve by-laws and by-law changes.
Special resolutions must have the approval of two thirds of
the votes cast. For example, shareholders usually make the following decisions
by special resolutions:
- fundamental changes, for example, amending the corporation's name; amending
the articles regarding such matters as the province of registered office;
restrictions on share transfer restrictions on activities; and changes involving
such matters as amalgamation, dissolution and continuance; and
- selling all, or substantially all, of the corporation's assets.
Unanimous resolutions must have the approval of all votes
cast. For example, where shareholders agree to not appoint an auditor, the decision
must be unanimous.
You will find an example of a Resolution of the Shareholders in
Annex E.
Return to Top
8.3 Shareholders' Meetings
Shareholders who are entitled to vote can attend an annual shareholders' meeting.
A notice of this meeting is sent not more than 60 days and not less than 21 days
before the meeting date. For example, if the meeting is to take place on May 20,
the notice should be sent no sooner than March 22 and no later than April 30.
Information regarding the first shareholders' meeting can be found in Section 4.3 First Meeting of Shareholders.
At the shareholders' meeting, the shareholders:
- appoint an auditor or waive the appointment of an auditor;
- elect directors;
- consider the corporation's financial statements; and
- raise any other business they wish to address.
A shareholder entitled to vote has the right to appoint a proxy holder to attend
and vote on his or her behalf at any shareholders' meeting.
For
more information on:
In a small business where one or two people act as directors, officers and shareholders,
meetings are not necessary. Shareholders in these corporations often prefer
to act through written resolutions. If every shareholder signs a written record
setting out the terms of the necessary resolutions, then a shareholders' meeting
need not be held.
A shareholder's right to attend and vote at a meeting depends on the rights
attached to the class of shares that person holds. As a general rule, shareholders
who are entitled to vote at a meeting are entitled to attend the meeting. (The
CBCA gives holders
of non-voting shares the right to attend certain meetings and vote on certain
fundamental issues. These issues are not addressed in this guide.)
Shareholders may also be called to special meetings. The notice for a special
meeting must:
- state the time and place of the meeting; and
- provide shareholders with enough information so that they will know in advance
what they will be asked to consider and vote on at the meeting.
See Section 6.4 Shareholders'
Meetings for further information on this topic.
Return to Top
8.4 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 CBCA allows
shareholders to enter into written agreements that restrict the powers of the
directors to manage or supervise the management of the corporation in whole
or in part. However, when shareholders decide, through an agreement, to assume
the rights, powers and duties of directors, they should be aware that they are
also agreeing to assume the liabilities of those directors to an equal degree.
The relationship among shareholders in a small corporation 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 corporation and relations among shareholders
Under the CBCA,
in the absence of a shareholder agreement, the board of directors has control
over the management of the corporation. Because directors are elected by ordinary
resolution of the shareholders, if one shareholder 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
corporation) may not feel adequately protected by a board of directors elected
by a majority shareholder and may want to negotiate a shareholder agreement
that better protects their investment in the corporation.
A very common shareholder agreement provision for a small corporation is one
that 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 the CBCA.
For example, an agreement might provide that a decision to sell the business
must be approved unanimously by all shareholders, whereas the CBCA
requires only a special resolution (approval by two thirds of shareholders).
Shareholder agreements may set rules directing how the future obligations of
the corporation will be shared or divided. For instance, each shareholder invests
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 corporation
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 corporation. So, three
equal partners starting a corporation (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 corporation 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 so that shareholders can control who
will become a shareholder in their corporation.
For
more information on:
By placing such restrictions in a shareholder agreement instead of in your Articles
of Incorporation, shareholders can remove or alter them without the company
having to file Articles of Amendment. Note that these are separate from the
restrictions placed in your Articles of Incorporation as part of the non-distributing
corporation restrictions (see Section
2.3.4, Restrictions on Share Transfer).
Of course, the most effective way to ensure ownership control is to prohibit
share transfers entirely or for a certain period of time (such as five years).
This is an extreme measure, however, and 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 to manage 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.
For
more information on:
Shareholder agreements are voluntary. If you choose to have one, your shareholder
agreement should reflect the particular needs of your company and its shareholders.
While undoubtedly the best advice is to keep your agreement as simple as possible,
we strongly suggest that you consult your professional advisors before signing
any shareholder agreement.
Special agreements
The CBCA also
deals specifically with two particular types of shareholder agreements:
- Pooling agreements: The CBCA
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.
- Unanimous shareholder agreements: The CBCA
also permits all of the shareholders of the corporation to use 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.
Return to Top
Previous Page | Table
of Contents | Next Page
|