Corporations can issue various shares to meet their capital structure and governance needs in Ontario. Understanding these different share types is beneficial for both business owners and investors. This article will explore some types of shares that can be issued under Ontario’s corporate governance framework, as regulated by the Business Corporations Act (Ontario), and discuss their specific features, benefits, and considerations.
A person who owns shares in your corporation is a shareholder. Generally speaking, and unless your articles provide otherwise, each share in the corporation entitles the shareholder to one vote. The larger the number of shares a shareholder holds, the larger the number of votes the shareholder can exercise.
Classes of Shares
The articles of a corporation can allow for one or more classes of shares. There is no limit on the number of classes of shares that can be set out in the articles. If there is more than one class, the rights, privileges, restrictions and conditions for each class must also be indicated in the articles.
If there is only one class of shares, those shares must, as a minimum, have:
- Right to vote
- Right to receive dividends (if the board of directors has declared any)
- Right to receive the remaining property of the corporation after it is dissolved.
If there is more than one class of shares, each of the three rights has to be assigned to at least one class of shares, but one class does not need to have all three. Also, each right can be given to more than one class.
How to change classes of shares
If the directors wish to change the classes of shares described in the articles or any of the rights attached to a class of shares, an amendment to the corporation’s articles will be required. A special resolution of the shareholders is needed. In certain circumstances involving changes to classes of shares and rights, the shareholders of each class or group may be entitled to vote separately as a class or group.
How to Become a Shareholder
A person can become a shareholder by buying shares, either from the corporation or from an existing shareholder. A person can purchase shares not previously issued by the corporation or buy shares from an existing shareholder and have the corporation register the transfer.
Types of Shares That Can Be Issued in A Corporation
The following are some of the types of shares that can be issued in a corporation:
Common Voting Shares
Common voting shares are the cornerstone of corporate ownership in Ontario corporations. Shareholders with voting common shares have the right to vote on key corporate matters, including board elections, mergers, and amendments to articles of incorporation. Typically, each share is entitled to one vote, but some corporations may issue multiple-voting or super-voting shares that offer multiple votes per share to certain shareholders.
Non-Voting Common Shares
Non-voting common shares offer financial benefits such as the right to dividends and a share of residual assets upon liquidation. However, they do not provide the holder with a vote in corporate matters. This type of share is often issued to raise capital without relinquishing control of the company.
Preferred shares are a specialized class of equity in a corporation that offers a distinct set of financial and strategic advantages. Unlike voting common shares, preferred shares usually do not confer voting rights, but they have a higher claim on the company’s assets and earnings. One of the most notable features of preferred shares is their priority in receiving dividends; these shareholders are typically entitled to a fixed dividend payment before any dividends are distributed to common shareholders. Additionally, in the event of a company’s liquidation, preferred shareholders stand ahead of common shareholders in the disbursement of assets. Preferred shares can come in various forms, including cumulative, non-cumulative, convertible, and redeemable, each with its rights and limitations. Due to their preferential treatment in dividends and liquidation, preferred shares are often considered a less risky investment compared to common shares. However, they also usually have less potential for capital appreciation. Because of their unique features, preferred shares are a valuable instrument for corporations seeking to raise capital while offering different risk-reward profiles to attract a broader range of investors.
Convertible Preferred Shares
Convertible preferred shares provide holders with the option to convert their preferred shares into a predetermined number of common shares. This feature allows investors to partake in the corporation’s future growth while enjoying dividend preferences and higher standing in the event of liquidation.
Consideration shares may be offered as non-cash consideration by a buyer in a transaction. Consideration shares are typically issued as part of a business transaction, such as a merger or acquisition. Rather than providing cash compensation, a company may issue shares to the owners of the acquired business as consideration for the transaction. This method can be advantageous for various reasons, including preserving cash reserves or aligning the interests of the merging entities.
Benefits of Investing in Corporate Shares
- Capital Appreciation: One of the most attractive benefits is the potential for capital gains. If the corporation performs well, the value of its shares is likely to increase, offering investors the possibility of high returns on their investment.
- Dividend Income: Many corporations distribute a portion of their profits to shareholders through dividends. This provides a steady income stream, which can benefit income-focused investors.
- Liquidity: Shares of publicly traded corporations are usually highly liquid, making it easy for investors to buy or sell their positions. This is especially valuable for investors who might need to convert their investments into cash quickly.
- Ownership and Control: Shareholders have a vested interest in the corporation’s success and often can influence its direction through voting rights. This gives them a level of control over their investment.
- Diversification: Corporate shares offer investors the opportunity to diversify their portfolios. With numerous sectors and markets to invest in, shareholders can spread their risk.
- Tax Benefits: Some jurisdictions offer tax advantages for holding shares for a certain period or receiving dividends, thus enhancing the overall return on investment.
Considerations and Risks
Some of the considerations and risks include:
- Market Risk: The value of shares can be volatile and affected by various factors, including economic conditions, interest rates, and market sentiment. Investors are at risk of losing part or all of their investment.
- Company-Specific Risks: Poor management, operational inefficiencies, or a flawed business model can all contribute to declining share value. Investors must conduct due diligence to mitigate these risks.
- Dividend Risk: Not all corporations pay dividends and those that do can cut or eliminate them without notice. For investors relying on dividend income, this can be a significant risk.
- Lack of Control: Although shareholders may have voting rights, these may be insufficient to influence corporate policies or decisions significantly, especially for minority shareholders.
- Dilution of Ownership: Corporations may issue additional shares to raise capital, which can dilute the ownership stake and potentially the earning power of existing shareholders.
- Regulatory Risks: Changes in regulations or government policies can affect a corporation’s profitability and, consequently, its share value. This is particularly relevant in sectors like healthcare, energy, and financial services.
- Liquidity Risks: While shares of large, publicly traded corporations are generally liquid, the same is not valid for smaller companies or those traded over-the-counter, where selling shares might be more challenging.
It’s important to note that the specific share structures must adhere to the guidelines in the Business Corporations Act (Ontario). Corporations also often define the rights, restrictions, and conditions of shares in their articles of incorporation and shareholder agreements. Consulting legal professionals is advisable for ensuring compliance and effective structuring. Ontario’s corporate framework offers various share types to meet diverse capital and governance needs. Whether you are a business owner looking to raise capital without sacrificing control or an investor seeking different levels of risk and reward, understanding the nuances of these share types is beneficial.
Consult with a knowledgeable Ontario business lawyer for corporate advice. Contact us to book a consultation for assistance with shareholder agreements and more from a Toronto small business lawyer.
The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.