Everything about shareholders in a corporation

Today is a big day: Lex Start ends its review of the different actors within a corporation. First we told all about what do directors do. We also took a look at the tasks officers undertake within a corporation. We are now closing the loop by presenting to you a key actor of every corporation, an actor without whom a corporation doesn’t have a purpose: shareholders.

Shareholders are persons (physical or natural) that possess shares issued by a corporation.

There are two types of corporations: public corporations and private corporations. The first category regroups corporations that are open to public investors following an initial public offering (an “IPO”). Generally speaking, these corporations are big companies listed in the stock exchange market that need an important influx of capital. Aside from the laws pertaining to corporations, these corporations have to comply with other securities laws.

Newly incorporated start-ups are generally private corporations, which means that they aren’t open to the general public.

Thus, pursuant to Regulation 45-106 respecting prospectus exemptions, only a limited number of persons can become shareholders of those types of companies. In addition to this, only certain types of persons will be able to be part of a private company’s shareholding. Amongst those there are the company’s funders, their parents, their spouses, their close friends and qualified investors.

Shareholders invest in a company and obtain certain rights in exchange. Rights attached to shares issued by a company are detailed its share capital description, which is included in its articles of incorporation.

Shareholders with rights

Though funders of a company can issue shares assorted of different rights, three basic rights exist: the right to vote, the right to receive dividends and the right to receive the the company’s remaining property.

The right to vote

This right is particularly important for shareholders. This right embodies the real political power shareholders have within a corporation.

First and foremost, the right to vote designates the right to elect directors during the shareholders’ meeting. As you probably remember, directors are responsible for the management of the company’s affairs and for the definition of its strategic orientations.

Generally speaking, the shareholders’ right to vote is proportionate to the number of shares each of them possess. However, funders of a corporation can decide, in their articles of incorporation, to create different classes of shares and make some of them multiple voting shares.

Furthermore, funders can also confer to shareholders of a certain class of shares the right to elect alone a director. Secondly, the right to vote includes the right to vote on certain decisions pertaining to the corporation. For example, a company’s shareholders entitled to vote can express themselves, notably, on a modification of this company’s articles of incorporation or the appointment of an auditor.

What happens if a company’s articles of incorporation don’t mention anything about the right to vote? In such a case, Quebec’s Business Corporations Act and Canada’s Business Corporations Act both presume that each share issued is assorted with the right to vote.

Note also that the shareholders, at every annuel shareholders meeting, will be able to review the financial statements for the fiscal year. They can also request to examine the financial statement at a further moment on request to the company.

The right to receive dividends

The second so-called basic right is the right to receive dividends declared by a corporation. According to the Reid’s dictionary on Quebec and Canadian law, dividends are parts of a corporation’s benefits that are distributed to its shareholders proportionally to their investment.

Dividends can be declared in money, in assets, in shares or in option rights. Pursuant to the principle of shareholders equality, dividends declared are distributed to shareholders entitled to dividends proportionally to their shares. Nonetheless, certain exceptions to this principle exist.

Let’s go back to our favourite entrepreneurs, Simon and Léa, to illustrate what precedes. Let’s suppose that their company Troque tes fringues has issued shares to Sylvie, Léa’s mom, shares assorted with a preferential, fixed and cumulative right to receive dividends. What does that entail?

First, because the right to receive dividends is preferential, Sylvie will receive her dividends in priority of other shareholders entitled to dividends.

Secondly, the fact that the right to receive dividends is fixed means that Troque tes fringues has agreed to distribute to shareholders with the same class of shares as Sylvie’s dividends equivalent to fixed or determinable percentage or an amount of money. The percentage or amount agreed upon constitutes a maximum threshold.

This means that Troque tes fringues will be able to distribute to Sylvie inferior dividends. However, because the right to receive dividends is cumulative, Sylvie will be able to receive the unpaid dividends during another dividend declaration. If not for this cumulative right to receive dividends, Sylvie would not be able to receive the unpaid dividends.

Admittedly, dividend payments certainly have their appeal for those looking to become shareholders. That being said, those aspiring shareholders must keep in mind that dividend declaration is at the directors’ discretion.

However, Quebec and Canada’s laws pertaining to corporations have established limits to this discretion. Thus, if directors want to declare dividends in monetary form, they must ensure that the company’s financial situation allows it to make such a declaration. In other words, they must ensure that the company isn’t insolvent. If directors don’t observe this formality, their personal liability can be incurred.

Let’s also mention that aside from statutory limitations, the directors’ discretion with regards is limited by the company’s articles of incorporation and by a unanimous shareholder agreement, if applicable.

What happens if the articles of incorporation are silent regarding the right to receive dividends? The answer to this question depends on the regime under which the company has been created.

If it is a federal company and it possesses only a class of shares, the right to receive dividends is automatically attributed to each share issued. If there are many class of shares, there must be at least one of these classes must provide a right to receive dividends.

Companies created under Quebec’s law possess by default shares assorted with a right to receive dividends. If the articles of incorporation of such corporations include a restriction with regards to the right to receive dividends, this restriction will only be effective once a share comprising the right to dividends has been issued.

The right to the company's remaining property

Finally, the last “basic” right conferred to shareholders is the right to the company’s remaining property. Thus, when the corporation will be liquidated or dissolved, the beneficiary shareholders will be able to receive, in proportion to their shares, a part of the company’s remaining assets after it has paid its creditors.

As you can well imagine, the right to the remaining property can only be exercised if there is property remaining after the company has paid its creditors. If this right isn’t mentioned in the articles of incorporation of companies created under Quebec’s law, it is attributed to each share issued.

Moreover, any restriction related to the right to a company’s remaining property will not be effective until a share assorted with this right has been issued. Federally constituted corporations that only have one class of shares automatically have a right to the remaining property attached to each share issued.

If such a company has different class of shares, the right to participate to the remaining property must be conferred to at least one of them.

The relationships between shareholders

Aside from the legislative provisions, the shareholder agreements concluded within a corporation also regulate the relationships between shareholders.

As we mentioned in a previous article a shareholder agreement can regulate, notably, the transfer, the acquisition and the sale shares as well as the decision-making process within the corporation’s shareholders. Furthermore, future shareholders could sign such agreement so they become subjected to it.

Let’s underline that shareholders can conclude a unanimous agreement that will allow them to take away and appropriate some or all powers conferred to directors.

That wraps up our review of the actors of a corporation. If you wish to create a corporation, don’t hesitate to communicate with us through email at bonjour@lexstart.ca or through telephone at (514) 378-6703.

 

Me Gilles de Saint-Exupéry, LL.M.

Vanessa Ntaganda

 

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