Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to drafting articles of incorporation, corporate by-laws, shareholder agreements, or resolutions involving shares, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto and Ottawa business lawyers registered on the website who can answer your questions and assist you in those regards.

What are shares?  What kinds of characteristics do they have?  How are they valued?  Well, in this blog, I’ll be addressing these issues in the context of a federal corporation governed by the Canada Business Corporations Act.

Lets begin with the basics.

Incorporated businesses are owned by persons (which include individuals, sole proprietorships, partnerships, trusts, joint ventures, not-for profit corporations, and other corporations) through shares.  Each corporation, through its articles of incorporation, can designate different classes of shares (i.e. shares with different characteristics).  At a minimum, section 24(3) the Act requires that a corporation have at least one class of shares.  That class of shares are called voting shares because they allow the holders to vote at any shareholder meetings.  They also allow the shareholders to receive dividends as declared from time to time and in the discretion of the board of directors (recall that the shareholders vote in the board of directors through an election).  Finally, the voting shares give their holders the right to receive the remaining property of the corporation on dissolution.   Remember that creditors (secured and unsecured) are entitled to be repaid before shareholders upon dissolution.

If the articles of incorporation provide for more than one class of share, then things can get interesting.  For example, a corporation can have 3 classes of shares (call them Class A, B, and C), all of which carry different rights with respect to voting (voting vs. non-voting), dividends (variable vs. fixed), and priority upon dissolution.  For example, Class C shares may be non-voting, having a right to regular dividends, and have priority over Class A shares.  This puts the Class A shareholders at risk of not getting anything if the corporation goes into dissolution – particularly if there isn’t enough assets to pay out creditors and priority shareholders.

Whenever shares are issued (i.e. sold/transferred to a shareholder in exchange for money, property, or past services rendered – see s. 25(3)), their value fluctuates depending on (1) the value of the company and (2) the total number of issued and outstanding shares.  With respect to the latter, if the corporation continues issuing more shares to different parties, then the original shareholders’ shares will be diluted in value.  In privately-held companies, valuing the shares is much more difficult.  Sometimes, shareholders value the shares as a multiple of something (e.g. book value) instead of potential earnings discounted to today. The value of the shares is typically pre-determined according to some formula set out in a Shareholders Agreement.  If a Shareholder Agreement doesn’t exist, the parties can seek help through a lawyer, consultant, business valuator, accountant, etc.  At the end of the day, the fair market value of the shares is typically described as the price that two arms length individuals would be willing to buy/sell the shares if they didn’t have to (i.e. if they weren’t forced to).

Finally worth mentioning is that the ability to transfer shares may be restricted in the Articles of Incorporation or a Shareholders Agreement.  Such restrictions are worthy of another blog entry entirely.  Furthermore, private corporations (unlike public ones) are restricted in terms of the number of shares they can have issued and outstanding.  Specifically, private corporations can only have 50 different shareholders or less.

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