Nicolas Guevara-Mann | Queen’s Business Law Clinic | December 2021
Editors: Mikela Page
In contrast to what you may have previously understood, ownership of a corporation’s share does not represent ownership of the corporation itself. Rather, it represents ownership of certain rights to the corporation, which are granted in consideration for an equity investment or past services. The three basic shareholder rights are: the right to vote, the right to receive dividends, and the right to the corporation’s remaining assets upon dissolution or winding-up. Where a corporation only has one class of shares, the three basic rights must attach to that class. If there are two or more different classes, each class may have different rights so long as each of the three rights is made available in some way. The rights attached to each share class must be stated in the corporation’s articles. If nothing is outlined, then it is presumed that all shares are equal in all respects and each share confers all three basic rights.
Right to Vote
The right to vote refers to a shareholders’ right to participate in the decision-making process on matters such as electing the directors and amending the articles. Typically, especially in closely-held corporations, the right to vote is reserved for shares issued to those shareholders who wish to be in control over the corporation (for example, the corporation’s founders). Note, however, that in some cases all shareholders will be entitled to vote, even if their shares do not explicitly grant them this right. These circumstances include instances that only affect a particular class of shares, amalgamating the corporation with another, and waiving the auditor requirement.
Right to Receive Dividends
Dividends refer to a share in profits that is divided among the shareholders. They are usually paid in cash but can also take the form of additional shares in the corporation. It is one way for investors to see a return on their investment. Directors decide if and when to declare dividends. Directors have no duty to declare dividends and cannot do so if declaring dividends is not in the best interest of the corporation.
Right to Remaining Assets
Remember that the corporation is a separate legal entity and thus owns all its own assets. The final basic right grants shareholders, subject to creditor claims, the right to the corporation’s assets when the corporation winds up. Shareholders will receive a proportion of the corporation’s remaining assets in accordance with the shareholder’s percentage of the corporation’s issued shares.
Common vs. Preference Shares
The term Common Shares describes shares that confer all three basic rights to the shareholder. These shares are typically reserved for those who wish to remain in control of the corporation because these shares grant the most rights. A way for founders to remain in control of the corporation while still attracting external investment is to issue Preference Shares. These shares typically describe non-voting shares which also grant their holders a priority right to the corporation’s remaining assets. This means that after any creditors recover their debts, owners of Preference Shares will have priority to the corporation’s assets over holders of Common Shares or any other class. This can be appealing to investors who wish to have some security over their investment. Should the corporation not be successful, owners of Preference Shares can rest easier knowing that they will be the first ones to receive the corporation’s assets after creditors.
Conclusion
It is important to understand the basic shareholder rights and to design your corporation’s share classes in a way that best achieves your goals before incorporation. There is a fee involved every time you need to alter your share classes, which requires an amendment to the articles and a shareholder vote. Whether your goal is to remain in control of your corporation, attract investors, or give your employees a stock option, the QBLC can help you understand how to assign these rights and draft your articles.
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