Consider classes of shares to confer different rights, privileges
When structuring the share provisions of a corporation, “there is no limit on creativity other than your imagination,” Toronto business lawyer Anton Katz tells AdvocateDaily.com.
He says there are many permutations in how shares can be designed to meet the needs of a corporation, but if there is only one class, all shareholders will have voting privileges and rights to dividends as well as assets upon liquidation.
“Share provisions can be put in place at the time of filing the articles of incorporation or they can be introduced as a part of the articles of amendment or amalgamation,” says Katz, principal of Anton M. Katz Barrister & Solicitor. “If you don’t stipulate the classes of shares, then what you have is common shares.
“With common shares, you have to treat all of the shareholders equally. What that means is if there’s a meeting, all common shareholders get to vote,” he says. “If there are dividends, everyone receives them proportionately and on dissolution or liquidation, they would obtain the assets equally.”
He says there is a multitude of reasons it may be desirable to have another class of shares available.
“You may want to authorize another class of shares — preferred or preference shares, the terms are interchangeable — in which different treatment as between the common and preferred shares — can be provided. For example, an entrepreneur may wish to be the sole director of the corporation and have full control, so he or she could issue non-voting shares with discretionary dividends,” he says.
With this structure, the sole director can declare dividends if, as, and when he or she chooses. As well, the shareholders do not have a right to vote. On dissolution or liquidation of the corporation, a shareholder receives only what the share provisions entitle him, her or it to receive, Katz says.
“If on dissolution, the assets amount to $1,000 and that shareholder paid $10 for his shares and the shares provide that the shareholder is to receive that amount plus any declared put unpaid dividends and there are no unpaid dividends, then he would get $10 on dissolution and the rest goes to the holder of the common shares,” he explains.
If you want to confer aspects of common share rights onto holders of other shares, he says there can be multiple classes — some could have voting privileges while others do not.
“Certain shares could be fixed in terms of a percentage of the shareholder’s investment. If they invested $1,000 their dividend could be limited to 10 per cent of that amount,” Katz says.
Preference shares can be viewed as a hybrid between common shares and issuing debt, he says.
“Preference shares could be a middle ground solution between the extremes of a full equity shareholder on the one hand and a creditor on the other hand,” he adds.
The benefit of having multiple share classes is to confer different rights and privileges on different shareholders as the needs for the corporation may dictate.
“Those other shareholders might be arm’s length individuals or family members, but, as always, when drafting share provisions, tax and legal advice should be attained,” Katz says.