Shares

• Author: J. Anthony VanDuzer
• Pages: 247-278

247

CHA PTER 6

SHARES

A. INTRODUC TION

One of the primar y ways in which corporations f‌inance t heir activities

is by issuing sha res. Sometimes raising money by is suing shares is re-

ferred to as “equity f‌inancing” as distinguished from debt f‌inancing,

which involves raising money by borrowing it.

But what are shares? A share is a bundle of rights against a corpora-

tion. Although a share is personal property, the claim it represents is

neither a property right in the corporation’s assets1 nor a proportion ate

ownership interest in the cor poration itself.2 Even though shareholders

are sometimes referred to as t he “owners” of the corporation, this i s not

technically accurate, even though shareholders are the residual claim-

ants to the value of the corporation on its di ssolution and have certain

rights in relation to the governance of the corporation.3

The particular r ights, privileges, restrictions, and conditions of each

class of shares (referred to here collectively as “characteristics”) are set

out in the articles of the corporation, as discussed in Ch apter 4. Subject

to a few statutory and common law limitations, the characteristic s that

1 Macaura v Northern As surance Co, [1925] AC 619 (HL); and United Fuel Invest-

ments Ltd v Union Ga s Company of Canada, [1966] 1 OR 165 (CA). On the basic

nature of a share holder’s rights, see Chapter 3.

2 Bradbury v English Sewing Cotton Co Ltd , [1923] AC 744 (HL).

3 These rights a re discussed below in t his chapter and in Chapter 7, section C

(“Shareholders and How They Exerc ise Power”).

THE LAW OF PARTNERSHIPS AND COR PORATIONS248

may be given to shares are re stricted only by the imagination of the per-

son drafting the articles. The characterist ics of a share determine the

risks and retur ns associated with the holder’s investment. In part icular,

share characteri stics determine the deg ree of control a shareholder has

over the corporation through the voting right s attached to the shares,

the right to share in the corporation’s prof‌its when distributed, and the

right to receive its property when it dissolves.

The particular share prov isions in a corporation’s articles may be

drafted to provide a bundle of rights that will be attract ive to prospect-

ive shareholder investors and may be highly customi zed to meet an

investor’s specif‌ic needs. Often, especially in corporations w ith few

shareholders, however, share provisions are kept simple for several rea-

sons. It will be more expen sive to have complex, specialized share pro-

visions drafted. As well, highly customized provisions may not meet

the needs of future investors, and ar ticles of amendment to change the

provisions or create different ki nds of shares may be required before

new investors are willi ng to invest. Shares with unusual specialized

characterist ics may be hard to sell for the same reason. Fina lly, because

articles are public, shareholders may not want the specif‌ic nature of

their investment ref‌lected in the share provisions.

In this chapter, the statutory scheme rel ating to shares and the

most important common law rules a re set out. Some of the more com-

mon practices in drafting share provisions are also de scribed.

B. BA SIC RULES

The basic rights associated with shares are a s follows:

• to vote at any meeting of shareholders;

• to receive dividends declared by t he board of directors; and

• on dissolution of the corporation, to receive the property of the

corporation remaining a fter creditors and any other persons w ith

claims again st the corporation are paid.

Where a corporation has only one class of sha res,4 the rights of

each shareholder are equal in all respects and must have the th ree basic

rights listed above (CBCA, s 24(3)).5 If the articles provide for more than

4 The next section di scusses classe s of shares in detail.

5 Most statutes ba sed on the Canada Business Cor porations Act, RSC 1985, c C-44

[CBCA], follow this approach. E.g., Alberta Bu siness Corporations Act, RSA 200 0,

c B-9 [ABCA], s 26. The Ontario Busin ess Corporations Act, RSO 1990, c B.16

Shares 249

one class of shares, then e ach of the basic rights must be possessed by

at least one class of shares, alt hough all three rights are not required

to be attached to the same cla ss (CBCA, s 24(4)). For example, if a cor-

poration has three classes of shares, Class A, Class B, and Clas s C, each

of the basic rights would have to be possessed by at least one of these

classes. A single class, say Class A, might have all three rights and the

other two none, or the rights might be distributed acros s the classes in

some other way. If the articles are silent on the right to vote, then each

share has one vote (CBCA, s 140(1)).6 Where a corporation has multiple

classes of shares, all shares are presumed to h ave equal rights, regard-

less of class, except to the extent specif‌ically provided in the ar ticles.7

Each owner of a share is entitled to a share certif‌icate, which is

a document formally representing ow nership of shares. If a corpora-

tion is authorized to issue more than one class of shares, or more than

one series of shares of a class as discussed below, the characteristics

of the class or series must appear on the certif‌icate or a notice must

appear stating th at there are particular characteristics and that cop-

ies of the text of such character istics may be obtained from the cor-

poration (CBCA, ss 49(1) and (13)).8 Unless a shareholder requests one,

however, there is no need for a corporation to issue a share certif‌icate

and, in order to minimi ze paperwork, many smaller corporations do

not bother. This practice is now expressly authorized under t he OBCA

[OBCA] only requires th at shares have the right to vote and to r eceive the

remaini ng property of the corporation on d issolution (s 22). These minimu m

requirement s for shares are not addressed i n the British Columbia Busine ss Cor-

porat ions Act, S BC 2002, c 57 [BCBCA], apart from a requireme nt for equality of

shares wit hin a class (s 59(4)). If a corporation has only one cl ass of shares and

the article s say nothing about their rig hts, shares of that cla ss have the three

basic right s (CBCA, s 24(3)).

6 Provincial rule s based on the CBCA follow this mo del. E.g., OBCA, s 102(1); and

ABCA, s 139. The BCBCA has a simi lar rule (s 173).

7 McClurg v Canad a, [1990] 3 SCR 1020; Muljo v Sunwest Projects Ltd (1991) , 60

BCLR (2d) 343 (CA). Gray suggests that the r equirement in CBCA, s 24(4) to

state the “rig hts, privileges, rest rictions and conditions” of eac h class of shares

expresse s a presumption of equalit y in the absence of a specif‌icat ion of differ-

ence between cla sses (W Gray, The Annotated Canada Bu siness Corporations Act,

2d ed (Toronto: Carswell, 2002) (loose-lea f release 4. 2013) at 1-122.38–1-122.40

[Gr ay, Annotated CBC A]). The ABCA expressly provide s for equality in s 26(5). In

Richardson v Mission Oil & Ga s Inc, 2008 ABQB 16, the court found that t his pro-

vision support ed its conclusion that a private ag reement between the corpor ation

and a holder of some share s of a class could not prevail over the a rticles, since

that would result i n different treatment of sha res of the same class.

8 Some provincial rules b ased on the CBCA follow this model . E.g., ABCA, ss 48

(1) and (10). The BCBCA has a similar ru le (s 57) (contents of share certi f‌icate).