Whether this option is chosen at the time of incorporation or later, the incorporating documents of each joint-stock corporation includes a designation of shares and a description of their characteristics. This share capital represents the shares the corporation may issue to its shareholders. Thus, while all joint-stock corporations have a share capital, some have the advantage of a flexible, detailed capital while others are often limited (unnecessarily) to a single class of shares.

If a detailed share capital is not specified and submitted to the Registraire des entreprises du Québec (corporations with a charter based in Quebec) or Corporations Canada (corporations incorporated under federal legislation), the corporation will be allocated “by default” a single class of shares, which means an unlimited number of “common” shares.

“Common” normally refers to shares with three basic rights: the right to vote, the right to receive dividends and the right to participate in the value of the corporation when it is wound up.

Unfortunately, many entrepreneurs make no decision on this aspect upon incorporation and thereafter fail to change their “default” share capital into several classes of shares. We describe this as “unfortunate” because a share capital with only one class of shares can significantly limit the business, legal and fiscal opportunities of the corporation and its shareholders.

For example, it is in a corporation’s interest to assign privileges to some of its shares, to attract outside investors more easily. It is actually quite common for an investor to demand certain privileges, such as the right to receive a dividend on a priority basis over other shareholders, as a precondition for providing financing. A corporation without this class of share would then be at a disadvantage compared with its competitors.

This type of share, commonly called “preferred share”, may also include restrictions as well as privileges. A common example of such a “restriction” is the removal of the right to vote. This class of shares can prove very useful when the objective is to have an investor participate in a corporation’s increase in value without however allowing the latter to get involved in the corporation’s decision-making process. We can also imagine another scenario in which the issue of such non-voting shares would be desirable in the context of family estate planning where a parent wishes to make a minor child a shareholder, in order to benefit from the family business.

Another class of share gaining popularity in recent years is the discretionary dividend share. The purpose of this share class is to sidestep the requirements regarding share equality so as to enable the board of directors to act at its sole discretion in declaring and paying a dividend to a single class of shares. Note that this share class is still quite controversial and, in any event, may never be used to discharge a director from his or her obligations to act in good faith and in the best interests of the corporation.

Although the number of share classes is virtually unlimited (for example: multiple-voting shares, fixed-dividend shares, roll-over shares, etc.), a share capital structure with about eight classes of shares appears to effectively meet the needs of most small and medium sized businesses in Quebec.

In conclusion, a detailed share capital offers many benefits to a corporation. This article covers just a few of such benefits. As such, corporations that still have yet to address this issue should seriously consider amending their articles of incorporation to change their single-share capital structure.

This article was also published in Liason, the Canadian Assotiation of Paralegals magazine.

If you have any questions or ideas for my next article, please feel free to contact me at 514-856-5601 (320) / malek@maleklaflamme.ca

The benefits of a share capital with various classes

What is a share capital and why should my business have many different shares in its share capital structure? Common shares vs. Preferred shares.

Sam Tardif Malek