Whether this option is chosen at the\u00a0time of incorporation or later, the\u00a0incorporating documents\u00a0of 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\u00a0share capital, some have the advantage of a\u00a0flexible, detailed capital while others are often limited (unnecessarily) to a single class of shares.<\/p>\n
If a detailed share capital is not specified and submitted to the Registraire des entreprises du Qu\u00e9bec<\/em> (corporations with a charter based in Quebec) or Corporations Canada<\/em> (corporations incorporated under federal legislation), the corporation will be allocated \u201cby default<\/em>\u201d a single class of shares, which means an unlimited number of \u201ccommon<\/em>\u201d shares.<\/p>\n \u201cCommon<\/em>\u201d 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.<\/p>\n Unfortunately, many entrepreneurs make no decision on this aspect\u00a0upon incorporation and thereafter fail to change their \u201cdefault<\/em>\u201d share capital into several classes of shares. We describe this as \u201cunfortunate<\/em>\u201d 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.<\/p>\n 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.<\/p>\n This type of share, commonly called \u201cpreferred share<\/em>\u201d, may also include restrictions as well as privileges. A common example of such a \u201crestriction<\/em>\u201d is the\u00a0removal 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\u2019s\u00a0increase in value\u00a0without however\u00a0allowing the latter to get\u00a0involved in\u00a0the 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.<\/p>\n 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\u00a0sole 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,\u00a0may 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.<\/p>\n 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\u00a0with about eight classes of shares\u00a0appears to effectively meet the needs of most\u00a0small and medium sized businesses\u00a0in Quebec.<\/p>\n In conclusion, a detailed share capital offers many\u00a0benefits to a corporation. This article covers just a few of such benefits. As such,\u00a0corporations that still have yet to address this issue should seriously consider\u00a0amending their\u00a0articles of incorporation\u00a0to change their single-share capital structure.<\/p>\n This article was also published in Liason<\/em>, the Canadian Assotiation of Paralegals <\/a>magazine.<\/p>\n