Although we have addressed the question of the three main actors of an Ontario corporation in a previous article, the subject of the shareholder remains a key issue. Thanks to this actor, the Ontario corporation takes on its full meaning. Today, Lex Start will explain the ins and outs of this role that can sometimes intimidate entrepreneurs, and will demystify the rights and obligations that come with being a shareholder.
Who are shareholders in an Ontario corporation ?
Shareholders are persons (individuals or legal entities) who own shares issued by a corporation – hence the name “share-holder”. They invest in a company in exchange for shares. But who can really become a shareholder?
First, we have to keep in mind that corporations fall into 2 groups: they can either be “publicly traded” or “private” companies. The first category includes companies regarded as “public” following an initial public offering. These are generally large companies listed on the stock exchange and requiring a significant capital contribution. In addition to the laws relating to business corporations, they must comply with other securities regulations.
Newly incorporated start-ups in Ontario generally do not intend to be listed on the Toronto Stock Exchange and are therefore called “private” or non-public companies. Because they are not “public”, a limited number of people can become shareholders of private companies. Under the National Instrument 45-106 Prospectus Exemptions, only certain types of individuals will be able to become shareholders of private companies. This includes the founders, directors or officers of the company, their parents and spouses, close friends and qualified investors.
What can shareholders do in a corporation in Ontario ?
As we said earlier, shareholders invest in a company. In return for their investment, they obtain rights in respect of the company in Ontario. The rights attached to the shares are specified in the description of what is called the “share capital”, which is included in the company’s statutes. This share capital sets outs the different rights attached to each class of shares.
Although the founders of a Ontario corporation may provide for various rights, there are three “basic” rights: the right to vote, the right to dividends and the right to the remaining assets.
THE RIGHT TO VOTE
The right to vote, in Ontario, is generally the most important right for shareholders. It represents the real political power a shareholder may hold within the company.
As a general rule, a shareholder’s voting rights are proportional to the number of shares they own. However, the founders may decide in their articles of incorporation to create several classes of shares, and to confer multiple voting rights per share in some classes, i.e. an increased number of votes per share.
We’ll give you a few cases showing why the right to vote can be a powerful tool.
First of all, the right to vote refers to the right to elect the directors of a company at the shareholders’ meeting. The directors are responsible for managing the affairs of their company and defining its strategic orientations.
The right to vote, in Ontario, also includes the right to vote on certain decisions to be made with respect to the company. For example, the shareholders holding shares with voting rights will be able to express their opinion, among other things, on amendments to the articles of incorporation of their company or on the appointment of an auditor for the company.
Finally, shareholders also have the right to consult the company’s financial statements both at the annual meeting of shareholders and much later, upon request.
What if a company’s articles of incorporation do not mention any voting rights? In such a case, the Ontario Business Corporations Act and the Canada Business Corporations Act presume the existence of the voting right attached to each of the issued shares.
THE RIGHT TO DIVIDENDS
The second so-called “basic” right in a corporation, in Ontario, is the right to dividends declared by the corporation. According to the Practical Law glossary, dividends are the portion of a corporation’s profits that is distributed to its shareholders in proportion to their capital outlay. Dividends can be declared in cash, property, shares or options.
In accordance with the principle of equality of shareholders, declared dividends are paid to shareholders entitled to them in proportion to their shares. However, there are certain exceptions to this principle.
Let us assume that your Ontario company issued shares to one of your relatives, Jack. These shares belong to a class with a preferential, fixed and cumulative dividends right. What does this imply?
First of all, it means that since the right to dividends is preferential, Jack will receive dividends before any shareholder of the other classes of shares.
Secondly, the fact that the right to dividends is fixed implies that your Ontario company has agreed to pay dividends equivalent to a fixed or determinable percentage or amount of money to the holders of shares of the same class as Jack’s. But keep in mind that the agreed percentage/amount is a maximum threshold, meaning that your company will be able to pay your relative Jack dividends that are less than the agreed-upon amount or percentage, if the company’s profits are not great enough to reach that threshold.
However, since the right to dividends is cumulative, Jack will be able to receive any unpaid dividends when the next dividend is declared. Without this cumulative dividend entitlement, Jack would not be able to collect the balance of unpaid dividends.
As you may have guessed, the right to dividends can be very interesting to those seeking to become shareholders. However, they should keep in mind that the declaration of dividends is at the discretion of the directors. Even so, Ontario and Canadian laws relating to business corporations have established statutory limits to this discretion. Therefore, if the directors intend to declare dividends in monetary form, they must ensure that the corporation is in a financial position to declare dividends. In other words, directors must ensure that the corporation does not become insolvent should it pay those dividends. If they fail to observe this formality, they may incur personal liability.
It should also be noted that in addition to these statutory limits, the directors’ discretion regarding the declaration of dividends is governed by the by-laws of the company and by the unanimous shareholder agreement, if any.
What happens if a corporation’s articles are silent on the right to dividends?
If the share capital provides for only one class of shares, the right to dividends will be automatically attached to each of the shares issued by the corporation. Take note that if there is more than one class of shares, at least one of those classes must have the right to dividends.
THE RIGHT TO THE REMAINING ASSETS
Finally, the last “basic” right conferred on shareholders in Ontario is the right to the remaining assets of the company in which they are shareholders. In essence, when the company is liquidated or dissolved, the shareholders benefiting from this right will be able to receive, in proportion to their shares, a portion of the property remaining to the company after it has paid its creditors. As you have probably understood, the right to the remainder can only be exercised to the extent that a remainder exists following the payment of a company’s creditors.
For federal and Ontario companies that issue only one class of shares, the right to the remainder is automatically included within those shares . If they issue more than one class of shares, the right to the remainder must obligatorily be provided for in one or the other of their classes.
The relationship between shareholders in Ontario
We have described hereinabove the different rights that shareholders can benefit from with regards to their shares in an Ontario corporation. What about their relationship with each other?
Since shareholders act as individuals they have, in principle, no obligation towards each other. However, through a shareholders’ agreement, shareholders can decide amongst themselves to grant each other rights or to place restrictions on what they may or may not be allowed to do.
As we pointed out in a previous article, a shareholders’ agreement may govern, among other things, the transfer, purchase, and sale of shares as well as decision-making within the company.
In addition, it may be signed by the future shareholders of the Ontario company so that the agreement also applies to these new shareholders. It should also be noted that shareholders may enter into a unanimous agreement, which will allow them to withdraw and appropriate some or all of the powers conferred on the directors.
We went in depth as to what shareholders are and what they are entitled to do in a corporation in Ontario. If you wish to incorporate or simply learn more about shareholders, do not hesitate to contact us!