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In a previous article, we explained the role of the three main actors in a Quebec corporation. One of them is the famous “shareholder”. If the word scares you, do not worry: today, Lex Start demystifies the rights and obligations that arise from being a shareholder.
What is a shareholder of a Quebec company?
In Quebec, as in the rest of Canada, shareholders are individuals or legal entities who own shares issued by a corporation – hence the name “share-holder”. The purpose of a shareholder is therefore to invest in a company in exchange for shares.
It should be kept in mind that corporations are divided into two groups, they can be either “public” or “private”.
“Public” companies are generally large, publicly listed companies and require a significant amount of capital input from a variety of people. The shareholders of these companies respond to a public offer in order to acquire shares. In addition to the laws relating to business corporations, these companies must comply with various securities regulations.
Start-ups, on the other hand, fall into the second category: “private” (i.e. non-public) companies.
Because of the fact that they are not “public”, only a limited number of people can become a shareholder of this type of company. Under Regulation 45-106 respecting Prospectus Exemptions only the founders of the company, their parents, spouses, close friends and qualified investors can become shareholders of a private corporation.
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What does a Quebec shareholder do?
In Quebec, shareholders invest in a company. In return for their contribution, they obtain shares with rights in the company. These rights are listed in the description of the “share capital” in the company’s articles of incorporation. It is therefore up to the founders of the corporation to provide for the rights of each class.
In a Quebec corporation, there are three “fundamental” rights: the right to vote, the right to dividends and the right to the remainder.
- THE RIGHT TO VOTE
The right to vote is probably the most important right for an entrepreneur. It represents the political force that a shareholder has within the company and is used, as its name suggests, to “vote”.
As a general rule, shareholders’ voting rights are proportional to the number of shares they hold. However, the founders may decide to create several classes of shares and confer multiple voting rights. For example: Charles, who buys “C” shares, has 10 votes per share, while Jonathan, who chooses “A” shares, has only one vote per share.
The voting right enables the election of the directors at the meeting of shareholders. The directors, it should be remembered, are responsible for managing the company’s affairs and defining its strategic orientations.
It also allows them to express their opinion on an amendment to the company’s bylaws or on the appointment of an auditor. It should be noted that shareholders also have the right to consult the company’s financial statements, both at the annual meeting of shareholders and later on request.
What happens if the articles do not mention any voting rights? In this case, the Quebec Business Corporations Act and the Canada Business Corporations Act presume the existence of voting rights for each share issued.
- THE RIGHT TO DIVIDENDS
The second so-called “basic” right in a Quebec corporation is the right to dividends. According to the dictionary of Quebec and Canadian law, a dividend is a “share of the profits of a company or business corporation that is distributed to shareholders in proportion to their capital outlay“.
Dividends may be declared in cash, property, shares or options. In accordance with the principle of equality between shareholders, declared dividends are paid to shareholders who are entitled to them in proportion to their shares. However, there are certain exceptions.
For example: Jonathan has learned that, because of his “A” shares, he is entitled to a “preferential, fixed and cumulative dividend”. What does this mean?
First of all, since Jonathan has a “preferential” right, he will receive dividends in priority to the other classes of shares. Second, the fact that Jonathan is entitled to a “fixed” dividend implies that the company has agreed to pay a fixed or determinable percentage or amount to Jonathan. This percentage or amount is a maximum threshold, which means that Jonathan will be entitled to receive an amount less than or equal to what was agreed upon. Finally, Jonathan’s dividend entitlement is “cumulative”, which means that in the event of non-payment of a dividend, Jonathan will be able to accumulate the unpaid dividends and receive them at the next payment. Without this cumulative right, Jonathan loses his right to the balance of unpaid dividends.
As you may have guessed, the dividend right is an interesting tool for those who wish to receive monetary consideration from the company.
However, Quebec shareholders should keep in mind that the payment of dividends is at the discretion of the directors.
To this effect, Quebec and Canadian laws set limits on this discretionary power.
Thus, if directors decide to declare cash dividends to shareholders, they must first ensure that the corporation is financially able to declare said dividends. In other words, directors must ensure that the corporation is not insolvent. If they fail to do so, the directors may incur personal liability.
It should also be noted that, in addition to these statutory limitations, the directors’ discretion regarding the declaration of dividends is governed by the articles of the corporation and the existing unanimous shareholder agreement, if any.
What happens if the articles of the Quebec corporation do not mention the right to dividends?
It all depends on which law the company was incorporated under.
If it is a federal corporation and has only one class of shares, the right to dividends will automatically be attached to each of the shares issued by the corporation. If there are several classes of shares, at least one of these classes must have dividend rights.
As for companies incorporated under Quebec law, they own by default shares that are entitled to dividends.
- THE RIGHT TO THE REMAINDER
The last “fundamental” right is the right to the remainder, i.e. the remaining assets of the company of which they are shareholders.
Upon the liquidation or dissolution of the company, the shareholders benefiting from this right may receive, in proportion to their shares, part of the assets remaining to the company after it has paid its creditors.
As you can understand, the right to the remainder can only be exercised to the extent that a remainder exists after the payment of a corporation’s creditors.
For federal and Quebec corporations that have only one class of shares, these shares automatically carry a right to the remainder. If they have more than one class, the right to the remainder must be provided for in one or the other of these classes in the share capital.
The relationship between the shareholders of a Quebec company
In addition to the legal provisions we have just explained, shareholders may decide to govern their relations within the company through a shareholders’ agreement. As we pointed out in a previous article “What contains shareholders’ agreements?”a shareholders’ agreement can govern, among other things, the transfer, purchase and sale of shares and the decision-making of shareholders within the company.
It can also be signed by new shareholders who also wish to be subject to it. It should also be noted that shareholders may enter into a unanimous agreement, which will allow them to withdraw and appropriate all or part of the powers conferred on the directors.
We have looked at great length at what shareholders are and what they are entitled to do.
If you wish to incorporate a Quebec corporation or simply want to know more about shareholders, do not hesitate to contact us!