Organizing Your Corporation: The Shareholders

A person who owns shares in a corporation is called a shareholder.

Generally speaking and unless the articles provide otherwise, each share in the corporation entitles the holder to one vote. The larger the number of shares a shareholder holds, the larger the number of votes the shareholder can exercise. The Articles of Incorporation describe the rights attached to each category of shares.

The Shareholders

Becoming and ceasing to be a shareholder

A person becomes a shareholder by buying shares, either from the corporation or from an existing shareholder. For example, a person may:

  • purchase shares not previously issued by the corporation (referred to as “buying shares from treasury”), either on incorporation or later; or
  • buy shares from an existing shareholder (according to the terms set out in the Articles of Incorporation) and have the corporation register the transfer.

A person ceases to be a shareholder once his or her shares are sold either to a third party or back to the corporation (in accordance with the terms of the Articles of Incorporation) or when the corporation is dissolved. Please note that there is no need to notify Corporations Canada when a person becomes or ceases to be a shareholder.

Rights and responsibilities of shareholders

After paying for their shares, shareholders have the right to:

  • vote at the shareholders’ meeting (according to the class of shares);
  • share in the profits (dividends) of the corporation (according to the class of shares);
  • share in the property of the corporation upon dissolution;
  • be called to and participate in shareholders’ meetings;
  • elect and dismiss directors;
  • approve by-laws and by-law changes;
  • appoint the auditor of the corporation (or waive the requirement for an auditor);
  • examine and copy corporate records, financial statements and directors’ reports;
  • receive the corporation’s financial statements at least 21 days before each annual meeting; and
  • approve major or fundamental changes (such as those affecting a corporation’s structure or business activities).

The shareholders’ liability in a corporation is limited to the amount they paid for their shares; shareholders are usually not liable for the corporation’s debts. At the same time, shareholders usually do not actively run the corporation.

Shareholder Resolutions

Shareholders exercise most of their influence over how the corporation is run by passing resolutions at shareholders’ meetings. Decisions are made by ordinary, special or unanimous resolutions.

Ordinary resolutions require a simple majority (50 percent plus 1) of votes cast by shareholders. For example, shareholders usually make the following decisions by ordinary resolutions:

  • elect directors;
  • appoint auditors; and
  • approve by-laws and by-law changes.

Special resolutions   must have the approval of two thirds of the votes cast. For example, shareholders usually make the following decisions by special resolutions:

  • fundamental changes, for example, amending the corporation’s name; amending the articles regarding such matters as the province of registered office; restrictions on share transfers; restrictions on activities; and changes involving such matters as amalgamation dissolution and continuance; and
  • selling all, or substantially all, of the corporation’s assets.

Unanimous resolutions   must have the approval of all votes cast. For example, where shareholders agree to not appoint an auditor, the decision must be unanimous.

Shareholders' Meetings

Shareholders who are entitled to vote can attend an annual shareholders’ meeting. A notice of this meeting is sent not more than 60 days and not less than 21 days before the meeting date. For example, if the meeting is to take place on May 20, the notice should be sent no sooner than March 22 and no later than April 30.

At the shareholders’ meeting, the shareholders:

  • appoint an auditor or waive the appointment of an auditor;
  • elect directors;
  • consider the corporation’s financial statements; and
  • raise any other business they wish to address. A shareholder entitled to vote has the right to appoint a proxy holder to attend and vote on his or her behalf at any shareholders’ meeting.

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In a small business where one or two people act as directors, officers and shareholders, meetings are not necessary. Shareholders in these corporations often prefer to act through written resolutions. If every shareholder signs a written record setting out the terms of the necessary resolutions, then a shareholders’ meeting need not be held.

A shareholder’s right to attend and vote at a meeting depends on the rights attached to the class of shares that person holds. As a general rule, shareholders who are entitled to vote at a meeting are entitled to attend the meeting. (The     gives holders of non-voting shares the right to attend certain meetings and vote on certain fundamental issues. These issues are not addressed in this guide.)

Shareholders may also be called to special meetings. The notice for a special meeting must:

  • state the time and place of the meeting; and
  • provide shareholders with enough information so that they will know in advance what they will be asked to consider and vote on at the meeting.

Shareholder Agreements

A shareholder agreement is an agreement entered into by some, and usually all, of the shareholders of a corporation. The agreement must be in writing, and must be signed by the shareholders who are party to it. While shareholder agreements are specific to each company and its shareholders, most of these documents deal with the same basic issues.

The     allows shareholders to enter into written agreements that restrict the powers of the directors to manage or supervise the management of the corporation in whole or in part. However, when shareholders decide, through an agreement, to assume the rights, powers and duties of directors, they should be aware that they are also agreeing to assume the liabilities of those directors to an equal degree.

The relationship among shareholders in a small corporation tends to be very much like a partnership, with each person having a say in the significant business decisions the company will be making. Obviously, a shareholder agreement is not necessary in a one-person corporation. However, you may consider entering into a shareholder agreement if you have more than one shareholder or when you want to bring in other investors as your business grows.

Management of the corporation and relations among shareholders

Under the   , in the absence of a shareholder agreement, the board of directors has control over the management of the corporation. Because directors are elected by ordinary resolution of the shareholders, if one shareholder has more than 50 percent of the votes, that shareholder alone can decide who will sit on the board. In a small corporation, minority shareholders (those with a small stake in the corporation) may not feel adequately protected by a board of directors elected by a majority shareholder and may want to negotiate a shareholder agreement that better protects their investment in the corporation.

A very common shareholder agreement provision for a small corporation is one that gives all the shareholders the right to sit on the board of directors or nominate a representative for that purpose. Each shareholder agrees in the document to vote his or her shares in such a way that each one is represented on the board, thus ensuring all shareholders an equal measure of control.

Shareholder agreements may also provide that certain significant decisions require a higher level of shareholder approval than is set out in the   . For example, an agreement might provide that a decision to sell the business must be approved unanimously by all shareholders, whereas the     requires only a special resolution (approval by two thirds of shareholders).

Shareholder agreements may set rules directing how the future obligations of the corporation will be shared or divided. For instance, each shareholder invests a minimal amount to get the business going, looking to bank loans or other credit for growth. The shareholders may agree that, when other means of raising funds are not available, each shareholder will contribute more funds to the corporation on a   pro rata   basis. This means simply that the extent of a shareholder’s obligation to fund the corporation would be determined by the extent of that shareholder’s ownership interest (the percentage of shares held) in the corporation. So, three equal partners starting a corporation (with equal shares held by each) might sign a shareholder agreement that each will be responsible to fund one third of any future obligations of the company through the purchase of more shares.

Other rules often found in shareholder agreements govern the future purchase of shares in a corporation when no funding is needed. In such a case, the shareholders could agree to maintain the same percentage of holdings among themselves. Three equal partners could agree that no shares in the corporation will be issued without the consent of all shareholders/directors. In the absence of such a provision, two shareholders/directors could issue shares by an ordinary or special resolution (because they control two thirds of the votes) to themselves without including or requiring the permission of the third shareholder/director.

Restrictions or prohibitions on share transfer

Restrictions on share transfer are used so that shareholders can control who will become a shareholder in their corporation.

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By placing such restrictions in a shareholder agreement instead of in your Articles of Incorporation, shareholders can remove or alter them without the company having to file Articles of Amendment. Note that these are separate from the restrictions placed in your Articles of Incorporation as part of the non-distributing corporation restrictions.

Of course, the most effective way to ensure ownership control is to prohibit share transfers entirely or for a certain period of time (such as five years). This is an extreme measure, however, and is rarely seen.

Another provision is the right of first refusal, which basically states that any shareholder who wants to sell his or her shares must first offer those shares to the other shareholders of the company before selling them to an outside party.

Shareholder agreements may also set out rules for the transfer of shares when certain events occur, such as the death, resignation, dismissal, personal bankruptcy or divorce of a shareholder. The restrictions can include detailed plans governing when a shareholder can or must sell his or her shares, or what happens to those shares after the individual shareholder has left. The shareholder agreement, for example, may require that the shares be transferred to the remaining shareholders or to the corporation, often at fair market value. These provisions are complex and usually set out mechanisms to manage the transfer, including notice and how the transfer price will be funded. Operators of small businesses who enter into agreements with this sort of exit provision sometimes purchase life insurance to fund the payment obligations of the party who will be purchasing the shares.

Other shareholder agreement provisions may include non-competition clauses, confidentiality agreements, dispute resolution mechanisms and details respecting how the shareholder agreement itself is to be amended or terminated.

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Shareholder agreements are voluntary. If you choose to have one, your shareholder agreement should reflect the particular needs of your company and its shareholders. While undoubtedly the best advice is to keep your agreement as simple as possible, we strongly suggest that you consult your professional advisors before signing any shareholder agreement.

Special agreements

The     also deals specifically with two particular types of shareholder agreements: 

  • Pooling agreements:   The     provides that shareholders may, in a written agreement between two or more shareholders, agree on how their respective shares will be voted on any particular matter. Shareholders could enter into an agreement solely for the purpose of determining, for instance, how they will vote their shares to elect directors. Shareholders may also decide to include a pooling provision in a larger shareholder agreement.
  • Unanimous shareholder agreements:   The     also permits all of the shareholders of the corporation to use a written agreement, to transfer all or some of the powers of the directors to the shareholders. Where there is only one shareholder, that person may sign a written declaration that has the same effect as a unanimous shareholder agreement. The wording must be very precise: an agreement signed by all of the shareholders does not fit the definition of a unanimous shareholder agreement if it does not deal with the transfer of powers, and the responsibilities that go along with them, from the directors to the shareholders.