The Business Corporations Act of Canada (the CBCA) and its provincial counterparts provide many of the guidelines necessary for corporations – each corporation in Canada will typically be incorporated federally under the CBCA or provincially under one of its provincial counterparts. It is crucial to know WHEN and HOW to issue shares in a private company in Canada. Another question that also arises is to whom you can issue shares.
Issuing shares is a common step after incorporation. The Board of directors of a company can decide when and to whom they will issue the shares. They also decide the shares’ values. Companies may alternatively determine these issues as specified in the by-laws or articles of incorporation. A company cannot issue a share before it gets some sort of consideration whether that be money or other compensation for it. In addition to money, services or properties can be offered as well as consideration for shares.
When a company issues a share, the person who purchased the share (a shareholder) gets a certificate.
The minute books is where the share issuing is noted, which typically includes the resolution of the board of directors authorizing the issuing of shares.
Can You Issue Shares in a Private Company?
Private companies have restrictions in terms of transferring/selling shares, and typically have a limited number of shareholders. A private company that wants to issue shares needs to satisfy one of these two requirements:
- To provide a prospectus, or
- To be exempted as a private issuer
A prospectus is a legal document which is a long and generally expensive to create. A prospectus is a core disclosure document that includes details about your company, finances, the business plan, and investment that is offered for sale.It has to be reviewed and accepted by at least one securities commission. When shares are issued with these terms, it is referred as initial public offering.
What is the main challenge with providing a prospectus?
Most startup companies don’t have time and money to issue it.
Who doesn’t need a prospectus?
Accredited investors can invest in a company via prospectus exemption – these include:
- Individuals with financial assets worth more than one million
- Businesses with net asset of 5 million dollars minimum.
- Pension funds, government and financial institutions.
The private issuer exemption allows companies to issue shares to individuals who are not the “public”. Securities law do not specify who the public are, but they clearly name individuals and organizations that are not considered to be the public. On the image below you can see who this group can include. Even if this exemption is available, members in this group may need to complete a risk acknowledgment form or otherwise provide evidence that they qualify within this group.
What is necessary to qualify as a private issuer?
- All share transfers have to be approved by your shareholders or board of directors.
- Any requirements stated in the articles of corporation or shareholder’s agreement must be fulfilled.
- You should have no more than 50 security beneficial holders.
- The articles of incorporation, by-laws or shareholder’s agreement must stipulate that the corporation can issue the shares as proposed by the transaction.
What terms of the share purchase do you need to arrange in a share subscription agreement?
- the class of shares
- the purchase price of the shares
- if there are any stock options to be granted
- whether the new shareholder must sign a shareholder agreement or become a part of an existing one
- make sure existing investors don’t have preemptive rights (to ensure that you don’t need to offer the shares to them first as in the case of a SAFE agreement).
- Specify the number and class of shares in a personal shareholder’s ledger (to point out where each shareholder obtained the shares)
There is always a fixed number of directors that are specified in the original articles of incorporation and a corporation’s by-laws will typically specify the max/min limit to the number of directors. Generally, there should be minimum one director in a corporation. A soliciting corporation must have at least 3 directors, at least two of them mustn’t be officers/employees of the corporation or its affiliates and there are generally Canadian residency requirements. In addition to ensuring that proper procedures are being followed, prospective shareholders/investors may want to review this set of information which is contained in the corporation’s minute book.
How to Issue Shares in a Private Company in Canada
The procedure to issue shares in a private company can be complex. To make sure everything goes right, you should consult a corporate or securities lawyer.
First check if the shares you want to issue meet the expectations of shareholders. Make sure there are enough unissued shares to take up and that the current capital of the company is stated.
At the same time, check if there are any restrictions or the conditions that are stated in the articles of the company or any other agreement. It may be disclosed in an agreement that a shareholder is not allowed to buy the shares or only under certain circumstances.
What is the next step?
The next step is to ask new shareholders to sign an agreement, setting out the number, the price (per share) and the type of shares – this is often referred to as a subscription agreement
Before the company issues shares, a shareholder needs to make a payment. Paying shares doesn’t have to be in the form of money, but may also be in the form of services or property.
When all this is completed, the directors of the company that is selling the shares should sign to approve the subscription agreement. In addition to that, directors pass a resolution that defines the price of the issuing shares, the shareholder’s name, the number and the type of shares that are issued. When shares are issued, the company has to update its securities register with the name, address and other details of the shareholder who purchased the shares.
Lastly, when you issue shares in your company, you need to deliver a share certificate to a shareholder. Share certificates can be kept personally or in the corporate records book. Proportion of shares is more important than the number of shares issued to every shareholder. Shareholders with higher proportion of overall shares have more control of the company.
Securities Law in Canada
Now that you have a slightly clearer picture on how to issue shares in a private company in Canada, you need to know one more thing. Not all provinces in Canada have the same securities laws. As a matter of fact, securities laws of every province may differ.
If a shareholder is from one jurisdiction and a company from another, the company will need to comply with the securities laws in both provinces. In this case, you are strongly advised to consult a securities lawyer and get more information about potential complications.
What is the Difference Between Class A and Class B shares?
Different classes of shares may have different attributes. These are typically defined by the by-laws of the corporation. Class A shares are typically common voting shares which means that stakeholders who have these shares will have:
- a right to vote at shareholders’ meetings
- a right to get dividends
- a right to assets of the company (if the company is about to close and all creditors have been paid out)
Class B shares are sometimes referred as non-voting shares as they often do not have voting rights attributed to them. In other words, owners of these shares may not have a right to vote at a shareholders’ meeting, and that is a major difference. However, they would typically have a right to get dividends and also a claim to corporate assets upon dissolution. In certain cases, supervoting rights may be attached to a class of shares or special dividend rights.
How to Transfer Shares in a Private Company in Canada?
Another way to get shares in one company, apart from issuing them is to have someone transfer the shares to you. Even if you are not currently a shareholder of a company, a shareholder can transfer their shares to you under certain circumstances. Similar to issuing shares, the transfer of shares can be done for money or other types of compensation, but there should always be a fixed value assigned to the shares on a per share basis.
Any transfer of shares usually has to be approved by the directors. Also, the seller of the shares of the company will determine their price and this may be done based on a formal business valuation or an inferred valuation. In some cases it may be related to the most recent share price of an acquisition of shares. Often, there is information on how to calculate the price of shares in the shareholder agreement if the corporation has one. You should also check with a tax lawyer, and possibly an accountant, to determine what tax implications you can expect.
Restrictions on Share Transfer
Some articles of incorporation may contain restrictions on share transfers, for all share transfers or for specific cases. So if you want to transfer shares to someone else, read carefully the articles of incorporation and by-laws, or consult a securities lawyer. They will help you and clarify what restrictions, if any, you need to obey.
Consult a Securities Lawyer
In order to issue shares in a private company, you need to follow the rules and regulations of the associated law. If you fail to comply with corporate and securities law regarding issuing or transferring shares, you may be charged and/or penalized. To avoid this, consult our securities lawyer and get timely professional advice.