Our previous blog posts highlighted the importance of directors and officers. Today, we’re tackling shareholders: what exactly do they do and how far does their reach extend?
Overview of the Corporate Structure
Corporate Structure
A corporation is split into three categories: shareholders, directors, and officers. Each category is defined by its roles and responsibilities, and they allow one person to occupy a position in all three. This is often the case in smaller companies where there are only one or two key people.
For instance, in a family-owned small business like Smith & Sons Construction, Mr. Smith may be the founder, the CEO (officer), a director, and a major shareholder.
Whether the same person occupies a position in all three categories or there are separate people in each, it is important to understand the obligations that come with each role. This allows decisions to be made, and understood, bearing in mind how each category functions within the broader context of a corporation.
Shareholder Rights
Share ownership confers certain rights: (1) the right to vote; (2) the right to receive declared dividends; and (3) the right to the residue in the event of the company’s liquidation.
Despite these rights, shareholders do not necessarily have any power in the management and affairs of the company. Depending on a company’s structure, not every shareholder will have all three rights. Where a shareholder does have voting rights, this only confers the right to vote in annual or special shareholder meetings. The biggest influence comes from the shareholder’s right to vote to elect members to the board of directors.
Shareholder Duties
Unlike the directors and officers, the shareholders do not have many duties. Whereas directors and officers are considered the mandataries of the company, which requires them to act in the best interest of the Corporation, shareholders have no such obligation. They are allowed, even expected, to act in their best interest.
Their main duty is to pay for the shares. Under the Quebec Business Corporations Act (QBCA), this duty is further reduced as shares may be issued without being fully paid. However, the same cannot be said for federal corporations. Under the Canada Business Corporations Act (CBCA), shares must be fully paid before being issued.
Electing the Board of Directors
Voting shareholders have the responsibility of electing the board of directors. In larger corporations, we can expect shareholders to cast their votes in line with their economic interests. Imagine a scenario at Global Pharma Corp where shareholders engage in strategic voting to ensure the election of directors who align with the company's expansion plans.
Shareholder Responsibility
Limited Liability
A hallmark of the corporate structure is that it provides limited liability. The shareholders' control or appointment of representatives to the board of directors does not automatically translate into their responsibility for the actions or debts of the business. However, this responsibility is triggered if a shareholder decides to personally guarantee the corporation’s debt.
Consider the example of SolarTech Solutions, which is seeking a substantial loan for groundbreaking solar technology. A shareholder, Ms. Anderson, might choose to personally guarantee the debt to secure funding. This decision, while enhancing the company's credibility, exposes Ms. Anderson to personal liability in case of default, demonstrating the delicate balance between risk and reward in corporate finance.
Furthermore, the business, and its shareholders, may find themselves in the presence of extraordinary circumstances that prompt the proverbial “lifting of the corporate veil” under s 317 of the C.c.Q.
Let's take the example of Alex, the sole director and shareholder of TechGuard Solutions who is facing a lawsuit due to fraudulent activities he committed in the name of the company. The court might "lift the corporate veil" if it's determined that Alex's actions were a deliberate attempt to defraud creditors, imposing individual accountability. This piercing of the corporate veil emphasizes that the protection of limited liability is not absolute.
Restitution
In certain circumstances, shareholders may find themselves compelled to reimburse the company for irregular payments received, be it for the purchase price, for a commission, dividends, indemnity, or reimbursement of shares (118(4) CBCA and 157 QBCA). Consider the situation where a shareholder receives an irregular dividend amid the company’s insolvency. A court may demand the shareholder return these funds to the company.
In a similar vein, after a company’s dissolution, a shareholder might be on the hook to repay amounts received during the distribution of the corporation’s assets (s 226(4) CBCA). Similarly, the QBCA expresses the same principle of shareholder liability up to the value of the share they have received (s 305).
Conclusion
In the landscape of business law, a nuanced understanding of shareholder dynamics is essential. Whether you're a shareholder navigating your rights or a business owner managing responsibilities, grasping these nuances is crucial.
Connect with our legal team today to ensure your business glides seamlessly through the intricate web of Quebec business law. We're here to guide you with advice tailored to your unique needs.
This blog post is not legal advice and is for general informational purposes only. Always speak with a lawyer before acting on any of the information contained herein.
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