Issuing shares is a crucial milestone for any corporation, as it signifies growth and new opportunities. If you're a Canadian corporation operating federally or in Quebec, it's essential to understand the legal procedures for issuing shares under the Canada Business Corporations Act (the “CBCA”) and Quebec’s Business Corporations Act (the “QBCA”).
In this blog post, we'll provide a comprehensive guide to help you navigate the legal aspects of issuing shares in compliance with both CBCA and QBCA.
The Importance of Properly Issuing Shares
Lawfully issuing shares protects the company, its directors, officers, and shareholders from potential legal disputes and liabilities.
Additionally, following the legal procedures for issuing shares helps safeguard the rights of existing shareholders. Ensuring that their ownership and voting rights are protected and that new shareholders are properly documented and accounted for. This will increase the confidence of current and potential investors in the company since it complies with the law. By doing so, the corporation decreases the risks of shareholder disputes thereby promoting harmony and stability in the business’ internal affairs.
Depending on the violation of the CBCA or QBCA, the share issuance transaction may be deemed voidable by the courts. This means that the shares could be invalidated, leading to potential complications for the company's ownership structure.
How to Issue Shares
An individual or entity can become a shareholder through four primary ways: (1) receiving shares of a company upon the death of a shareholder; (2) purchasing shares from an existing shareholder; (3) the corporation offering shares to an individual or entity (also known as options); (4) subscribing to shares of the corporation directly. We will discuss this fourth way of becoming a shareholder.
Authorization
Before issuing shares, it’s important to consult the corporation’s documents such as the articles of incorporation to ensure that your corporation is authorized to issue shares. If not, you may need to amend the articles before proceeding. Generally, companies will have an unlimited number of shares but in some cases, there may be a fixed number of shares available. Additionally, it’s important to check any shareholders’ agreement or by-laws to determine whether there are other formalities required before proceeding to the issuance of shares.
Share Subscription
There are two ways to purchase shares in a corporation: (1) through an offer to subscribe by the individual or entity to the corporation; (2) by the corporation offering the option to purchase shares in the Corporation. In the former case, the corporation will receive a subscription offer which will indicate the name of the shareholder, the number and class of shares to which they want to subscribe, and the consideration they are offering. This consideration can be either paid in money, past services, or property. Both the CBCA and QBCA requires that consideration paid in property or past services must not be less than the fair equivalent of the money the corporation would have received if the consideration was paid in money (s 25(3) CBCA and s 54 QBCA).
Resolutions of the Board of Directors
Subject to any restrictions contained within the organizing documents, the directors may issue shares at any time (s 52 QBCA and s 25(1) CBCA).
The board of directors reviews the subscription offers and assesses their compatibility with the corporation's strategic goals and financial requirements. Once the offers are evaluated, the board will decide whether to accept the subscriptions. This acceptance is often given through a resolution approving the subscription and the issuance of shares. The resolutions will echo the number and class of shares and the consideration received for the shares. The resolutions should be drafted clearly to indicate the name of the person or entity that is becoming a shareholder, their shares, the share certificate number, and the consideration received.
Shareholder Approval (Depending on the Corporate Documents)
Depending on the corporation's by-laws or unanimous shareholder’s agreement, shareholder approval may be necessary for certain subscription offers. Oftentimes, shareholder's agreements or by-laws can contain pre-emptive rights, which means that the corporation cannot issue shares without first offering them to the existing shareholders.
What To Do After Shares are Issued
Issuing the Share Certificates
Once the board of directors passes the resolutions, and the shareholders give their approval (if necessary), there are other formalities to complete to give effect to the share issuance. This includes issuing the accompanying share certificates, with details such as the shareholder’s name, class of shares, and the number of shares issued. These certificates serve as evidence of ownership.
Updating the Corporate Records
Next is updating the corporate records. This includes adding the shareholder’s name and information to the shareholder registry and updating the share registry with the class, number, and consideration received for those shares.
Updating the Corporate Registries
Depending on the percentage of ownership acquired through the subscription and the existing number of shareholders in the corporation, your company may need to file updates with the corporate registries.
Conclusion
Issuing shares under the CBCA and QBCA involves several important steps, including the subscription process. Before the board of directors passes a resolution to issue shares, potential subscribers typically make subscription offers, expressing their interest in acquiring shares in the corporation. This step ensures transparency and compliance with legal procedures while fostering active involvement from shareholders in the company's growth. Contact us to get started.
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.