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CORPORATE LAW & THEORY: Examples of Share Classes (Rights & Restrictions) and Corporate Organization

Much too often I receive questions about the rights and restrictions that corporate shares carry with them, and what the concept of having different classes of shares is all about.  Thus, I decided to post up the most common examples of share classes and the way the rights were attributed to each class; so that you, the reader, may comment or ask questions using our commenting section below, and for which I or the other lawyers at Levy Zavet PC may answer. This article will be a work in progress and include examples of the particulars in organizing a corporation. Remember, this is what some of the more sophisticated corporate investors and stakeholders would consider as basic, and obviously you should contact us at Levy Zavet PC to procure your ideal corporate organization.

This post consists of various Schedules listing the classes of shares and their rights (ie. properties) thereof: The first schedule provides the company with the power to issue an unlimited number of Class A shares and an unlimited number of Class B shares with the rights, privileges, restrictions and conditions set out in that Schedule 1.  This schedule or the content within this schedule would be used in the corresponding section of the company’s articles of incorporation.

Schedule 1: Share Rights

The company can issue an unlimited number of Class A shares and an unlimited number of Class B shares with the rights, privileges, restrictions and conditions set out below:

The holders of Class A shares are:

Entitled to vote at all meetings of shareholders except meetings at which only holders of a specified class of shares are entitled to vote;

What this means is that if you are a shareholder of Class A shares, you will have the power of one voting right for every Class A share you own.  Thus, every time the company requires a shareholder’s resolution, such as electing directors, you will be able to vote in your choice of directors against the other votes of the remaining shareholders.  This is a basic share right, and under the Canada Business Corporation Actand the equivalent provincial legislations such as the Ontario Business Corporation Act, a company must make sure to provide the following three basic rights in any combination or multiplicity between the different classes of shares the company issues.  That being said, so long as some of the other classes of shares individually or together account for these three basic share rights, the other classes need not have any of these three basic rights at all. But do not be mislead there are many creative rights and privileges company’s offer with their shares in addition to these three basic share rights:

  1. The right to vote (this can be as simple as one right to vote per share for this class, or a multiple or fraction of voting rights per share, such as 4 voting rights per share for this class, or for every 4 shares you will have one voting right for this class of shares).  You should also note that this may not necessarily mean that you, as a shareholder, will be able to vote at every shareholder’s meeting.  Some resolutions, or decisions requiring a shareholder’s vote, may only require the shareholders of a particular class.  Unless the type of decision, such as winding down the company, which requires a special resolution (where at least a super-majority or two thirds, of all the shareholders from all classes, are required to vote on), not all shareholders will be guaranteed the power to influence every decision of the company.  This allows great flexibility for the company to control exactly which class of shareholders it wants to allow the right to influence a specific aspect of the company, as well as to what degree of influence.
  2. The right to a dividend (this can be a fixed value, such as $1.00 per share, or a percentage such as 10% of par value per share). Again, just because a share has a right to a dividend does not mean you will be getting one. Dividends are ultimately a return on your investment as a shareholder in the company. It allows you to enjoy in the fruits of its labor on an after tax basis.  What this means, is that at the end of the year, the net income after tax for the company will be considered retained earnings. It is then up to the directors of the company to declare that a dividend will be paid out to a class of shareholders or instead retain those earnings to either reinvest in the company, pay down some outstanding debt, or accumulate further earnings so that it would have a stronger balance sheet to weather any market downturns. Even if the directors do declare a dividend, it does not mean you will get one.  You must be a holder of that class of share for which dividends were declared, and you must be a holder on the “Date of Record” set as two days after the “Ex-Dividend” date.  Once the directors do declare the dividend they set two dates, the first being the:  “Ex-Dividend” date, which is the cut-off date to transfer the shares with the dividend; the second being the dividend payable date, the date dividend payments are sent out to the shareholders listed in the company’s registry on the Date of Record.  An obvious question is what happens if I buy shares in between the ex-dividend date and the dividend payable date, it may not be fair?  Actually, it is fair that the seller of the shares still receive the dividend should he or she sell his or her shares to you on or after the ex-dividend date but prior to the dividend payable date.  The reason is two-fold:  First, the seller deserves the dividend purely on a time-value of money basis, he or she held the shares longer than you, took more risk and is thus worthy of the return on his or her investment; second, in theory, the market price should fall or discount itself on the Ex-Dividend date by the value of the dividend, so technically the purchaser receives the discount on the shares purchased by the value of the dividend.  The latter reason is based on finance theory, and to put it simple; one method of valuating any asset is to discount back the value or amount of the future payments to the asset holder, that the asset should or could generate.  Hence, come the future, if the asset is going to make one less payment to that asset holder, in this case a shareholder, the value of that share should be discounted by that one less payment, in this case the dividend.  The reason the “Date of Record” mentioned above is two days after the Ex-Dividend date, is because our clearing systems for transferring shares do not happen instantaneously.  The clearing houses require 2 days for national/domestic transfers of shares and 3 days for international transfers of shares.  What this means is that if you purchase shares today, you wont appear as a shareholder on the company’s shareholders registry until 2 or 3 days later.  Therefore, in order to ensure that you receive the dividends should you happen to purchase shares up to the day before the Ex-Dividend date, the directors need to allow 2-3 days from the day prior to the Ex-Dividend date to see your name appear as a shareholder in the shareholder’s registry.
  3. The right to participate in the proceeds from the liquidation of the assets of the company. Although this right does not seem too valuable to a regular shareholder – because usually if a company is liquidating its assets its already in a terrible bankrupting position to the point where the proceeds of any sales thereof would first go to creditors – it is probably the most important right to those shareholders who are looking to invest on the premise that their share values will go up. The reason is, the assets of the company are where all its value is attributed to; whether tangible such as cash or intangible such as goodwill. If your shares do not have the participative right to the assets, your shares do not carry the reciprocal value potential the company may experience.  In other words, if the company does well, the class of shares without the participating right will not go up as a result thereof.  Hence, this right allows the company to control what classes of shares will “commonly” grow or contract with the company’s performance, and which class of shares will remain unaffected until the company winds down or that class is converted or redeemed.  Why would anyone want to buy shares from a class that do not offer this right?  The answer is not that they would, it is how the company packages their share offerings.  Usually, a company would issue shares without this right, but provide for a guaranteed par value, a “preferred” fixed dividend (first of all classes of shares to receive a dividend if one is to be declared), and with a right of conversion.  This is very attractive to lenders in large private placements or debt offerings to the company.  Here the lenders get to discipline the company by making sure that the company will pay them first some kind of flexible annual return (a dividend), and at the same time the lenders have the right to enjoy in the positive performance of the company should it do well by converting their shares to a class that does offer the participative right.

Entitled to receive the remaining property of the corporation upon dissolution; and

Entitled, subject to the rights and privileges attached to the Class B shares, to receive dividends as and when declared by the board of directors of the Company.

The holders of Class B shares are:

Entitled to a preferred dividend as fixed by the board of directors; and

Entitled, upon the dissolution or liquidation of the company, to repayment of the amount paid for such shares (plus any declared and unpaid dividends) in priority to the Class A shares, but they shall not confer a right to any further participation in profits or assets.

The holders of Class B shares shall not be entitled to vote at meetings of the shareholders except as otherwise specifically provided for by the terms of the Canada Business Corporations Act.

Schedule 2: Restrictions on Share Transfers

The right to transfer shares of the Company shall be restricted in that no shareholder shall be entitled to transfer any share or shares of the Company without the approval of:

The directors of the Company expressed by resolution passed by the votes cast by a majority of the directors of the Company at a meeting of the board of directors or signed by all of the directors of the Company; or

The shareholders of the Company expressed by resolution passed by the votes cast by a majority of the shareholders who voted in respect of the resolution or signed by all shareholders entitled to vote on that resolutions.

Schedule 3: Other provisions

The corporation’s securities, other than non-convertible debt securities, shall not be transferred without either:

  1. The sanction of a majority of the directors of the corporation, or
  2. The sanction of a majority of the shareholders of the corporation, or alternatively
  3. If applicable, the restriction contained in security holders’ agreements.

If authorized by by-law which is duly made by the directors and confirmed by ordinary resolution of the shareholders, the directors of the corporation may from time to time:

  1. Borrow money upon the credit of the corporation;
  2. Issue, reissue, sell or pledge debt obligations of the company; and
  3. Mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the company, owned or subsequently acquired to secure any debt obligation of the company.

Any such by-law may provide for the delegation of such powers by the directors to such officers or directors of the company to such extent and in such manner as may be set out in the by-law.

Nothing herein limits or restricts the borrowing of money by the company on bills of exchange or promissory notes made, drawn, accepted or endorsed by or on behalf of the corporation.

The directors may appoint one or more directors, who shall hold office for a term expiring not later than the close of the next annual general meeting of shareholders, but the total number of directors so appointed may not exceed one third of the number of directors elected at the previous annual general meeting of shareholders.

By-Laws (example of a corporate by-law based on the CBCA)

A By-Law relating generally to the transaction of the business and affairs of the Company.


1. Calling of and notice of meetings: Meetings of the board shall be held at such place and time and on such day as the President, Vice President or Secretary or any two directors may determine. Notice of meetings of the board shall be given to each director not less than 48 hours before the time when the meeting is to be held. Each newly-elected board may without notice hold its first meeting for the purposes of organization and the appointment of officers immediately following the meeting of shareholders at which such board is elected.

2. Governing votes: At all meetings of the board, every question shall be decided by a majority of the votes cast on the question; and in case of an equality of votes, the chair of the meeting (shall/ shall not [indicate one option]) be entitled to a second or casting vote.

3. Interest of directors and officers generally in contracts: No director or officer shall be disqualified by his/her office from contracting with the Company nor shall any contract or arrangement entered into by or on behalf of the Company with any director or officer or in which any director or officer is in any way interested be liable to be voided nor shall any director or officer so contracting or being so interested be liable to account to the Company for any profit realized by any such contract or arrangement by reason of such director or officer holding that office or of the fiduciary relationship thereby established, provided that the director or officer shall have complied with the provisions of the Canada Business Corporations Act.

Meetings of the Shareholders

4. Location and quorum: Meetings of shareholders shall be held at the registered office of the Company or elsewhere in the municipality in which the registered office is located or, if the board shall so determine, at some other place in Canada or, if all the shareholders entitled to vote at the meeting so agree, at some place outside Canada. At any meeting of shareholders, a quorum shall be (any number you decide) persons present in person and each entitled to vote thereat [and holding or representing by proxy not less than (any number you decide) percent of the votes entitled to be cast thereat].


5. Indemnification of directors and officers: The Company shall indemnify a director or officer of the Company, a former director or officer of the Company or a person who acts or acted at the Company request as a director or officer of a body corporate of which the Company is or was a shareholder or creditor, and his/her heirs and legal representatives to the extent permitted by the Canada Business Corporations Act.

6. Indemnity of others: Except as otherwise required by the Canada Business Corporations Act and subject to paragraph 5, the Company may from time to time indemnify and save harmless any person who was or is a party or is threatened to be made a party to any threatened, pending or completed activity, suit or proceeding, whether civil, criminal, administrative or investigative (other than an activity by or in the right of the Company) by reason of the fact that he or she is an employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent of or participant in another body corporate, partnership, joint venture, trust or other enterprise, against expenses (including legal fees), judgments, fines and any amount actually and reasonably incurred by him/her in connection with such activity, suit or proceeding if he/she acted honestly and in good faith with a view to the best interests of the Company and, with respect to any criminal or administrative activity or proceeding that is enforced by a monetary penalty, had reasonable grounds for believing that his/her conduct was lawful. The termination of any activity, suit or proceeding by judgment, order, settlement or conviction shall not, of itself, create a presumption that the person did not act honestly and in good faith with a view to the best interests of the Company and, with respect to any criminal or administrative activity or proceeding that is enforced by a monetary penalty, had no reasonable grounds for believing that his/her conduct was lawful.

7. Right of indemnity not exclusive: The provisions for indemnification contained in the by-laws of the Corporation shall not be deemed exclusive of any other rights to which any person seeking indemnification may be entitled under any agreement, vote of shareholders or directors or otherwise, both as to activity in his/her official capacity and as to activity in another capacity, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs and legal representatives of such a person.

8. No liability of directors or officers for certain matters: To the extent permitted by the by-laws, no director or officer for the time being of the Company shall be liable for the acts, receipts, neglects or defaults of any other director or officer or employee or for joining in any receipt or act for conformity or for any loss, damage or expense happening to the Company through the insufficiency or deficiency of title to any property acquired by the Company or for or on behalf of the Company or for the insufficiency or deficiency of any security in or upon which any of the moneys of or belonging to the Company shall be placed out or invested or for any loss or damage arising from the bankruptcy, insolvency or tortious act of any person, firm or body corporate with whom or which any moneys, securities or other assets belonging to the Company shall be lodged or deposited or for any loss, conversion, misapplication or misappropriation of or any damage resulting from any dealings with any moneys, securities or other assets belonging to the Company or for any other loss, damage or misfortune whatever that may happen in the execution of the duties of his/her respective office or trust or in relation thereto unless the same shall happen by or through his/her failure to act honestly and in good faith with a view to the best interests of the Company and in connection therewith to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. If any director or officer of the Company shall be employed by or shall perform services for the Company otherwise than as a director or officer or shall be a member of a firm or a shareholder, director or officer of a body corporate that is employed by or performs services for the Company, the fact of his/her being a director or officer of the Company shall not dis-entitle such director or officer or such firm or body corporate, as the case may be, from receiving proper remuneration for such services.