Shares and Share Rights

1
Shares and Share Rights

• Darcy L. MacPherson

2
Share Rights

• In terms of share rights, the CBCA allots three
  basic rights to shareholders (s-s. 24(3) and
  para. 24(4)(b))
• the right to vote
• the right to receive dividends, and
• the right to receive the remaining property of
  the corporation upon dissolution.

3
Share Rights (contd)

• Under the old system, shares did not have to be
  fully paid for prior to being issued.
• Also, the par value of the shares of the
  corporation was determined in the articles, and
  was often unrelated to the monetary value earned
  by the corporation for the shares to be issued.

4
Share Rights (contd)

• Also, there needed to be a limit on the number of
  shares that can be issued.
• Shares are ordinarily issued in the sole
  discretion of the directors (subsection 25(1)).
• The shares must be fully paid prior to their
  being issued (subsection 25(3)).
• A promise to pay later is not valuable property
  for this purpose (subsection 25(5)).

5
Share Rights (contd)

• A stated capital account has to indicate the
  amount of consideration received in return for
  shares (subsection 26(2)).
• A separate stated capital account must be
  maintained for each class (subsection 26(1))
• It is now permissible to have an unlimited
  authorized capital (subsection 25(1))
• There is also no concept of par value (subsection
  24(1))

6
McClurg v. Canada

• The husband and wife each own a different class
  of shares in the corporation (para. 4)
• Each family is trying to income-split through a
  discretionary dividend clause (para. 5)

7
McClurg v. Canada (contd)

• The families were trying to give the income to
  the wives, while the husbands got the votes, and
  the growth (para. 8)
• Both husband and wife were involved in funding
  the business. The wife contributed meaningfully
  to the business (paras. 9-11)

8
McClurg v. Canada (contd)

• The issuance of a dividend is always
  discretionary. At this level, discretionary
  dividend clause does not really mean that much
  (paras. 14 and 35).
• However, for the purposes of this discussion,
  discretionary dividend clause means that
  directors can unilaterally choose between the
  various classes of shares (para. 36)

9
McClurg v. Canada (contd)

• The fiduciary nature of director conduct means
  that the issuance of the dividend must be in the
  best interests of the corporation (para. 16)
• The presumption of equality is the statement that
  in corporate law (in terms of share rights), if
  there is no indication otherwise, everybody gets
  the same rights

10
McClurg v. Canada (contd)

• (i) to vote at any meeting of shareholders
• (ii) to receive any dividend declared by the
  corporation and
• (iii) to receive any remaining property of the
  corporation on dissolution (paras. 18-20).

11
McClurg v. Canada (contd)

• Rights attach to shares not shareholders (para.
  19)
• A class is by definition a differentiation
  between shares. There is a focus on rights
  (para. 20)
• Common and preferred shares are relatively
  meaningless nomenclature the rights of each are
  what matter.
• The presumption of equality can be rebutted
  (para. 21)

12
McClurg v. Canada (contd)

• There are many different potential areas of
  differentiation
• (i) dividend rights
• (ii) voting rights
• (iii) the right to participate in the division of
  property on the dissolution of the corporation

13
McClurg v. Canada (contd)

• (iv) share transfer restrictions and
• (v) conversion rights
• The DDC is a valid means to rebut the presumption
  of equality (paras. 21-23)
• Sharing in Profits as a Going Concern
• This is discretionary right (para. 24).
• There are limits on this.
• The first is fiduciary duty (para. 24).
• The second is the solvency test in section 42.

14
McClurg v. Canada (contd)

• The arrangements could have been structured
  differently in order to achieve the same result,
  and in a way that would have been fine from the
  point of view of corporate law (para. 25)
• Consideration of identity is not invalid, nor is
  it necessarily a conflict of interest (para. 26)
• Separating declaration of the dividend from
  allocation thereof is permissible (para. 27)

15
McClurg v. Canada (contd)

• Corporate statutes are facilitative (para. 28)
• There are other remedies even if the parties are
  aggrieved (para. 28)
• Section 56(2) does not apply because the money
  was not diverted from the husband to the wife it
  was always owed to the wife (para. 31). There
  was a legitimate business interest in structuring
  it this way (para. 32)

16
McClurg v. Canada (contd)

• The separation of ownership and control of the
  corporation makes the interpretation of share
  rights particularly important, given that this is
  the way that shareholders make sure that they not
  taken advantage of (para. 39)
• The presumption is like fiduciary duty in that it
  is more than contractual (paras. 40-41)

17
McClurg v. Canada (contd)

• The DDC (if it works) is an allowance for the
  directors to discriminate between shareholders
  (paras. 42-47).
• Personal benefit is not permitted. The directors
  can favour the other shareholders and effectively
  exclude the minority (paras. 48-51).
• Even if this were otherwise permitted, the
  dissent says that the DDC is insufficient to
  overcome the presumption of equality (paras.
  54-59)

18
McClurg v. Canada (contd)

• To allow this would in the view of the dissent
  violate both s. 27(1) (issuing shares in series,
  which we not talk about in the course) and para.
  24(3)(b) (paras. 62-64)
• Fiduciary duty is not enough to prevent this
  (paras. 65-66)
• This really was not a dividend payment at all
  (paras. 70), and the wifes contribution is
  irrelevant, because this is about being a
  shareholder, not what was done for the company
  (paras. 72-73)

19
International Power Co. v. McMaster University

• What are preferred shareholders rights with
  respect to dividends and surplus assets on
  winding-up?
• The preferred shareholder have a dividend
  preference, and this has been paid. The
  preferred shareholders want
• (i) an equalization of amounts, and then
• (ii) an equal share in dividends after the
  preference.

20
International Power Co. v. McMaster University
(contd)

• The appellants are the common shareholders want
  to prevent the preference shareholders from
  sharing in the excess profits
• Kerwin, J., says that the preference shareholders
  are entitled to their 7 per cent dividend, and no
  more in terms of dividends, but are entitled to
  share rateably with the common shareholders on
  excess profit

21
International Power Co. v. McMaster University
(contd)

• Taschereau, J. (Estey J., concurring), says that
  the priority on dividends does not extend to
  participation beyond 7 per cent (paras. 40-42)
  there is no right to further profits (paras.
  31-32)
• Rinfret C.J. Need for equalization of dividends
  to favour the position of the common shareholders
  (para. 69)

22
Edmonton Country Club Ltd. v. Case

• Can share rights require further contribution
  from the shareholder?
• The articles of the corporation require the
  payment of the playing fee or there would be a
  lien on the shares (para. 5)
• There are also share transfer restrictions
• You pay for your shares and they are yours

23
Edmonton Country Club Ltd. v. Case (contd)

• The CBCA requires that the shares be fully paid
  for before issuance (s. 25(3))
• The scheme presented here flies in the face of
  that
• This is not a fee for service (para. 9)
• Limited liability leads to the same result,
  because once you own the shares, those cannot be
  removed from you based on the debts of the
  company (para. 6).

24
Edmonton Country Club Ltd. v. Case (contd)

• Reasonable share transfer restrictions (such as
  the payment of a reasonable fee) are allowed
  (para. 14)
• The majority says that share transfer
  restrictions on a public company are not ultra
  vires the company just because the shareholder
  needs director approval for transfer. This is
  not new, and is allowed (para. 20)