Preparing and drafting the authorized capital ("share capital" or "capital" depending on the incorporating statute) of a corporation requires a certain degree of expertise because the authorized capital must meet the specific needs of the corporation and achieve the objectives of its founders. It should, as far as possible, be adapted to any potential situation or transaction that could arise such as a merger, acquisition, rollover, estate freeze or tax operation. It must also take into account the persons having an interest in the corporation, i.e. the shareholders.
Although there are some standard templates, each authorized capital has its own characteristics, including because of the statutory requirements of the incorporating statute, whether it be the Business Corporations Act (Quebec) ("BCAQ"), the Canada Business Corporations Act (Canada) ("CBCA") or that of another jurisdiction. It is therefore recommended to seek the assistance of a practitioner to draft the text of the authorized capital, a fundamental document.
DESCRIPTION OF THE AUTHORIZED CAPITAL
Since the authorized capital determines the rights and restrictions of each class of shares which may be issued, it must be prepared upon the creation of the corporation even before shares can be issued. This drafting exercise must therefore take place at the time of incorporation, although it is still possible for a corporation to amend its authorized capital afterwards, however, only with the shareholders' consent and the filing of articles of amendment with the appropriate authorities. The authorized capital is one of the elements that must be determined at the time of incorporation, together with the name, head office and restrictions, if any, on the transfer of the corporation's securities. These elements must appear in the articles of incorporation which are filed with the authorities. The articles of the corporation therefore set out the classes of shares and the rights and restrictions attached to each class of shares, similarily to an instruction manual.
A FEW CHARACTERISTICS...
The authorized capital may be unlimited or limited to a fixed number of shares and is comprised of one or more classes of shares. Classes of shares can also be subdivided into several series of shares. Shareholders holding shares of the same class or same series always have equal rights between them. However, when shares are issued in series, each series of shares of the same class may have special characteristics pertaining to, for example, the amount of the dividend or share purchase or redemption rights. Furthermore, the shares are in registered form (they cannot be issued "to bearer") and, under the BCAQ, they may be with par value.
ESSENTIAL RIGHTS AND COMMON SHARES
The corporation's authorized capital must include shares carrying the right to (1) vote at any shareholders meeting, (2) receive any dividends declared by the corporation, and (3) receive a share of the remaining property of the corporation upon liquidation. Depending on whether the incorporating statute is the BCAQ or the CBCA, an express reference including or excluding such rights shall be required to determine whether they are attached to a class of shares or not. All of these rights are not required to be attached to a single class of shares. The shares of the class of shares that regroups all of these rights are usually designated as "common shares".
Each class of preferred shares should serve a useful purpose and be based on strategy and logic. Some coherence is required in drafting the rights, restrictions and privileges of each class of shares in order to establish the rank and privileges inherent to each class. It is important to establish a clear order of priority between the rights attached to each class of shares.
Depending on the context, certain types of classes of shares are suitable to specific situations, such as investment shares (e.g., shares without voting rights, but entitling to the payment of dividends) or so-called rollover shares dedicated to tax purposes.
The following are some of the rights that may be attributed to preferred shares, the combination of which is up to the drafter:
- redemption at the option of the corporation: right of the corporation to force its shareholders to sell shares held by them back to the corporation;
- redemption at the option of the holder: right of the shareholder of the corporation to force the corporation to buy back shares held by him;
- preferential dividend: right of the shareholder of the corporation to receive a dividend in preference to any other shareholder of the corporation holding shares of a different class and ranking below the said class of shares in regard to the dividends, according to a predetermined order of priority. Such dividend may be cumulative or non-cumulative;
- multiple voting rights: right of the shareholder of the corporation to several votes per share, rather than just one vote per share;
- right to preferential reimbursement: right of the shareholder to the reimbursement, in case of liquidation, in preference to any other shareholder of the corporation holding shares of another class, generally of the amount paid for his shares, or of an amount equal to the fair market value of the consideration, in kind, received by the corporation at the time of their issuance.
HOW TO AMEND THE AUTHORIZED CAPITAL?
As hereinabove mentioned, the authorized capital is an integral component of the articles of incorporation. To make changes to it, one must, therefore, amend the articles of incorporation of the corporation in accordance with the procedure laid down in the incorporating statute. Both the BCAQ and the CBCA require the adoption by the shareholders of a special resolution and the filing of articles of amendment with the appropriate authorities. Note that a filing fee is always applicable to obtain a certificate of amendment and that the effective date of the certificate may not precede the filing date.
Once the authorized capital is drafted, the corporation is incorporated and the shares are issued, a shareholders' agreement may provide for various rules pertaining to the management of the corporation's business, the consents required for the approval of important decisions or changes, and the transfer of shares held by each of the shareholders enabling, among other things, their co-shareholders to acquire the said shares before they are sold to third parties in accordance with pre-established terms and considerations.
The foregoing is a non-exhaustive summary of the features of a corporation's authorized capital. Informed readers will therefore retain the services of a professional in this area of law if they wish to perform any of the operations referred to above.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.