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Shareholders

What is a shareholder?​

A shareholder must be a "person" in the legal sense of the word, which includes individuals, corporations, trusts, etc.

How does one become a shareholder?​

A person can become a shareholder by buying newly shares from the corporation or from an existing shareholder.

Rights and responsibilities of shareholders​

Corporations Canada lays out the rights and responsibilities of shareholders

Rights and responsibilities of shareholders After paying for their shares, shareholders have the right to:

  • vote at the shareholders' meeting (if their shares have a right to vote)
  • receive a share of the profits (dividends) of the corporation
  • receive a share of the property of the corporation when the corporation is dissolved
  • be notified about shareholders' meetings and attend them
  • elect and dismiss directors
  • approve by-laws and by-law changes
  • appoint the auditor of the corporation (or waive the requirement for an auditor)
  • examine and copy corporate records, financial statements and directors' reports
  • receive the corporation's financial statements at least 21 days before each annual meeting
  • approve major or fundamental changes (such as those affecting a corporation's structure or business activities).
  • The shareholders' liability in a corporation is limited to the amount they paid for their shares;

shareholders are usually not liable for the corporation's debts.

Corporations Canada

Transfer of shares​

Shares transferred (bought and sold) between individuals. Often corporations will have limitations on share transfers. For example the pre-written text provided by Corporations Canada in the Restrictions on share transfer" section of the articles of incorporation, requires board of directors or majority of the shareholders approval before shares can be transferred.

Annual Shareholders Meeting​

Shareholders must meet, not greater than 18 months from the previous meeting and not more than 6 months from fiscal year end. Effectively this means that shareholders must meet annually.

At a minimum at the annual meeting must cover the following:

  • consideration of the financial statements
  • appointment of an auditor (or a resolution of all shareholders not to appoint an auditor)
  • election of directors.

A written resolution can be issued by the shareholders in lieu of the meeting. This is common in smaller corporations.

Shareholder agreements​

Shareholder agreements govern the relationship between shareholders and the corporation. Under the Canada Business Corporations Act, a unanimous shareholders agreement can transfer power (with associated liabilities) from the directors to the shareholders.

Common items to include in shareholder agreements are:

  • Right to sit on the board - Often minority shareholders may negotiate to have a guaranteed board seat.
  • Higher shareholder approval - Different shareholder decisions require differing levels of approval and can be adjusted by shareholder agreements. For example by default the decision to sell the business requires 2/3 shareholders approval but could be increased through a shareholder agreement to require unanimous approval.
  • Pro-rata rights - Pro-rata rights refer to the privilege of existing shareholders to maintain their proportional ownership in a company by having the opportunity to purchase additional shares in proportion to their current holdings during a new equity issuance.
  • Right of first refusal - Right of first refusal is a contractual right that grants a party the option to match or better any offer made by a third party before the asset or property is sold to that third party.

Share vesting​

Founders vesting is a mechanism commonly used in startups and businesses to ensure the long-term commitment and alignment of founders with the company's success. It involves a time-based or milestone-based schedule that dictates how the founders' equity will be earned or "vested" over a specific period, typically several years. If a founder leaves the company before their equity fully vests, they would forfeit the unvested portion, which helps protect the interests of the company and other stakeholders.

The share vesting is often included in a shareholders agreement or founders vesting agreement.

Typical clauses in a share vesting agreement are:

  • Length and Cliff - In equity vesting, the "length" refers to the total duration, typically 4 years, during which the equity gradually becomes vested, while the "cliff" is the initial period (often 12 months) where no equity is vested before a significant portion vests all at once.
  • Single and Double Trigger - Single-trigger provision for equity vesting means that a specific event (e.g., acquisition or change of control) automatically accelerates the vesting of a portion or all of the equity. Double-trigger provision, on the other hand, requires two events to occur - typically both a change of control and the founder's termination without cause - before the equity vesting is accelerated.

Additional Resources​