Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you are an employer or employee and need legal advice with respect to shareholder or officer liability, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto, Ottawa, Hamilton, Brampton, Mississauga and other Ontario lawyers registered to help you. You can contact me directly if you need a lawyer.

In this blog, I’ll be discussing shareholder liability with respect to a Federal corporation (i.e. one governed by the Canadian Business Corporations Act).  Generally, a shareholder can be liable under the Act or under the common (i.e. judge-made law).

Separate Legal Persons
We begin with the idea that corporations are separate legal entities from their owners and managers (i.e. directors, officers, employees).  They are legal persons created by statutes (e.g. the Canadian Business Corporations Act).  And since they are separate legal persons, this means that they are capable of entering into agreements on their own.  This means that they are capable of being sued in court.

Limited Liability
For shareholders, because corporations are separate legal entities, their liability is limited. In other words, the personal assets of the shareholders are not exposed; if the corporation gets sued and is ordered to pay damages, it’s the corporation’s assets that are typically at risk of being used to pay those damages.  Indeed, section 45(1) of the Act says that, except in certain circumstances, the shareholders are not liable for the corporation’s liabilities, acts or defaults.

What are the exceptions?
There are certain exceptions to the rule that shareholders are not liable.  These exceptions can be found in the Act and in common law (i.e. judge-made law).   Lets start off with the Act, shall we?

• First, under section 38(4), a creditor of the corporation can apply to court for an order COMPELLING A SHAREHOLDER TO PAY the corporation an amount representing a shareholder liability.  You see, sometimes, the corporation will loan out money to a shareholder.  This is a liability. Sometimes, those liabilities aren’t repaid and the big losers are those that the corporation owes money to.  These are the creditors.  To try getting their money back, they can bring an application to order the shareholder to repay their loan.  Now it’s only in certain circumstances that they can do so (and you can speak to a lawyer about these circumstances).
• Second, under section 118(4), a director who is liable to pay money for inappropriately buying back shares or issuing dividends can apply to the court for an order compelling a shareholder to pay any money or property that was paid or distributed to the shareholder.  So what’s inappropriate?  Well, if the corporation bought back shares or issued dividends and doing so made the corporation unable to pay its liabilities, then that’s a no-no.  There are other examples of what’s in appropriate and it’s best to speak with a lawyer about these circumstances.
• Third, even if the corporation is dissolved, a shareholder may be liable to the extent of any property they received from the corporation which is subject to a civil, criminal, or administrative claim against the corporation: section 126(4).
• Fourth, any PERSON who enters into a written contract in the name of or on behalf of a corporation before it comes into existence is PERSONALLY bound by the contract.  This means that a person who signs a contract on behalf of the corporation and then later becomes a shareholder of that corporation WILL be liable under the contract.  There is an exception, however: if the corporation adopts that written contract within a reasonable time after its existence, then that person will not be bound by the contract: section 14.

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Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to incorporating (e.g. registering articles of incorporation, drafting by-laws, director / shareholder resolutions, registries), you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto, Ottawa, Hamilton, Brampton, Mississauga and other Ontario lawyers registered to help you.  You can also contact me directly (I am a Toronto business lawyer).

Corporate Shares: Ontario Corporation
So for the purposes of this blog post, I’m going to be talking about corporate shares for Ontario corporations.  Remember: corporations are creatures of statutes and are governed by the jurisdiction in which they were incorporated or operate.  For example, an Ontario corporation is governed by the Ontario Business Corporations Act, whereas a federal corporation is governed by the Canada Business Corporations Act.

Shareholders: Voting and Non-Voting
Ontario corporations are owned by shareholders.  A shareholder is a person (which include individuals, sole proprietorships, partnerships, trusts, joint ventures, not-for profit corporations, and other corporations) who owns the corporation’s shares.  Each corporation, through its articles of incorporation, can designate different classes of shares (i.e. shares with different characteristics).  At a minimum, section 22(3) the Act requires that a corporation have at least one class of shares.  That class of shares are called voting shares because they allow the holders to vote at any shareholder meetings.  They also allow the shareholders to receive dividends as declared from time to time and in the discretion of the board of directors (recall that the shareholders vote in the board of directors through an election).  Finally, the voting shares give their holders the right to receive the remaining property of the corporation on dissolution.   Remember that creditors (secured and unsecured) are entitled to be repaid before shareholders upon dissolution.

Classes of Shares
If the articles of incorporation provide for more than one class of share, then things can get interesting.  For example, a corporation can have 3 classes of shares (call them Class A, B, and C), all of which carry different rights with respect to voting (voting vs. non-voting), dividends (variable vs. fixed), and priority upon dissolution.  For example, Class C shares may be non-voting, having a right to regular dividends, and have priority over Class A shares.  This puts the Class A shareholders at risk of not getting anything if the corporation goes into dissolution – particularly if there isn’t enough assets to pay out creditors and priority shareholders.

Valuing Shares
Whenever shares are issued (i.e. sold/transferred to a shareholder in exchange for money, property, or past services rendered – see s. 23(3)), their value fluctuates depending on (1) the value of the company and (2) the total number of issued and outstanding shares.  With respect to the latter, if the corporation continues issuing more shares to different parties, then the original shareholders’ shares will be diluted in value.  In privately-held companies, valuing the shares is much more difficult.  Sometimes, shareholders value the shares as a multiple of something (e.g. book value) instead of potential earnings discounted to today. The value of the shares is typically pre-determined according to some formula set out in a Shareholders Agreement.  If a Shareholder Agreement doesn’t exist, the parties can seek help through a lawyer, consultant, business valuator, accountant, etc.  At the end of the day, the fair market value of the shares is typically described as the price that two arms length individuals would be willing to buy/sell the shares if they didn’t have to (i.e. if they weren’t forced to).

Restrictions on Share Transfers
Worth mentioning is that the ability to transfer shares may be restricted in the Articles of Incorporation or a Shareholders Agreement.  Furthermore, private corporations (unlike public ones) are restricted in terms of the number of shares they can have issued and outstanding.  Specifically, private corporations can only have 50 different shareholders or less.

Class A vs. Class B; Common vs. Preferred; Voting vs. Non-Voting, etc.
What you find in a typical corporation is 2 classes of shares.  These can be called Class A and Class B, Common and Preferred, Voting and Non-Voting.  The name of the shares isn’t terribly important.  What’s important is the duties, privileges, and rights of the holders of those shares.  Those things are described in the articles of incorporation.  So we already know that at least ONE of the class of shares that exist must:

• entitle the holders to vote at all shareholder meetings; and
• entitle the holders to receive the remaining property upon dissolution.

So we can call this Class A, Common, or Voting Shares (or even a combination of those terms, such as Class A Voting Shares, or Common Voting Shares, etc.).  The next class of shares can be characterized as Non-Voting shares, Preferred Shares, Class B shares (or a combination thereof).  These shares typically:

• DO NOT allow the holders to vote at ALL shareholder meetings (i.e. they can’t vote in the board of directors);
• give the holders the right to a dividend in advance of a dividend to the holders of the Class A, Voting, or Common shareholders; and
• give the holders the right to receive the corporation’s remaining property in advance of the Class A, Voting,  or Common shareholders.

In the next blog, I’ll be discussing dividends (which are after-tax earnings paid to shareholders)….

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Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to setting up a dental, health, or legal professional corporation, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your professional corporation.  I should know – I’m one of them and you can contact me directly (michael@carabashlaw.com).

So you are a dentist and you want to have a professional corporation for tax purposes.  Here’s the general process:

1. Under the Regulated Health Professions Act, 1991, no corporation shall hold itself out as a health profession corporation unless it holds a valid certificate of authorization: s. 34.1(1).
2. Schedule 2 of that Act discusses Health Profession Corporations (ss. 85.8 through to 85.14).
3. Subject to the regulations made the Act and the by-laws, one or more members of the same health profession may establish a health profession corporation for the purposes of practising their health profession: s. 85.8(1).
4. The Certificates of Authorization (Ontario Regulation 39/02) are made under the Act.
5. You will need to have a corporation BEFORE you can have a health profession corporation.  In other words, a health profession corporation is simply a corporation holding a certificate of authorization. So the corporation will need to be registered under the Canada Business Corporations Act or the Ontario Business Corporations Act.  To register a corporation, you should have a lawyer prepare the articles of incorporation, the by-laws, director and shareholder resolution and meeting minutes, director and shareholder registry, etc.  A lawyer may also be needed to  create a special class of shares for certain family members (for income-splitting purposes).
6. If you would like a lawyer to fill out the Certificate of Authorization, lawyers would charge extra for their time and it would also cost $750 in fees to the Royal College of Dental Surgeons of Ontario.
7. Depending on the name you choose for your professional corporation, the normal time frame to incorporate is between 1-3 business days.  If there are issues with the name you’ve selected, it could take longer.

FYI, you might want to consider getting a memo from a lawyer on the tax advantages/potential traps of having a dental professional corporation.  There are many things that you should be aware of (e.g. income splitting, loans, attribution rules, etc.).  The way I see it, if you’re going so far as to spend $2,500 to $3,000 incorporating (which includes getting a certificate of authorization), you should spend a bit extra to find out what you can legally do with a corporation with respect to taxes.

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Please keep in mind that this is not legal advice.  The information provided herein is for educational purposes only. If you would like to get in touch with a lawyer to help you draft, interpret, negotiate or resolve a dispute about a shareholder agreement or unanimous shareholder agreement, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers).  We have Ontario lawyers who can assist you in this regard (I would know, I’m one of them!).  If you want to get in touch with me directly, feel free to email me at michael@dynamiclawyers.com to discuss all your shareholder agreements needs!

This is the second blog I’ll be making about unanimous shareholder agreements.  Specifically, I’ll be discussing a basic template and things you should consider/pay attention to when thinking about unanimous shareholder agreements.  For the purpose of this blog post, I’ll be discussing unanimous shareholder agreements in the context of the Canada Business Corporations Act.

Parties
Make sure to properly identify the parties.   You should have the correct spelling of the parties’ names.  Also, identifying features such as “X is a corporation incorporated under the laws of Canada with a mailing address at” is also good.  If you have too many parties, you may want to use a Schedule, where all of the parties for example are holders of a particular class of shares, etc.

Recitals
Here, you’ll want to put some basic information about the corporation, the parties, and the reason for their entering into a unanimous shareholder agreement.   It’s pretty common to see something in this section like:

• The authorized capital of the Corporation is X;
• The issued and outstanding shares of the Corporation is X;
• The parties want to enter into this agreement to fix and determine their respective rights, duties, obligations, etc. with respect to each other and the Corporation.

Preliminary Matters
In the first real section of the unanimous shareholder agreement, you’ll probably want the parties to confirm the truth and completeness of the recitals and define terms used throughout the Agreement.

Business of the Corporation
In this section, you may want to define the business of the corporation.  This will come in handy with respect to non-compete provisions and agreements which restrict parties’ ability to compete with the Corporation in the business (however that is defined).

Operation and Control of the Corporation
Here, it’s typical to find provisions that say that the discretion and powers of the directors to manage and supervise the management of the corporation are being restricted and usurped by the Shareholders.  Essentially, the Shareholders are relieving the Directors of their powers.

The provisions in this section go on to provide details – often akin to the Corporation’s by laws – on how the Shareholders as both the Directors and the Shareholders will conduct meetings (e.g. nominees, notice, quorum, casting votes, elections and appointments, passing resolutions, etc.).

The provisions in this section may also include specific requirements for the Corporation to enter into contracts (e.g. X number of Directors required) or for the Corporation to do things with respect to issuing shares, borrowing money, selling or leasing Corporate property, amending the Corporation’s articles, continuing the Corporation in another jurisdiction, winding up or dissolving the Corporation, etc.  These things may require special majorities (i.e. majorities which are not specified anywhere in the Act).

You’ll also find provisions in this section of the unanimous shareholder agreement dealing with things like who the officers of the Corporation will be, keeping proper books of account, appointing a banker, etc.

Restrictions on the Issue and Transfer of Shares
This is a very important part of any shareholder agreement: restrictions on share transfers.  There are many ways to restrict transfers on shares, some of which include:

• General prohibition against the Corporation and the Directors for issuing new shares.
• General prohibition against existing shareholders from transferring, selling, assigning, etc. their existing shares.
• A requirement that any party that does, through one of the permissible ways of acquiring shares, acquire shares becomes bound to and a party of the unanimous shareholder agreement.

Here are some of the ways in which share transfers are permitted/restricted:

• Consent Sale: a shareholder can transfer their shares after obtaining the consent of a pre-determined number or percentage of other shareholders.
• Right of First Refusal: a shareholder who receives an offer from a third party for the purchase of their shares must first offer the other existing shareholders the opportunity to purchase those same shares on terms, for example, that are equivalent to the third party’s offer.
• Shot Gun Buy-Sell: a shareholder can name a price at which it is willing to either buy or sell its shares.  The offer is then presented to other shareholders who have a specific amount of time to decide whether to accept the offer.
• Right to Come Along (Piggy-Back): when a shareholder who sells to a third party, the other shareholders are entitled to have their shares sold on, for example, the same terms to that third party.
• Right to Take Along (Drag Along): when a shareholder sells to a third party, the other shareholders are forced to have their shares sold on, for example, the same terms, to that third party.
• Option to Purchase (Call Option): this right gives a shareholder/Corporation the option to purchase shares in certain circumstances (these are called Triggering Events) from the Corporation/shareholder.
• Option to Sell (Put Option): this right gives a shareholder/Corporation the option to sell shares in certain circumstances from the Corporation/shareholder.
• Auction: an auction is a mechanism whereby shares are sold to the highest bidder (or on certain terms of the auction) to third parties.

In each of these circumstances, there are a few common variables: timing or an event occurring, valuing the shares, and rights/obligations affecting the other shareholders, closing provisions, identification of the buyer/seller/third parties (if any), etc.

Confidentiality
If a Shareholder receives Confidential Information (which should be a defined term) in the course of being a Shareholder, Director, Officer, employee, etc. then they should be restricted in what they can do with that information.  I’ve previously blogged about confidentiality agreements, so you can refer to that blog for more information about drafting, understanding and negotiating confidentiality agreements here.

Proprietary Rights
This section will deal with things like defining intellectual property rights (remember that there should be a definition for both proprietary rights and developed proprietary rights), who they belong to, the waiving of any moral rights under the Canada Copyright Act, and an agreement to obtain protection of intellectual property rights.

Non Competition
This section will deal with the repercussions, if any, of a Shareholder who starts competing with the corporation in the Business (which should be a defined term).  To make these provisions enforceable, they should be specific enough (e.g. by identifying parties, the Business, a time line, etc.).

Termination
Here, provisions may be put in place to initiate termination of the agreement where:

• There is only 1 shareholder left.
• A shareholder dies, becomes disabled, or goes bankrupt, etc.
• There is a breach of the shareholder agreement.
• A specific number or percentage of shareholders mutually agree to terminate the agreement.

General Terms
Here, you’ll find terms dealing with things like (but not limited to):

• Notice (how do the parties give notice under the agreement for things like termination).
• Arbitration.
• Assignment (e.g. is this to be done by the parties having to consent in writing?).
• Survival of terms (i.e. if a term is found by a court to be void, should the rest of the agreement survive?).
• Governing Law (which jurisdiction governs the interpretation and enforcement of the agreement?).
• Amendment (how is this to be done?).
• Entire Agreement (i.e. this agreement supersedes all other agreements – whether oral or written – relating to the same subject matters in the agreement)
• Waiver.
• Interpretation.
• Independent Legal Advice
• Currency.

Please keep in mind that there are many other kinds of terms and conditions you can find in the general terms section of this agreement.  You should consult with a lawyer to address these general terms.

Execution
The final section of the agreement (other than any schedules or exhibits) requires that the parties, or duly authorized representatives of the parties with the power to bind, execute the agreement.  It is sometimes a requirement that witnesses be present and sign their names alongside the parties’.

In conclusion, this blog has discussed a basic unanimous shareholder agreement template.  You should note, however, that the particular details of a unanimous shareholder agreement vary depending on the needs of the shareholders and the business.  These documents should be put together by lawyers (such as myself) who are trained, knowledgeable, and experienced professionals.

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Please keep in mind that this is not legal advice.  The information provided herein is for educational purposes only. If you would like to get in touch with a lawyer to help you draft, interpret, negotiate or resolve a dispute about a shareholder agreement or unanimous shareholder agreement, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers).  We have Ontario lawyers who can assist you in this regard (I would know, I’m one of them!).

This is the first blog I’ll be making about unanimous shareholder agreements.  For the purpose of this blog post, I’ll be discussing unanimous shareholder agreements in the context of the Canada Business Corporations Act.

What is a Unanimous Shareholder Agreement?
A unanimous shareholder agreement is defined under the Act (s. 146) as a lawful written agreement among the shareholder of a corporation (some or all of them) that restricts, in whole or in part, the powers of the directors to manage or supervise the management of, the business and affairs of the corporation. So a shareholder agreement is basically an agreement that allows the shareholders to usurp and override the powers of the directors (e.g. the shareholders become the directors or they agree to each appoint 1 director on the board of directors, etc.).

Violation of the agreement on the part of a shareholder can lead to a breach of contract claim.  If and when shareholders take over the power of the directors to manage the corporation, the Act gives them the same rights, power, duties, and liabilities as a director of the corporation.  This is important because generally shareholders’ liability is limited under the Act (in other words, unless a party can pierce the corporate veil, shareholder’s personal liability and personal assets cannot be exposed to having to pay for damages of the corporation, its representatives, agents, employees, directors, etc.).

Unanimous shareholder agreements are important to have early on in the corporation’s life because it details the rights and obligations of each shareholder, including management issues and share transfer provisions.  It puts expectations on the table early on.  Unanimous shareholder agreements are much harder to enter into between shareholders later on when progress (which carries with it political jealousies and potential infighting) has been made.

Finally worth mentioning is that the Act makes certain corporate requirements and powers subject t0 a unanimous shareholder agreement, including:

• Special majorities for director or shareholder votes (s. 6(3));
• The power to borrow and give security (s. 189);
• Issuance of shares (s. 25(1));
• Directors’ ability to manage, or supervise the management of the business and affairs of the corporation (s. 102);
• The making, amending or repealing of by-laws (s. 103);
• The appointing of officers (s. 121);
• Directors and officers compliance with a unanimous shareholders agreement (s. 122(2)); and
• Directors and officers remuneration (s. 125).

A copy of the unanimous shareholder agreement must be kept at the corporate head office (along with the other documents in the minute book).

How much does a Shareholder Agreement cost?
Shareholder agreements vary in cost (e.g. from $2500 to $10,000), depending on the complexity of the provisions in the unanimous shareholder agreement.  For example:

• What will be the business of the corporation?  Will this be restricted?
• Who are the parties (e.g. voting and non-voting shareholders)?
• What mechanism will be used by the shareholders to elect or appoint board members?
• What mechanism will be used by the shareholders to vote their shares?
• What mechanisms will exist for shareholders to sell or transfer their shares (e.g. shotgun, put/call, consent sales, auctions, piggy back, drag a long, etc.)?
• What about compensation for shareholders who become working shareholders/directors?
• What about working shareholders who become inactive?  How will their shares be treated upon inactive?
• What about confidentiality, non-solicitation, and proprietary information provisions?  Are these needed?
• How will the agreement be terminated?  Can dissolution result from a shareholder complaining about a breach of the agreement?
• General provisions such as notice, entire agreement, currency, assignment, severability, waiver, independent legal advice, etc.

I’ll deal with these provisions in the next blog about unanimous shareholder agreements.

written by admin \\ tags: canada business corporations act, ontario lawyers, shareholder agreement, unanimous shareholder agreement

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to drafting articles of incorporation, corporate by-laws, shareholder agreements, or resolutions involving shares, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto and Ottawa business lawyers registered on the website who can answer your questions and assist you in those regards.

What are shares?  What kinds of characteristics do they have?  How are they valued?  Well, in this blog, I’ll be addressing these issues in the context of a federal corporation governed by the Canada Business Corporations Act.

Lets begin with the basics.

Incorporated businesses are owned by persons (which include individuals, sole proprietorships, partnerships, trusts, joint ventures, not-for profit corporations, and other corporations) through shares.  Each corporation, through its articles of incorporation, can designate different classes of shares (i.e. shares with different characteristics).  At a minimum, section 24(3) the Act requires that a corporation have at least one class of shares.  That class of shares are called voting shares because they allow the holders to vote at any shareholder meetings.  They also allow the shareholders to receive dividends as declared from time to time and in the discretion of the board of directors (recall that the shareholders vote in the board of directors through an election).  Finally, the voting shares give their holders the right to receive the remaining property of the corporation on dissolution.   Remember that creditors (secured and unsecured) are entitled to be repaid before shareholders upon dissolution.

If the articles of incorporation provide for more than one class of share, then things can get interesting.  For example, a corporation can have 3 classes of shares (call them Class A, B, and C), all of which carry different rights with respect to voting (voting vs. non-voting), dividends (variable vs. fixed), and priority upon dissolution.  For example, Class C shares may be non-voting, having a right to regular dividends, and have priority over Class A shares.  This puts the Class A shareholders at risk of not getting anything if the corporation goes into dissolution – particularly if there isn’t enough assets to pay out creditors and priority shareholders.

Whenever shares are issued (i.e. sold/transferred to a shareholder in exchange for money, property, or past services rendered – see s. 25(3)), their value fluctuates depending on (1) the value of the company and (2) the total number of issued and outstanding shares.  With respect to the latter, if the corporation continues issuing more shares to different parties, then the original shareholders’ shares will be diluted in value.  In privately-held companies, valuing the shares is much more difficult.  Sometimes, shareholders value the shares as a multiple of something (e.g. book value) instead of potential earnings discounted to today. The value of the shares is typically pre-determined according to some formula set out in a Shareholders Agreement.  If a Shareholder Agreement doesn’t exist, the parties can seek help through a lawyer, consultant, business valuator, accountant, etc.  At the end of the day, the fair market value of the shares is typically described as the price that two arms length individuals would be willing to buy/sell the shares if they didn’t have to (i.e. if they weren’t forced to).

Finally worth mentioning is that the ability to transfer shares may be restricted in the Articles of Incorporation or a Shareholders Agreement.  Such restrictions are worthy of another blog entry entirely.  Furthermore, private corporations (unlike public ones) are restricted in terms of the number of shares they can have issued and outstanding.  Specifically, private corporations can only have 50 different shareholders or less.

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