What are share classes?

Any ‘person’ can own a share in a corporation and be a 'shareholder.' 'Person' includes individuals, corporations and trusts. Shares are a form of property, and can be bought and sold. However, these rights may be subject to any limitations that may be set out in the Canada Business Corporations Act (the "CBCA") (or similar legislation such as the Business Corporations Act (Ontario), the articles of incorporation, or the shareholders’ agreements. Generally, there are three types of rights associated with shares:

•  the right to vote
•  the right to receive dividends
•  the right to receive the remaining property of the corporation upon dissolution.

These rights can be divided among different types or classes of shares. Classes can be assigned names: common, non-voting, preferred or Class A, Class B, Class C. The articles of incorporation described the characteristics of different classes of shares. At a minimum you should have one class of shares (as required by legislation- section 22(3) of the CBCA.)  

Where there is only one class of shares, the rights of all shareholders are equal. Where there are more classes of shares, each class may have different rights, privileges, restrictions and conditions. The number of shares issuable of each class will be unlimited, unless there is a maximum specified in the articles. The name of the shares is not what's important. What's important is the way you define the rights and privileges attaching to the shares.  

[We have seen corporations incorporated provincially that didn't specify the classes of shares, resulting in ... lots of administrative headache so make sure that your articles of incorporation have the share terms properly drafted and reviewed by a competent professional.]

Some Types of Share Classes:

Common Shares: These usually refer to the share class that gets the remaining property of the corporation if it is dissolved. Common shares also usually have the voting rights.

Non-Voting Shares: They do not carry a vote in the normal running of the corporation. They are often paid dividends but at the sole discretion of the Board of Directors.

Preferred Shares: This usually means that there’s some ‘preference’ attached to these shares, such as the right to get dividends before the holders of common shares and/or at some fixed rate of return whether dividends are paid to other classes of shares or not.

Here are some ways the rights of share classes are allocated:

Class A/Common/Voting Shares:

• Entitle the shareholders to vote at all shareholder meetings.
• Entitle the shareholders to receive dividends as declared from time to time and in the discretion of the board of directors (the shareholders vote in the board of directors through an election).
• Entitle the shareholders to receive the remaining property after dissolution.

Class B/Preferred/Non-voting shares:

• Do not allow the holders to vote at all shareholder meetings (i.e. they can’t vote in the board of directors meeting);
• 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.

Authorization for variations of rights by special shareholders:

The shareholders of a class or series are entitled to vote separately as a class or series for a proposal to amend the articles in certain cases which are specified in section 170(1) of the OBCA. The shareholders of a class or series are entitled to vote separately only if the series is affected by the amendment in a manner different from other shares of the same class. A proposed amendment to the articles is adopted when the shareholders have approved the amendment by a special resolution of the shareholders of the shares of each class or series entitled to vote thereon.

In another post at StartupLegals, we will discuss why you may want to create different classes of shares.