Knowing the corporate share structure is pertinent to a small business owner for the strategic management and growth of their company. The following guide will walk you through some of the most vital elements of the corporate share structure and different types of shares and explain the importance of a proper share structure in your business.
What is a Corporate Share Structure?
Corporate share structure refers to the structure through which the shares of a company are classified or organized with different rights, privileges, and restrictions.
A share structure details how ownership is divided in a company, controlling everything from voting power to profit distribution. Any small business should have a clear and well-defined share structure to ensure its smooth running and future growth.
During the stage of incorporation, documents such as the Articles of Association and Shareholders Agreements containing the corporate share structure and rights is prepared. This is an imperative step, as the corporate share structure can have extensive legal, accounting and tax related implications.
What are the Different Types of Shares?
In Canada, shares in a corporate can be broadly categorised into 3 types: common, non-voting and preference shares. To briefly understand the different types:
Common Shares (Ordinary Shares)
Definition: Common shares, otherwise known as ordinary shares, represent equity ownership in a company. The holders of common shares are the co-owners of the company, and each share is attached with some form of voting power, usually one vote per share, wherein the holders vote on major company matters such as elections of directors or significant corporate policies.
Key Features:
- Voting Rights: Common stockholders generally enjoy voting rights and may, therefore, take part in the corporate decision-making process.
- Dividends: Common stockholders receive dividends from the gains or profits that the company makes. However, the declaration of dividends is subject to variation depending upon the performance of the company.
- Residual Claim: Common shareholders have a residual claim on the company’s assets in the case of liquidation, but only after all the debts and other obligations have first been repaid, including the ones to preferred shareholders.
- Capital Appreciation: There is potential for capital appreciation under ordinary shares. When the company grows and becomes more profitable, the value of common shares may appreciate.
Non-Voting Shares
Definition: Non-voting shares refer to equity shares that do not give holders the authority to vote on any matters presented within the company. These types of shares allow investors to benefit from the profits of the company without having any say in running the management of the company.
Key Features:
- No Voting Rights: A non-voting shareholder does not have the right to vote on matters pertaining to the corporation, like election to the post of directors or main corporate policies. As per the Canada Business Corporations Act (CBCA), in some circumstances, the holders of non-voting shares are given the right to attend certain meetings and vote on matters relating to fundamental issues.
- Dividends: Non-voting shares are entitled to receive dividends, though the rate may be the same or different from those declared for ordinary shares.
- Residual Claim: In the case of liquidation, non-voting shareholders stand last in ranking and participate in residual claims over the company’s assets after debts and other liabilities have been settled.
- Capital Appreciation: Non-voting shares would appreciate in value, just like common shares do, with shareholders earning from the company’s growth.
Preference Shares
Definition: Preference shares, otherwise known as preferred shares, are a hybrid form of equity that generally yields a fixed dividend and is senior in the distribution of dividends and liquidation of assets over common shares.
Key Features:
- Priority in Dividends: Preferred stockholders receive priority over common stockholders in the distribution of dividends. They are usually fixed and paid out on a regular basis.
- No Voting Rights: Normally, there is no voting power attached to preferred stock. Some conditions or preferred share types, though, allow for voting rights—especially when dividends are in arrears.
- Priority in Liquidation: Preferred shareholders have a higher claim on the assets of a business, before common shareholders, but after debt has been paid, in the event of liquidation.
- Convertible Option: Some preferred shares are convertible into a specified number of equity shares that provide an upside in terms of capital appreciation.
- Callable Feature: A company may indeed have an option to repurchase or call preferred shares at a fixed price after a particular date.
Essentially, common shares carry voting rights and the potential for capital appreciation, nonvoting shares provide similar benefits as far as finance is concerned without voting rights, and preference shares have claims to fixed dividends and assets, normally without voting rights.
What are the Different Classes of Shares?
Shares in a corporate setting, can be primarily classified into Class A and Class B shares.
Class A Shares
- This class of stock has greater voting power compared to other classes.
- First claim on dividends and assets in liquidation.
- Can be costlier and less available to the public.
- Some companies may place trading restrictions on their class a shares.
Class B Shares
- Known more commonly as “common shares” or “ordinary shares”.
- Normally they have one vote per share with the same treatment in the allotment of dividends and assets.
- Publicly free trading in stock exchanges.
Additionally, there is another class: Class C Shares
Class C Shares
- Few entities offer this kind of share.
- Normally it is gifted to employees as compensation for their services.
- It may sometimes curtail trade.
- Sometimes also refers to a publicly traded share class that has a lower price and lower voting rights compared to Class A.
How is an appropriate share structure important for a small business?
An appropriate share structure is important for various reasons:
- Control and Decision-Making: This structure outlines who has control of the company and how decisions will be made. It means for instance, issuing non-voting shares will help attract some capital without losing control over the business.
- Attractiveness to Investors: Clear and attractive share structure makes the company more attractive to potential investors who might be interested in knowing their rights and probable returns.
- Tax Planning: Different share classes can be used strategically to optimize tax outcomes for shareholders. For instance, issuing preference shares with fixed dividends can help manage taxable income.
- Exit Strategies: A clear share structure paves the way for a smooth exit when mergers and acquisitions or sale of the business takes place. This simply refers to having clarity in relation to how the proceeds are to be divided among the shareholders.
Steps to take to change the classes of shares
If the directors of a corporation seek to convert the class of shares or rights attached to such class mentioned in the articles of the corporation, an amendment will have to be made. Generally, this can be done through a special resolution of the shareholders.
Seeking Professional Help
Complexities of corporate share structures can be laborious to master for a person with little background on the subject. In Canada, professional help from a corporate lawyer or, in more specific geography, a business lawyer in Ottawa will assure that your share structure complies with the law and is strategically beneficial.
Legal advice may pertain to the following matters:
- Preparation of shareholder agreements: Clearly stating all rights and obligations of shareholders to avoid conflicts in the future.
- Tax Implications: Advisory on the tax implications of different share structures that assist in optimizing shareholder returns.
- Compliance: Ensuring that your share structure meets and satisfies local regulations and corporate laws.
- Strategic Planning: Assistance in proper alignment of your share structure with your long-term goals for your business, whether it is about raising capital, planning an exit strategy, or preparing for mergers and acquisitions.
Conclusion
In the case of small businesses, a well-designed share structure represents much more than mere compliance with the law; it is a strategic tool for control, attracting investment, or optimally managing tax outcomes. Understanding the types of shares and their implications will help you make informed decisions that can support your business in its growth and stability.
Common, non-voting, and preference shares are only some examples of the forms of shares that bestow several rights and advantages to the firm and its stakeholders in different ways. Moreover, the type of shares, such as Class A, Class B, and Class C, further polishes this corporate structure in a strategic manner.
Given the complexity, professional help from a corporate lawyer or a business lawyer in Ottawa may provide relevant legal advice on compliance and strategic business needs. This will lead the way into the future of growth, good governance, and tax planning.
