Why have multiple classes?

In general, a company must treat all shareholders equally; however, if a company has different classes of shares, a company can differentiate between the classes. For example, a company may declare a dividend to only one class of shareholders to the exclusion of other share classes.

Having different classes allows the company to have shareholders with different rights. For example, the founders of a company (i.e. the people setting up the company) may subscribe for voting shares and ensure that all other shareholders subscribe for non-voting shares. This will ensure that the founders of the company will retain control over the company while allowing outside investors to participate in the economic success of the company.

Summary of six classes

We have developed a standard set of six different classes of shares that will allow the company to accomplish most transactions. However, they may not be suitable for all companies and we recommend discussing these share classes with the company’s tax advisor and a lawyer at Clark Wilson LLP.

The following is a summary of the six classes of shares and an explanation for each column of the table:

Class

This column states the name of each class of shares. Each class is assigned a letter to help identify the class. For example, a directors’ resolution may refer to the “Class A” shares. Each class also states whether the class is comprised of “common” or “preferred” shares. In general, preferred shares have priority upon the liquidation of the company but only for a set amount (see the last two columns and the explanation below).

Authorized

This column states how many shares of that class can be issued. In British Columbia, most companies do not set any limit on how many shares may be issued. Companies incorporated in other jurisdictions may set a limit on the number of shares because they are either not allowed to authorize an unlimited number of shares or they have to pay an increased annual fee if they authorize more shares.

A company in British Columbia would limit the number of shares if the shareholders want to restrict the ability of the directors to issue shares, as they would need the approval of the shareholders to increase the authorized shares if they wish to exceed it.

Par Value

This column states the par value of the class of shares. The par value of the shares is the minimum price the directors may issue the shares. For example, if a class of shares has a par value of $1.00, the directors could not issue shares for $0.50. The par value also has important accounting and tax implications. We recommend discussing the par value of the shares with the company’s accountant and tax advisor.

Voting

This column states whether the shares of that class have the right to attend and vote at a general meeting of shareholders. If the shares do not have voting rights, they will not have a say in who are the directors of the company. There are certain votes that require all shareholders to approve, even if the class of shareholders does not normally have voting rights. For example, if a company wants to sell all of its assets or amalgamate with another company, every class of shareholders must approve that transaction.

Dividend Entitlement

This column states whether the share class is entitled to dividends. No class of shares in our standard six classes requires the directors to pay any dividends. The company and its investors may want to do a financing where the shares are required to pay dividends but that is usually very specific to that financing and the shareholders generally approve a new class of shares for that financing.

Redeemable

This column states whether the shares are redeemable. If the shares are redeemable, the company has the option to buy any or all of the shares back from the shareholders. If a company redeems the shares, the shareholders must sell their shares back to the company. The articles of the company will set out detailed rules regarding how the company must redeem the shares.

Redeemable Amount

This column states that if a class of shares is redeemable, how much the company must pay to buy the shares. Two of the classes require the directors to pay the shareholders the amount they paid for the shares or the value of the property exchanged for the shares. One class of shares has set the redemption amount as a fixed amount of $100 per share.

Liquidation

The final two columns state how the shareholders will divide the assets of the company upon liquidation. When a company is liquidated, it must settle all outstanding obligations (such as wages owed and outstanding debt) and the remaining assets are divided among the shareholders. The preferred shares will be paid first but their claim is limited to their redemption amount plus any unpaid dividends. Once the preferred shares are paid in full, the common shares divide the remaining assets based on how many shares each shareholder owns.