Share Classes

The shareholders of a company are often referred to as the owners of the company. Shareholders do not have any direct ownership in the assets of the company as the company is a separate legal entity. A shareholder’s ownership rights are instead represented by their shares in the company.

When purchasing shares of an existing company or incorporating a new company, it is important to remember that not all shares are created equal. There can be different classes of shares which will impact the voting rights and economic value of the shares. The most important aspect to review with regards to the different share classes are the special rights and restrictions of the specific share class.

The special rights and restrictions of the different classes of shares, if any, should be set out in the Articles of the company. The Articles will set out the share rights as they relate to voting, dividends, liquidation rights, and redemptions/retraction.

With regards to voting rights, not all shares carry with them the right to vote on matters pertaining to the company. It is possible for some shares to not have any voting rights assigned to them thus leaving the shareholder with no direct voting rights. In addition, the standard practice of “one vote per share” can also be deviated from in the Articles, so it is important to ensure that the voting rights of each share class and not just the shares you are acquiring are considered.

Dividends are profits of the corporation paid out to shareholders based upon the number of shares they hold and the type of share. It is possible in the special rights and restrictions to set out priority between different share classes as to who is to receive a dividend, establish guaranteed dividends for some share classes while other share classes will only receive dividends at the discretion of the directors, and set out limits to the amount of dividends that may be paid out to specific share classes. It is essential for minority shareholders to understand the dividend structure as it relates to both their own shares and those of the majority shareholders.

When a company is winding down and/or dissolving, it must divest itself of all of its remaining assets to its shareholders after it has paid all its debts and liabilities. Upon dissolution, different share classes can be entitled to both different priority on who is paid out first and the amount paid out per share.

Redemption of shares is when a corporation requires a shareholder to sell its shares back to the corporation. Retraction occurs when a shareholder requires the corporation to purchase its shares from the shareholder. Different share classes may or may not have the rights to redemption/retraction and the price at which shares can be purchased and sold in such circumstances can be dictated by the share class.

It is important to consider when incorporating a new company, purchasing a company or investing in an existing company to receive legal and accounting advice on your transaction.

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