Issuing Shares - The Basics

Always remember that your corporation is a separate legal entity from anyone else -- even yourself. It's a legal "person" unto itself. However, because a corporation is also just paper, it needs flesh and blood people if it's going to accomplish anything in the real world.

So an active corporation will always need a full cast of supporting characters:

• directors: who are ultimately responsible for the management and operations of the corporation;


• officers: who are appointed by the directors and look after the day to day operations;


• customers, employees and suppliers: people or entities who are bound to the corporation through contractual arrangements; and


• shareholders: who own the corporation and are usually responsible to appoint the directors.

The ownership interest of the shareholders is contained in the shares of the corporation. In law, a "share" is simply a bundle of intangible rights (such as the right to vote or the right to receive dividends or the right to receive the net assets of the company on its dissolution). Because no one can see a share, a company issues "share certificates" which represent the shares named in the certificate, such as "100 Class A Common shares without par value". Applicable corporate legislation usually sets out minimum requirements for the wording that share certificates must contain. In addition, often securities legislation requires certain wording (called "legends") be printed on the face of a share certificate, to comply with particular securities law requirements.

Although the articles or a unanimous shareholder agreem View Blog ent might be different in any particular situation, most corporations formed in British Columbia will make the directors responsible to issue shares. A company will need to issue at least some shares, so that one or more persons will be the shareholders of the company and entitled to exercise the rights needed to run the company (at a minimum, to appoint a director who can then manage the company).

All share issuances involve at least two considerations: corporate law considerations; and securities law considerations.

Share Issuance - Corporate Law Considerations

Most share issuances will involve these minimum steps. Please note that what follows only skims the surface, and leaves out some considerations that might apply in particular circumstances. Share issuances are an area where you really need to understand the legal implications of what you're doing and the legal requirements necessary to have a valid share issuance. It's hard enough to do business, let alone have to deal with unhappy shareholders who also have a right to get their money back because their share issuance was botched.

So, from the corporate law side of things, a company will need at least these items:

• Make sure the shares exist: Before issuing shares, make sure that the authorized capital of the company is up to date, and that there are sufficient numbers of unissued shares to be taken up and that the shares to be issued have the rights that the proposed shareholders are expecting. The BC Business Corporations Act does contain provisions to correct invalid share issuances, but why not be correct from the start?


• Make sure the issuance is allowed: Sometimes the articles of the company or an agreement or a court order might prevent shares from being issued or require that certain conditions be met (such as a right of first refusal) before shares can be issued to new shareholders


• Subscription agreement in writing and signed: Take the trouble to get incoming shareholders to sign a written subscription agreement. At a minimum, the agreement will set out the number and kind of shares that the incoming shareholder is buying and the price per share. Very often, provisions related to securities law considerations are included.


• Actual payment for the shares: BC corporate law requires that payment be received by the company before any shares can be validly issued. Payment can come in any one or combination of three forms: i) money actually paid to the company; ii) past services actually performed for the corporation (which have to be valued by the directors); and iii) property (which, again, must be valued by the directors of the company).


• Directors resolution: Once the subscription agreement has been signed by the proposed shareholder and payment has been received, the directors of the company can accept the subscription agreement by signing it on behalf of the company. To actually issue the shares, the directors then pass a directors resolution that sets out the issue price of the shares, the name of the shareholder to whom the shares are issued, and the number and kind of shares being issued.


• Update corporate records: The central securities register must be updated after each share issuance with the name and address of the new shareholder and other details of the share issuance. This register is kept in the corporate records book for the company.


• Share certificate(s): A shareholder is entitled to receive a share certificate for his or her shares in the company. Although the shareholder is entitled to receive such a certificate personally, in real life the certificates tend to go missing, so it's better to keep them in the corporate records book for most closely held companies.

Share Issuance - Securities Law Considerations

Securities laws are complex. They're definitely something not to be attempted at home. Although you can do some research yourself on websites such as the BC Securities Commission, save yourself some grief and get legal advice if you have any securities law questions -- and even if you think you don't have questions. Securities laws change frequently and contain all sorts of traps for the uninformed or unwary.

In Canada, each province has its own securities laws. There has been ongoing work over the past two decades to harmonize the laws, but many weird and seemingly irrational differences, large and small, remain. At a minimum, these securities law considerations will apply:

• How many jurisdictions are involved?: At a minimum, in the easiest case, there will be only one jurisdiction involved. This will be the case where the issuing company and the incoming shareholders all live in the same jurisdiction (for example, everyone lives in BC and the company is a BC company). But if the company is in one jurisdiction and even one new shareholder is in a second jurisdiction, the company will have to comply with each jurisdiction: the company's home jurisdiction and the jurisdiction of the new shareholder.


• Is an exemption available?: In Canada, the general structure of each province's securities laws is to absolutely prohibit any shares from being issued, subject to two exceptions:
  
  
  • Prospectus requirement: One exception is to go to the trouble and expense (tens of thousands of dollars, minimum) of preparing and issuing a "prospectus". A prospectus is a long, complicated document that sets out the business of the company and contains the company's financial information, and that is reviewed and accepted by at least one securities commission. An IPO (initial public offering) means a share issuance done under the prospectus requirement.
  
  
  • Exemption requirement: The other exception is to find a provision in the securities legislation that exempts the company from the prospectus requirement. There are a half dozen or so exemptions that a private company might be able to use. But when using an exemption, it's up to the issuing company to meet the terms of the exemption exactly. And some of the terms can be troublesome; for example, a company might be required to prepare an "offering memorandum" (a document like a prospectus, but a little less troublesome to prepare), and to meet tight deadlines for filing notice of the issuance with the applicable securities commissions.
  
  Most privately held companies will rely on the "private issuer exemption" when issuing shares. Because it's the easiest exemption to use, it's one you want to keep, so be careful to comply with its' requirements, which include:
  
  
  • After the issuance, the number of shareholders in the company cannot exceed 50 persons, not counting real employees, and counting joint shareholders as one shareholder
  
  
  • The incoming shareholders must not be a "member of the public", which is a term defined by general securities laws.
  
  
  • The incoming shareholder must not be outside of a circle of people who are fairly close to the founders or directors of the company. This circle is generally limited to certain family members or close personal friends or close business associates of existing members of the company, but can also include accredited investors (generally, fairly wealthy people with assets or annual income over a certain value).

If you're considering issuing shares, we'd be pleased to help steer you through the potential minefields of securities and corporate considerations.

Annual Maintenance for Companies

Having your own corporation will introduce you that species of government beast known as red tape. A BC company will face annual filing requirements under various statutes, provincial and federal. The main annual filings are:

• corporate income tax return;
• filing T4 income tax withholding report for your employees (including the owner);
• goods and services tax (GST);
• Workers' Compensation Board annual return;
• filing requirements imposed by applicable regulatory bodies (eg, motor carrier; real estate; medical doctors; dentists; accountants; lawyers; securities industry); and
• Corporate Registry (annual report) filing.

Today, I want to focus on this last requirement: filing the company's "annual report" in the Corporate Registry.

Some people confuse this filing with the requirement to file their corporate income tax return, probably because "annual report" sounds a lot like something they heard in relation to tax filings or possibly from public company documents. But they're not the same thing at all. The T2 corporate income tax return must be filed with Canada Revenue Agency under the Canadian Income Tax Act. Unlike individuals, a corporation must file its tax return each year, even if there is no activity. For corporations that qualify, a "T2 Short Return" can be filed, which reduces the paperwork needed. Either kind of return is due within six months after the corporation's taxation year-end.

The requirement to file the "annual report" with the Corporate Registry arises under the Business Corporations Act (BC). The document is a simple form that sets out the name of the company, the address of the registered office of the company, the original date of incorporation and the anniversary date for which the filing is being made, the incorporation number, and the full names and addresses for each officer (not director) of the company. The form must be filed online, within 60 days of the anniversary of the company's incorporation date. The current filing fee is $45. It is something you can do yourself, with a credit card, through Corporate Online. If you do file yourself, be sure to either print or save to your hard disk a copy of the filed annual report. Put the printed copy of the annual report under the "Documents Filed with Registrar" tab in your corporate records book.

Be aware that if you don't file the annual report for two years in a row, the BC Registrar of Companies will be able to strike your company, which means your company will die, with potentially unwanted consequences.

Filing the annual report is good, but that's not the end of the story. Just before you file the annual report, be sure to create and get signed the required "annual general meeting" shareholder and director resolutions for your company. These are resolutions allowed to be passed in writing instead of going to the trouble and expense of having a real shareholders' meeting, in the way that a public company, such as Telus or Intel, is required to do. Having a formal shareholder meeting involves writing up a formal notice of meeting, proxy, and management information circular, mailing those documents to the shareholders, and then having a physical meeting within the time limits required by applicable law.

A typical AGM consent shareholder resolution does four things:

1. elects or re-elects the directors for the upcoming year;
2. accepts the report of the directors;
3. accepts the financial statements for the company; and
4. waives the appointment of an auditor for the company for the next financial year.

The AGM consent director resolution is passed by the newly (re-)elected directors and appoints the officers of the company for the upcoming year. The information from this resolution is what goes into the annual report that gets filed online. Note that it is no longer mandatory in British Columbia to have corporate officers (such as a President or Secretary). However, we find that in a company's dealings with third parties it can often be useful to have at least a "President" appointed, so give some thought to maintaining at least one officer.

In order to effectively waive the auditor of the company (something you'll want to do, since for most private corporations audited financial statements are too expensive), remember that all voting and even non-voting shareholders must sign the resolution waiving appointment of the auditor. The waiver is required because the default under the Business Corporations Act BC is for the company to have an auditor.

Once both resolutions are signed, be sure to file them under the correct tab in your corporate records book. The shareholder resolution goes under the "Shareholder [or Members] Minutes" tab and the director resolution goes under the "Director Minutes" tab. Once you have a copy of these resolutions, they can be done quickly each year, as the information in them will only change where there is a change to the shareholders, directors or officers of the company.

Doing the annual shareholder and director resolutions and filing the annual report is something that will keep your company in "good standing" and thus alive for as long as you choose to have the company. The documents are fairly simple. If you need our help, be sure to call or e-mail us.

Amalgamating: The urge to merge

Time to keep a promise. In December, I wrote about 4-1/2 ways to kill off your company, legally. I mentioned amalgamation as the "1/2" way. So here's the scoop.

Amalgamation is the word for the legal process where two or more corporations become one continuing corporation. The "one flesh" concept (see Genesis 2:24) of what marriage means is one analogy that judges have used to describe amalgamation. But, these days, marriage isn't that good an analogy; we tend to focus too much on the separate identify of husband and wife (or spouse and spouse, seeing as I'm writing this in Canada). A better analogy (though one some judges have criticized), then, is to consider two streams flowing together as one. The individual identity of each stream is lost; and, in a certain sense, you have a brand new single entity -- not brand new in the sense of being without a history, such as a new-born infant. No, the continuing corporation is rather that sadder and wiser girl: it retains all the strengths but all the weaknesses and liabilities of the corporations from which it arose.

Why Amalgamate?

A variety of reasons are possible, but the primary reason is to simplify the corporate structure. Perhaps a subsidiary company is no longer useful, but can't be simply dissolved. Amalgamations can also be used in purchase situations, to merge a target corporation with an acquiring corporation. Obviously, here, you'll need to be aware of the income tax consequences of the result. A third reason might be to re-jig the shareholdings in a corporate structure, as there is some leeway to re-organize the share structure in the continuing corporation and make it different than the share structures of the amalgamating corporations.

Amalgamation Procedures

In brief, there are three different procedures that can be invoked in order to amalgamate. Some require more paperwork than others, and all involve, at the end, a filing with the Corporate Registry before they'll be effective. For more information about any of them, please contact us.

• Short-form amalgamations: These occur in two flavours: vertical and horizontal. "Short-form" means that there's less paperwork involved, so the costs are less and the amalgamation can be finished sooner. The procedure can be done without an amalgamation agreement or obtaining shareholder approval.

  • In a vertical short-form amalgamation, a wholly-owned subsidiary company (or more than one) gets absorbed into its (or their) parent holding company. The holding company must be incorporated in BC; the subsidiary companies can be incorporated anywhere. The resulting continuing company will have the identical share structure, and directors and officers, of the parent company. The shares of the subsidiary company will be cancelled, without compensation. Only the directors or shareholders of the parent company need to approve the amalgamation.

  • In a horizontal short-form amalgamation, two subsidiary companies amalgamate into one continuing subsidiary company. All amalgamating companies must be owned by the same corporation (that is, not by an individual). All of the shares of each amalgamating company must be held either by the parent or by the other amalgamating companies. The amalgamating companies must be incorporated in BC, but the parent company can be incorporated anywhere. The shareholders or directors of each amalgamating company must approve the amalgamation. And one company must be chosen as the primary company (that is, the company that will continue as the amalgamated company once the amalgamation takes effect).

• Non-court approved amalgamations: You will use this procedure for amalgamation when neither of the short-form procedures apply and there is no need (as is usually the case) to seek court approval of the amalgamation. These amalgamations have more paperwork than the short-form amalgamations. All participating companies must obtain shareholder approval for the amalgamation and must enter into a written amalgamation agreement, which must contain certain specified provisions, and have a director swear an affidavit as to certain facts. Where the required affidavit cannot be sworn, it will be necessary as well to formally notify creditors of the proposed amalgamation. This procedure gives the most flexibility to the amalgamating companies in terms of structuring the continuing company's directors, officers, articles and share structure.

• Court approved amalgamations: Companies will want to use this procedure, despite the extra expense involved in going to court, where the affidavit required for the non-court procedure cannot be sworn or where complying with the creditor-notification requirements would be too troublesome. This procedure is also used in some public securities transactions, involving US securities law. In addition to having an amalgamating agreement approved by their shareholders, the amalgamating companies will need to prepare court documents: a petition and supporting affidavit or affidavits. The application to court must be brought within the required deadline (not less than 6 days nor more than 2 months after the last company approved the amalgamating agreement). Creditors and shareholders each have the right to ask to be notified of the court date and to show up to object to the amalgamation.

Amalgamating your company with another is not an every-day kind of corporate transaction. But be aware of the procedure, and who knows--maybe your circumstances will require it one day.

Following your passion & Choosing niches

Is following your passion really such a good idea? It's advice that's frequently offered to people thinking about starting their own business. Two articles from the business section today's Vancouver Sun newspaper provide some helpful and cautionary lessons for those who are considering that advice.

One person started a chain of low-carb foodstores in and around Vancouver, riding the wave of popularity that arose around 2004 when Atkins Diet emerged from many years of fringe obscurity. She had lost weight herself following Atkins, and wanted to share that success with a broader public. She mortgaged her house, raised investment money from friends and family ($200,000, the article said), and opened four retail stores selling low-carb products. For a while, business was good. At the height, she was grossing $150,000 a month.

Unfortunately, the Atkins Diet craze peaked and then crashed. The business owner had to close her stores one by one, and at the end had to break the lease on her main store. She ended up in court, being sued by creditors for tens of thousands of dollars.

The other fellow is at an earlier stage in his venture. He's a cook with an interest in sailing: he's interested in catching real waves. As the article tells his story, it's a classic case: Someone with a passion sees a need and sets out to find a customer. In this case, he started small. After developing his business plan, he started walking the docks and talking to yacht owners who were interested in gourmet-level meals on board. After all, you don't have a business if you can't find customers. He's won an entrepreneur of the year award, so one might assume that he's probably doing alright on the business side, though the article didn't really say.

The two businesses are dissimilar enough (as to length of time in business, type of business, customer base and so on) that we have to exercise caution inat comparisons we make, but a few points deserve comment:

• Is your choice of business model appropriate? Could the low-carb owner have foreseen the difficulties she would run into? In opening her four stores, the low-carb owner attempted to adopt the Amazon / E-Bay model: go big or go home. To do so, she had to raise a lot of money, and it only got her four stores in and around Vancouver. Yet she was up against the Save-On Foods and Safeways of the world, who already had a distribution network, established relationships with suppliers of the low-carb products, and far deeper pockets. In addition, she may have chosen a different route if she had considered the psychology of her customers and how difficult it is to change eating patterns for a sizeable portion of the population over the longer term.

• Understand your business. Both businesses found customers. The trouble for the low-carb owner arose when her customers and their food passion moved and her passion didn't. She was locked into her locations, both with investment capital, and what she had spent the money on: inventory and retail premises. Retail, particularly retail food, is a tough business, requiring large capital outlays, and possessing small margins. By contrast, the sailboat gourmet is running a service business. He's selling to a long-established and easy-to-identify group of people: those who own or rent yachts and want high quality food for their voyages. Both are areas where people won't be changing their preferences any time soon: there will always be yachters, and they'll always need to eat while they're out yachting.

• Specialization may not save you.Both businesses focused on a particular niche. For those of us in small business, that's a wise strategy. Yet, as the low-carb example shows, those who live by the niche can die by the niche. "Climate change" happens in the business world just as much as in the physical world. How will you adapt if the business climate favouring your niche changes? One way to protect yourself here is, when choosing your niche, pay attention to what's already being done in that area of business (or a similar area, if you're one of the rare birds actually doing something truly new). Find out how your predecessors have managed to survive; the fact of their survival itself provides valuable guidance about the strategies and practices that you will need to adopt if you are going to survive in your niche.

• Go where the money is. I first learned this point from Fred Picker, the founder of Zone VI Studios, which focused on large-format photography in the Ansel Adams tradition. (Mr. Picker died in about 2000. Calumet Photographic bought his company before he died.) You'll sell more, and at higher prices, to those who can afford to pay. Fish where the fish are. That someone owns a yacht is often a good -- though not infallible! -- sign that a person can afford to pay for your services. People going on yachts are looking for a good time, a vacation, something out of the ordinary; their purse strings will be looser than usual. By contrast, many grocery shoppers are dealing with day-to-day necessities. They tend to look for bargains.

• Find your customers.It's a point that bears repeating. Forget about your capital, forget about your business plan, forget about doing all those things that the business start-up books tell you are good things to do: you don't have a business until you've found your first sale, and then the next, and the next.... What I like about the yacht gourmand is that he just got out there, where his customers were and started knocking on doors. Not every business can make that model work. But for a lot of service businesses, it's a technique to remember and use.