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 exists only on 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, securities legislation often 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 agreement may vary somewhat, 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 run a successful business, let alone have to deal with unhappy shareholders who 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, 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 difficult 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 remain eligible for, 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.  Please contact us if you are interested in this service.