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Corporate Governance Basics (Part 1): The Shareholders

Overview

Toronto corporate lawyer, Antonio DiMinno, of DiMinno Rizzi Lawyers, gives entrepreneurs and business owners a basic overview of the shareholders of a company and their legal & business functions.

Who are the Shareholders of a Corporation?

Simply stated, the shareholders are the owners of the business. This ownership is expressed through owning shares of the company. A person becomes a shareholder in one of two ways. A person may be given shares at the first meetings of directors & shareholders soon after a company is incorporated. Alternatively, a person may acquire shares in the company later on, in exchange for money, property, or past services given to the corporation. There are a few different types of shares, each bringing with them their own rights. The most usual type of share is called a common share. We'll discuss those bellow.

What are the Shareholders' Rights & Powers?

Shareholders holding common shares have five main rights:

  1. the right to elect or remove directors from office;
  2. the right to receive financial statements by the company’s accountant. These statements tell the shareholders about the financial health of the company they are invested in;
  3. the right to appoint an auditor. The auditor acts as the shareholders’ watchdog, ensuring that the books of the company are true and accurate. Appointing an auditor is more common in mid to large companies;
  4. the right to receive dividends if the company issues any; and
  5. the right to receive cash if the company is dissolved or sold.

 

How do Shareholders Exercise Their Rights & Powers?

Shareholders exercise their rights by voting at “annual shareholder meetings”, which generally occur the same time every year.

Meetings to deal with any other matters are called “special meetings”. Special meetings may deal with matters like:

  • certain changes to the articles of incorporation;
  • the corporation’s exit from one jurisdiction and entry into another (also known as a “continuance”);
  • the sale, lease, or exchange of all or substantially all of the property of the corporation; and
  • an amalgamation, or merger, with another company

Shareholders act by passing “shareholder resolutions” either at a meeting of the shareholders or by written resolution signed by all of the directors. In practice, shareholders of small businesses typically sign written resolutions instead of having meetings. These resolutions deal with all the matters that would be dealt with at a meeting and have the same binding force as a meeting. Resolutions are prepared by the company’s business lawyer, who stores and updates them in the company’s “minute book.”

As is the case with most “solopreneurs” or professionals, a corporation may only have one shareholder, who is also the director and officer of the company. On the flip side, a company may have thousands of shareholders if it is a publicly traded company, such as Bell Canada. A corporation can also be a shareholder of another corporation. Where there is more than more shareholder, their relationship is usually set out in a shareholders agreement.

How an Ontario Business Lawyer Can Help

When starting a business or dealing with corporate governance, a good first step is to speak to a business lawyer and a corporate accountant.

Extreme care must be taken when drafting resolutions to ensure that shareholders have the legal authority to act and vote. Many government departments, such as Canada Revenue Agency, Employer Health Tax, Workplace Safety and Insurance, and others can and do audit corporations.  All typically require a review of the minute book, which they expect will be up to date. 

A good business lawyer will work closely with a corporation’s accountant to ensure that all of the corporation’s ducks are in a row.

 

Antonio DiMinno

647-205-9128

antonio@drlawyers.ca

Contact us today for a free strategy session!

 

Disclaimer: All number figures are approximate only and may be subject to change. Like all material on this website, this is not financial, legal, or tax advice. Contact a professional for your specific situation. 

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