What kind of shares should I issue?

What kinds of shares should I issue?

A “share” is a percentage of ownership in a corporation that entitles its owner to certain rights in that corporation. These rights can generally be categorized as “control rights” and “income rights”. Control rights refer to the shareholder’s ability to influence decisions of the corporation, whereas income rights refer to the shareholder’s ability to share in the corporation’s profit or loss. Many of our clients have found it helpful to consider the balancing of these rights prior to determining the specific classes of shares to issue.

Control Rights

Voting – The ability to influence decision-making such as electing directors of the corporation, approving by-laws and passing resolutions is the primary control feature of voting shares. Each corporation is required to have at least one class of shares with voting rights. Once this class is established, the corporation is free to issue shares that have limited or no voting rights.  Despite this flexibility, there are certain circumstances in which even non-voting shareholders are entitled to a statutory right to vote

Conversion – Conversion rights provide a shareholder with the opportunity to convert their existing shares to shares of another class, which may be desired for efficient tax planning purposes or to increase in their control of the corporation.

Income Rights

Dividends – Dividends are the primary method of distributing income from a corporation to shareholders.  The types of dividends available by holding a class of shares will likely determine the type of investors they will attract. Shares offering fixed dividends that are paid in priority to other dividends are appropriate for investors seeking a predictable return from the corporation, whereas shares eligible to share in the profits of the corporation are appropriate for investors willing to tie their potential financial returns to the corporation’s underlying performance.

Dissolution Rights – Upon a corporation’s dissolution there are different potential rights available to shareholders. Some classes of shares are only eligible to participate to fixed amounts, whereas others may be entitled to a larger return of capital. The corporation must also consider in what priority different classes of shares will be eligible to participate in the return of capital upon dissolution.

Redemption, Retraction & Conversion – A corporation may redeem (repurchase) certain classes of shares for a stated amount. Exercising this option provides shareholders with a fixed return on their investment, but may preclude them from future earnings. Similarly, certain classes of shares may include retraction rights, which provide shareholders with the right to demand that the corporation repurchase their shares for a fixed price. Having this option available provides flexibility to investors to realize their return on investment on demand. Conversion rights may also provide shareholders with the opportunity to alter their income rights in the corporation.

After considering their desired allocations of control and income rights, we often focus our discussion on the following classes of shares with our clients:

Common Shares – Common shares are the most typical type of shares issued by a corporation. They often come with voting rights, a dividend structure tied to the profits of the corporation and the opportunity to participate upon dissolution after higher-ranking stakeholders (e.g. creditors, preferred shareholders). Common shareholders are likely to value pre-emptive rights and may also benefit from the right of conversion. Common shares are most commonly issued to founders, employees and advisors.

Preferred Shares – Preferred shares are typically issued to investors seeking predictable returns from the corporation. They are often non-voting and provide fixed dividends and priority participation upon dissolution. Preferred shareholders are likely to value conversion and retraction rights, while resisting redemption rights. Preferred shares are most commonly issued to investors.

Special Shares – Special shares often include elements of both common and preferred shares. These “hybrid” shares offer the corporation the opportunity to issue shares with a unique mix of rights that are desirable in specific fundraising circumstances. Special shares are also often utilized as part of an effective tax-planning strategy to take advantage of tax-saving opportunities such as income splitting, capital gains exemptions and estate freezes.

Determining which class of shares to issue, and which rights to attribute to those shares, is an ongoing and fundamental consideration in the life of a corporation. We are always happy to work with our clients and their accounting advisors to determine the optimal mix of shares that meet their operational, fundraising and tax-planning needs.

Note: Special thanks to our LPP Candidate Donald P. Brown for his contributions to this post.

[1] CBCA: s. 163(3), s. 176, s. 183 (3), s. 188(4), s. 189(6), s. 210(2), s. 211 (3).

OBCA: s. 148, s. 170, s. 176 (3), s. 182(4), s. 184(6).

 

Dissecting the Medical Professional Corporation – Part 3

Physicians practicing in Ontario are permitted to incorporate their medical practices and operate as a medicine professional corporation (“MPC”). The law grants corporations certain powers that may be financially beneficial for physicians, such as the ability to hold assets and incur liabilities; as well as certain added responsibilities which may be somewhat onerous, such as additional paperwork and fees.  For these reasons, recent graduates, solo or small groups of practitioners and newly resident physicians may be interested in exploring this option. This series of blogs explores the following topics:

i) Part 1: Advantages of incorporating as an MPC

ii) Part 2: Pre-incorporation considerations

iii) Part 3: Key steps in MPC incorporation

KEY STEPS IN MPC INCORPORATION

Having reviewed the advantages and pre-incorporation considerations of an MPC, if a physician or a group of physicians should decide to incorporate, the key steps towards successfully incorporating an MPC listed below would apply.

  1. Assemble Advisers

Incorporating a medical practice can be a complex process. It is advisable that practitioners start by assembling a team of advisers including legal, accounting/tax and financial expertise.

  1. Incorporation

Once a lawyer has the following requisite information to file the application for incorporation, receiving the approved Articles of Incorporation from the government generally takes 1-2 days. The necessary information is as follows:

  1. Jurisdiction: MPCs must be incorporated as a provincial corporation under the Business Corporations Act (Ontario).
  2. Name: Naming an MPC requires adhering to strict rules. A corporate name must include the physician’s surname as it appears on College of Physicians and Surgeons of Ontario’s (“CPSO”) register. It may also include given names or initials and “Dr.”. If the prospective MPC has more than one physician member, its name only requires one of their respective names. The name must also include the words “Medicine Professional Corporation”.
  3. Issuing Shares: The type and number of shares being issued to the physician(s) and their family members is most often determined by coordinating with the physician’s accountant and lawyer. Three common classes of shares that are often issued include:
    1. Special Shares: Special shares have their values frozen upon issuance (e.g $1.00 per share) and are typically issued to family members. The MPC’s board of directors is then able to declare variable amounts of dividends (or no dividends at all) to the family member shareholders assuming they each hold a different class or series of shares. The board of directors may easily redeem the Special Shares at any time because their value was frozen at issuance.
    2. Common Shares: Common Shares are usually issued to the physician shareholder and are also the voting shares of the MPC.
    3. Preference Shares: Transferring an existing medical practice to an MPC can be accomplished on a tax-free basis by having the physician and MPC engage in a section 85(1) rollover agreement (as permitted under the ITA). This “rolls over” the practice from the physician to the MPC at its tax values. As part of the consideration for the rollover, the MPC issues Preference Shares to the physician at the fair market value of the practice as at the time of transfer.
  4. Restrictions: There are several nuances between a standard for-profit corporation and an MPC. For example, the Articles of an MPC must provide that “the corporation cannot carry on a business other than the practice of medicine and activities related to or ancillary to the practice of medicine”. Furthermore, restrictions should be put in place ensuring that only shareholders who are members of the CPSO can become officers or directors of the MPC.
  1. Certificate of Authorization

Once the MPC has been incorporated, a copy of the Articles can be used to establish a corporate bank account or change the name on the existing account. An application to the CPSO is also required and must be submitted along with a fee of $350.00 in order to obtain a Certificate of Authorization. Without this certificate, the corporation is not permitted to practice. It generally takes about two to three weeks to obtain a Certificate of Authorization from the CSPO, but the Certificate will be dated and take effect from the date CPSO received the completed application.

  1. Statutory Declaration

A statutory declaration executed by a director of the MPC must be completed not more than 15 days prior to submitting the application to CPSO. It certifies that the MPC is in compliance with applicable law, will only carry on the business of practicing medicine and that the information provided to CPSO is accurate and complete. This must be signed in the presence of a lawyer or notary public.

  1. Organize the Corporation

As with every corporation, the physician’s lawyer will prepare a comprehensive minute book that contains all the required corporate records such as by-laws, resolutions, certificates and officer/director/shareholder registers.

  1. Miscellaneous (if necessary):
  1. Rollover Agreement to Transfer Practice to the MPC: If transferring an existing practice to the MPC, the physician’s lawyer and accountant will prepare a Section 85(1) Rollover Agreement.
  2. Assign Lease: If the physician’s existing practice is operating as a tenant under a lease it may be necessary to get the landlord’s consent prior to assigning the lease to a new entity (i.e. the MPC). The lease provisions should be reviewed to ensure the appropriate assignment process is followed.
  3. Employment Agreement: It may be beneficial to prepare an employment agreement whereby the physician personally agrees that all services being provided to patients are being made on behalf of the MPC and the physician as trustee for the MPC holds payments received by the physician personally. It may be that if a physician receives these payments personally without an agreement the Canada Revenue Agency will tax the physician at personal income tax rates rather than at corporate tax rates in the MPC.
  4. Renewal of Certificate of Authorization: MPCs must apply for renewals of authorization on the anniversary of the certificate’s date of issue. Administrative filing charges will apply.

 We are always happy to discuss any of the steps enumerated above, and answer any questions you may have about establishing an MPC.

Note: Tax information was graciously provided by our friend Scott Vloet, Partner at Vloet & Kan LLP.

Dissecting the Medical Professional Corporation – Part 2

Physicians practicing in Ontario are permitted to incorporate their medical practices and operate as a medicine professional corporation (“MPC”). The law grants corporations certain powers that may be financially beneficial for physicians, such as the ability to hold assets and incur liabilities; as well as certain added responsibilities which may be somewhat onerous, such as additional paperwork and fees.  For these reasons, recent graduates, solo or small groups of practitioners and newly resident physicians may be interested in exploring this option. This series of blogs explores the following topics:

i) Part 1: Advantages of incorporating as an MPC

ii) Part 2: Pre-incorporation considerations

iii) Part 3: Key steps in MPC incorporation

PRE-INCORPORATION CONSIDERATIONS

Prior to incorporating as an MPC, there are several considerations that a physician and their professional advisers must consider. These considerations include:

  1. Transfer of Practice (if applicable)

After the MPC is incorporated, the physician will need to transfer their existing practice to the new entity. To avoid tax repercussions, assets and liabilities must be transferred to the MPC at fair market value (“FMV”). The medical practice (including goodwill etc.) could be sold to the MPC triggering a capital gain that could be used against any capital loss carry forwards. Another option is a tax-efficient option that would transfer the existing medical practice to an MPC on a tax-free basis using a Section 85 Rollover as permitted under the Income Tax Act (Canada) (“ITA”). This involves following the provisions of the ITA to transfer the medical practice to the MPC in exchange for non-voting shares and/or debt equal to the FMV of MPC. Any accumulation of goodwill could result in capital gains or additional legal and accounting fees. It is recommended that physicians considering transferring an existing practice to an incorporated entity consult a tax professional to avoid these additional costs.

  1. Structuring Retained Earnings and Tax Deferral

Careful planning will be required in order to optimize the approach the MPC will adopt in remunerating the physician via a mix of salary and/or dividends in order to keep the physician in a lower personal income tax bracket with the excess taxed in the MPC. This planning should also take into account minimizing the additional personal tax payable on earnings retained in the MPC that are paid out as income in the future.

  1. Structuring Income Splitting

An MPC is only permitted to issue voting shares to registered physicians. If the physician wishes to engage in income splitting, the MPC must issue non-voting shares to family members in order to allow them to receive dividends on those shares. The recipients of those dividends will then be taxed at their marginal personal income tax rate. Family members include the physician’s spouse, parents and adult children (this includes step-parents, step children and common law spouses). If the physician has minor children (under 18 years old) the physician must hold the shares for them in trust until they turn 18 at which time the shares will be transferred to that child directly.

  1. Multiple Practitioners (if applicable)

Where an MPC is in partnership with other MPCs or practitioners, it is important to note that the physician must share the SBD with these partners. Physicians and their advisers must consider this consequence prior to engaging in any such partnerships. When the MPC is in a partnership, the financial year end of the MPC must be December 31st.

  1. Additional Costs

Corporations must issue financial statements, file corporate income tax returns, prepare payroll-reporting forms and maintain up-to-date corporate governance records. These requirements involve additional annual costs and should be considered prior to incorporating an MPC.

  1. Sale of Corporation

Selling an unincorporated practice may result in substantial capital gains. However, an MPC that qualifies under the small business capital gains exemption rules would be exempt from capital gains up to the first $800,000 (or as adjusted upwards for inflation). The value of the lifetime capital gains exemption could be further multiplied by the number of family members who own shares. As such, ensuring that an MPC is structured in a manner to take advantage of the small business capital gains exemption rules can be extremely valuable.

We are always happy to discuss any of the considerations enumerated above, and answer any questions you may have about establishing an MPC.

Note: Tax information was graciously provided by our friend Scott Vloet, Partner at Vloet & Kan LLP.

Dissecting the Medical Professional Corporation – Part 1

Physicians practicing in Ontario are permitted to incorporate their medical practices and operate as a medicine professional corporation (“MPC”). The law grants corporations certain powers that may be financially beneficial for physicians, such as the ability to hold assets and incur liabilities; as well as certain added responsibilities which may be somewhat onerous, such as additional paperwork and fees.  For these reasons, recent graduates, solo or small groups of practitioners and newly resident physicians may be interested in exploring this option. This series of blogs explores the following topics:

i) Part 1: Advantages of incorporating as an MPC

ii) Part 2: Pre-incorporation considerations

iii) Part 3: Key steps in MPC incorporation

ADVANTAGES OF INCORPORATING AS AN MPC

Corporations are separate legal entities from their owners (i.e. shareholders). This separate legal status can offer shareholders certain financial benefits, such as: tax deferral, income splitting, deducting business expenses and limited personal liability.

  1. Tax Deferral

Physicians practicing in Ontario are probably subject to the highest marginal personal income tax rate. In contrast, on the first $500,000 of income, MPCs can take advantage of the Small Business Deduction (“SBD”) and only pay the lower corporate income tax rate (in Ontario 15.5%). When compared to the highest Ontario personal tax rate (49.53%) this represents a 34.03% tax deferral – i.e. for every $100,000 left in the company, the net tax savings will be $34,030. To enjoy these savings, the earnings must be left in the MPC. However, any earnings left in the MPC may be invested as they would be outside of the MPC, which is an effective approach for the physician to accumulate savings in a tax-efficient manner.

  1. Income Splitting

Income splitting is another approach to limiting a physician’s personal tax burden by allowing income from an MPC to be reallocated to eligible family members (i.e. spouse, parents, adult children and trusts for minor children). These recipients are able to take advantage of lower tax brackets and available credits and deductions to minimize overall tax obligations. Typically, this is achieved by family members receiving non-voting (preferred) shares and having dividends declared on those shares. Dividends are treated more favorably than other types of income. For instance, a family member with no income can receive non-eligible dividends of approximately $35,500 without paying federal income tax. It is recommended that a tax adviser be consulted regarding provincial income taxes, Ontario Health Surtax and Alternative Minimum Tax implications.

  1. Paying life insurance through your corporation

Paying life insurance where the MPC is the beneficiary allows the physician to pay the premiums with pre-personal tax dollars. Although the premiums are not deductible by the MPC (unless insurance is required by a financial institution as a condition for financing) there is a net cash benefit of paying the premiums with dollars that have not been subject to the high personal tax rates. The insurance proceeds are then paid out tax-free using the company’s capital dividend account.

  1. Limiting Personal Liability

While physicians are still liable for their professional work when providing services via an MPC and subject to discipline from their licensing body, there may be some modest liability advantages with respect to non-professional matters (e.g. loans, leases). In such non-professional business transactions, the corporation will only be liable to the extent of the corporation’s assets, not the shareholder’s personal assets, unless the transaction implicates some legal wrongdoing and exposes the shareholder to personal liability.

We are always happy to discuss any of the advantages enumerated above, and answer any questions you may have about establishing an MPC.

Note: Tax information was graciously provided by our friend Scott Vloet, Partner at Vloet & Kan LLP.

Client Profile: Fashion Takes Action

FTAlogo
Wakulat Dhirani LLP has had an ongoing relationship with Fashion Takes Action (FTA) since the organization’s inception in 2011. FTA is a not-for-profit corporation (NFP) focused on increasing environmental awareness in the fashion industry by encouraging the development of sustainable choices in all aspects of the fashion lifecycle. Although FTA is based in Canada, it looks for opportunities to foster positive change in fashion industry business practices across global supply chains.

The organization started by conducting research into issues surrounding industry labour practices, usage of toxic chemicals, water and energy, supply chain transparency and waste disposal. Funds for initial operations were raised in two galas organized by FTA’s eventual founders – Kelly Drennan and Sarah Peel Kear. These two events successfully showcased the potential for new sustainable fabrics by using them to create beautiful high-end garments.

In addition to providing pro-bono legal services, Robert Wakulat was asked to sit on FTA’s inaugural Board of Directors. Robert’s contributions to the Board included incorporating FTA, assisting with early-stage governance of the organization and guiding FTA’s transition to operate under the new Canada Not-for-Profit Corporations Act (CNCA). Moreover, the Board has consistently considered how to position FTA’s mission and activities to be considered a social enterprise by providing support to fashion students and emerging entrepreneurs. Participating on the Board provided Robert with an in-depth opportunity to develop his knowledge base of operating an NFP under the new CNCA and the unique challenges of operating in the sustainable fashion industry.

Incorporation Documents

At incorporation, the first documents you should find in your corporation’s Minute Book include:

  1. General Operating By-law (“By-Law No. 1”) – By-Law No. 1 is a list of general operating rules for the corporation.
  2. First Director(s) Resolution – The individual(s) who agreed to be the first director(s) on the Articles have a legal obligation to approve certain things right after incorporation including: the allocation of shares and confirming the consideration (i.e. amount) paid for those shares. Once the first director(s) has approved these matters they officially resign as the “first director(s)”.
  3. First Shareholders Meetings – Once the shares are allocated, the shareholders hold their first meeting (or unanimously sign resolutions in lieu of a meeting). A shareholder (owner of a company) does not have to be a director and a director does not have to be a shareholder.  Some of the items approved at the first shareholders meeting are:
    • Establishing the number of directors
    • Accepting the resignation of the first director(s) and voting on the new director(s)
    • Confirming By-Law No. 1.
  4. Consent to Act – Directors must consent to act as directors and this consent must be signed and inserted into the Minute Book.  This ensures that a director is not elected to the Board and his or her name is not put on the public record without his or her consent.
  5. Exemption from Appointment of an Auditor – Most privately held corporations are not required to have audited books. However, the statute governing a Canadian or Ontario corporation will require that the shareholders approve an audit exemption.
  6. Registers – Registers must be prepared for the corporation listing (i) the addresses and dates of appointment and resignation for directors and officers, and (ii) all of the individuals or corporate entities that hold shares in the corporation, the number of shares they own and the date they received those shares. It also records when shares are returned to the company or transferred to other individuals or corporate entities. Each shareholder will also have an individual ledger showing the date upon which shares were received and how many shares were allotted.
  7. Government Forms – All corporations must file returns with the government under which they are incorporated regarding changes to the status or personal information of the directors and officers.
  8. Share Certificates – Every shareholder has a right to a share certificate. This certificate evidences ownership and should be a part of the Minute Book.

Annual Corporate Governance

What is Annual Corporate Governance?

All corporations incorporated federally and provincially in Ontario are required by law to hold annual meetings of shareholders or to have annual resolutions signed by all of the shareholders in lieu of holding an annual meeting. Both the annual meeting and the annual resolutions are used to document certain critical decisions affecting the corporation both in the year that just past, and the year to come. Correctly identifying, preparing, passing, documenting and filing these decisions make up a corporation’s Annual Corporate Governance.

How is Annual Corporate Governance Helpful?

In addition to the legal obligation, engaging in appropriate Annual Corporate Governance is helpful in two ways:

  1. Liability Management – Annual Corporate Governance helps ensure that the responsibility and authority to manage the corporation (along with the associated liability) is clearly understood. This is of particular concern to directors and officers for whom liability insurance should be purchased.
  2. Changes in Structure (Investment, New Shareholders) / Major Transactions – When a corporation finds itself in a position to raise capital through investment, or is taking on new shareholders for any purpose, one of the first inquiries a potential investor or shareholder will make it to review the Minute Book (which includes all of the Annual Corporate Governance) to get a better understanding of your corporation’s governance structure. Corporations that have not maintained complete records generally find it very time consuming (and costly) to try and update and fully rectify their Minute Book at the time of investment. Furthermore, holding incomplete records can risk alienating the potential investor or shareholder from participating in the transaction. This can also be the case when a corporation is entering into other major transactions (including financing), as counterparties often wish to ensure that the individuals they are dealing with have the appropriate authority to bind the corporation to a significant commitment.

What decisions need to be documented?

Annual Corporate Governance documents involving several key decisions, including:

  • Financial Statements – Approval by the directors and submission to the shareholders
  • Approval of dividends, management salaries or bonuses
  • Directors – Resignations during the year, elections for the next year and consents to act as directors
  • Officers – Resignations during the year and appointments for the next year
  • The issuance and transfer of any shares in the corporation
  • Appointing Auditors & Accountants for the following year
  • Exemption from statutory audit requirements
  • Address Changes – Changes in the registered addresses of the corporation, shareholders, directors or officers, all of which require filing notice with the government.

What are the potential consequences of not maintaining Annual Corporate Governance?

In addition to the concerns with Liability Management, Changes in Structure and Major Transactions discussed above, not maintaining Annual Corporate Governance exposes a corporation to the following:

  • Substantial fines and penalties for breaching the Business Corporations Act (Ontario) or the Canada Business Corporations Act levied against the corporation and directors
  • Reassessment of income tax position by the Canada Revenue Agency
  • Significant (and costly) room for contention regarding decisions & accounting practices during a shareholder dispute
  • Missing critical communication from the government

Can I prepare the Annual Corporate Governance myself?

We are always happy to work with our clients to craft a bespoke solution to their Annual Corporate Governance needs. Smaller start-up clients often wish to draft initial resolutions themselves and have us provide a simple review, whereas more mature businesses often appreciate a comprehensive overview conversation prior to having us prepare their Annual Corporate Governance materials.

Minute Book

What is a “Minute Book” and why should I care?

After completing the incorporation process, your lawyer should provide you with a corporate minute book which becomes the permanent repository of your corporation’s key documents (the “Minute Book”). The Minute Book must be kept at the corporation’s registered office or at another place in Canada as designated by the corporation’s board of directors (the “Board”).

Your Minute Book should include Incorporation Documents and Annual Corporate Governance along with appropriately documenting and reflecting any decisions made by the Board or shareholders.

There are at least three good reasons to maintain your Minute Book:

  1. It’s the Law: Both federally and provincially incorporated companies are required to maintain corporate records that meet the statutory requirements of the Canadian Business Corporations Act (section 20) and Ontario Business Corporations Act (section 140) respectively.Although rare, it is possible statutory penalties may be assessed for failure to attend to these matters.
  2. Equity Transactions: An investor or purchaser of your corporation will likely want legal opinions relating to various corporate governance matters. Having an up-to-date Minute Book will provide for a smoother (and likely less expensive) transaction process. Even if you wish to transfer the corporation to a family member, you will want to ensure that the transfer is appropriately documented in order to avoid costly remediation in the future.
  3. Third Party Review: Various other parties may also want or need to examine your Minute Book from time to time to verify corporate authority or structure including:
  • Professional service providers (e.g. lawyers, accountants) prior to being retained
  • Lenders prior to issuing a loan
  • Real estate agents prior to completing commercial real estate transactions
  • The Canada Revenue Agency (as part of a tax audit)
  • Other federal/provincial taxation authorities.

As you can imagine, time is usually of the essence when a Minute Book is requested for review and remediating an out-of-date Minute Book can increase costs.  Setting up a Minute Book from incorporation and regularly maintaining it will save money and aggravation.

Unanimous Shareholder Agreements

What is a Unanimous Shareholder Agreement?

Corporate statutes in Canada[1] provide that a corporation’s default position is to be managed entirely by its directors and officers. This situation can be reversed through the use of a unanimous shareholder agreement (“USA”), which restricts the power of the directors to manage the corporation and instead transfers additional authority to the shareholders. All of the shareholders must agree that they desire to enter into a USA.

Why is a USA useful?

A USA is particularly useful for a closely held start-up company to establish the rules for governing and managing the corporation. The USA will provide mechanisms for resolving deadlocks and govern any transfer of shares. Clarifying expectations between shareholders at the initial stages of organizing the company can be the best way for the corporation to avoid drawn out and expensive disputes in the future.

What are the drawbacks?

Shareholders may become subject to the liabilities normally assigned to directors and officers to the extent that the USA removes powers and responsibilities from the directors and gives it to the shareholders. Protection from liability for shareholders is an important factor in deciding to incorporate a business in the first place. Consequently, any loss of that protection should be carefully weighed.

Typical USA Contents

USAs typically address a number of key measures that are designed to ensure a fair outcome for all parties involved during the course of the corporation’s existence:

  1. Dispute Resolution: Consideration can be given as to how deadlocks amongst shareholders can be resolved. The dispute resolution process may be limited to mediation or binding arbitration, which can be a less expensive alternative than seeking restitution through the courts. Shareholders may also wish to consider whether one of them should have a tiebreaking vote or a veto over certain actions.
  1. Unanimous Shareholder Approval: In the case where one shareholder owns the majority of shares, it is important to consider whether any issues exist that should not be decided by a simple majority vote. A USA can set out a class of material decisions which require supra-majority and/or unanimous shareholder approval to ensure that the majority stakeholder is not able to make unilateral decisions without first obtaining the consent of the other stakeholders involved.
  1. Share Transfer: A USA typically contains a primary rule that no shares can be transferred without the receiver of the shares becoming a party to the USA. This primary rule can be supplemented with a number of additional mechanisms to promote liquidity of the shares:
  • Right of First Refusal: A shareholder who receives a bona fide offer from a third party to purchase his or her shares must first allow the existing shareholders the right to match such offer prior to selling to any third party. This mechanism allows the existing shareholders the option to prevent a third party purchaser from becoming a shareholder and exercising control over the corporation in the future.
  • Buy/Sell or “Shot Gun” Provision: This provision allows one shareholder to offer the other shareholders a price and establish the terms under which he or she is prepared to either purchase the other shareholder’s interests or sell his or her interest to the other shareholders. It is then up to the other shareholders to decide whether they wish to either buy the offered shares or sell their own shares on the same terms and conditions presented. This provision can be very useful in the event of a shareholder dispute where the relationship between the shareholders has broken down and one party wishes to exit.
  • “Piggyback” or “Tag-along” Provision. If a shareholder is able to sell shares to a third-party, a piggyback or tag-along allows the non-selling shareholders to include their shares in the agreement with the third-party buyer. In other words, a shareholder could tag along with the seller and exit the corporation.
  • “Drag-along” Provision. If a majority shareholder decides to sell its shares it can require the minority shareholders to sell their shares to the buyer as well. This allows a majority shareholder to exit the corporation without a minority shareholder blocking the sale.
  1. Funding Considerations: A corporation requires access to capital both upon incorporation and during operation. A USA can prescribe how such capital can be obtained and ensure that each shareholder contributes the requisite amount in conjunction with his or her interest in the corporation or face a penalty for failure to do so. In the case of debt financing, a USA can prescribe how guarantees are to be signed and provide for the sharing of liability among shareholders.

There are several other matters that a USA can address depending on the needs of an organization. We are always happy to discuss how a USA may be of value to your corporation, and answer any question you may have.

Additional Reading:

Canada Business Corporations Act: Unanimous Shareholder Agreements

Chapter 8 – Organizing Your Corporation: The Shareholders

[1] In particular, the Business Corporations Act (Ontario) and the Canada Business Corporations Act

The Seven Key Steps Towards Incorporation

Step 1 – Decide on whether to incorporate Federally or Provincially

Will your operations take place only in Ontario, across the country or internationally?

Step 2 – Decide on your company’s name

Every company needs a name. If you want a unique name, we will conduct a name search to ensure that someone else hasn’t registered your proposed name. If you don’t want a unique name, your company can be registered and known as a numbered company (e.g. 100001 Canada Ltd. or Ontario 101202 Ltd.).

Your name must include one of the following: Limited, Ltd., Incorporation, Inc., Corporation or Corp.

You may also consider registering a trademark for your company name at this point.

Step 3 – Decide on who your directors will be

We will need the name, address and citizenship of each of your anticipated directors. For both Federal and Ontario corporations at least 25% of directors must be resident Canadians, but if you have less than four directors one of them has to be a resident Canadian.

Step 4 – Meet with your accountant

At this point we strongly suggest meeting with an accountant to discuss the following issues:

1)      Shareholdings – You should discuss the tax and practical implications of who the shareholders will be, what types of shares will be issued (common, preferred, voting, non-voting, convertible etc.), how many shares will be issued and what price the shares will be issued for.

2)      Year-end Date – What date makes sense in the life cycle of your business and the availability of your accountant?

3)      Financial Distributions – How are the various stakeholders in the proposed business (you, your business partner, your significant other) going to be compensated by the business (salaries? Dividends? Options?)

We are happy to introduce you to an accountant with experience relevant to your business.

Step 5 – Confirm the following with us

Now that you have met with your accountant, we should be able to easily identify the following stakeholders in your company:

1)      The Shareholders – Their names, addresses and the number and type of shares they are to be issued (at this stage you will also want to consider whether a Unanimous Shareholder Agreement is required

2)      The Officers – Who the President and Secretary will be, and any other anticipated or required officers

We also request the following information:

1)      Signing Authority – Who will have the authority to execute documents on behalf of the corporation? Will there be situations when multiple signatories are required (usually when transactions exceed a certain financial threshold)?

2)      Registered Head Office Address – A residential address is fine

3)      Accountant / Auditor – Name and address of the company’s accountant/auditor

And advise that you consider:

1)      Pre-incorporation Intellectual Property – Prepare an inventory of all the IP owned by the corporation’s stakeholders. These assets need to be properly assigned to the corporation.

Step 6 – Incorporating and organizing the company

At this step we are now ready to incorporate your company. We will conduct the appropriate name searches, register the company with the appropriate governing authority, and prepare a comprehensive minute book that contains all the required corporate documents (by-laws, resolutions, certificates, registers).

Once the minute book is ready, we will schedule a meeting with you where we can walk you through our minute book, and have you execute all of the required documents.

Step 7 – Start your business

Now that your corporation has been organized correctly you can feel free to move forward with common considerations including:

1)      Registering for a Canada Business Number

2)      Registering for a GST/HST Number

3)      Setting up a bank account

We are always happy to discuss any of the steps enumerated above, and answer any questions you may have about the incorporation process.