Shareholders Rights

Shareholders’ Rights Shareholder control • De jure control – 50% +1 shares – can secure an ordinary resolution alone (majority shareholder) • De facto control – in public companies in Canada, only votes actually cast count towards a resolution; many shareholders do not actually vote, so a company can be a controlling shareholder with only ~20% of the votes, even though they are not a majority • Negative control – can be de jure or de facto – power to block a resolution from passing – may be 34% in the case of a special resolution • Always count how many votes are cast, do not assume 100% Shares and voting • Share is not defined in BCA – unit of capital • voting rights can allow shareholders to elect directors – ensures directors do not act in their own self interest • voting rights are key distinction between creditors and shareholders • unless articles say otherwise, 1 share has 1 vote • at least one class must have voting rights • preferred (non-voting) shares often have preferential dividend, priority on insolvency, but no voting rights • within a class of shares – rights are the same but # of rights depend on amount of shares • Shareholders are entitled to vote on a small number of items that may be considered management issues o Because they are fundamental changes, the shareholders may vote on: § Amalgamation § Sale (or lease or exchange) of all or substantially all of the undertaking (the assets of the corp) § Continuing into another jurisdiction § Changes to the corp’s Articles • Owners of non-voting share may vote on a very small number of items (generally info from directors/mgmt) o Each year they are entitled to vote in favour of, or against, waiving the: o obligation of directors to produce financial statements (usually small closely-held companies) o requirement to have financial statements prepared to the form of GAAP o appointment of an auditor • Also, owners of shares of any class (voting or not) may vote (within their class) for or against the creation of a new class of shares that could interfere with that class’ special rights (eg. priority to receive dividends s 61) o New preferential-treatment class of shares can be made for new angel investor, and allowed by existing shareholders because they know the investment is going to make the corp more valuable • Any person can ask a company for a list of shareholders and their last known addresses (s 49 BCA) Jacobsen v United Canso Oil & Gas [1980] F: Company incorporated under Alberta, old federal and new federal legislation • Issue with respect to rights of shareholders • Company articles said that no matter how many shares are owned, maximum vote is 1000 shares • Company had only one class of shares • Plaintiff Jacobsen brings claim asking whether this provision contravenes any of those 3 acts A: Court looks at 3 different pieces of legislation, and different rules on what applies with different classes of shares • BCA 59(3) – if only one class – that class all has same voting rights • article violates each of the three acts – Jacobsen will get to vote with all of his shares (1000 share max invalid) • whatever number of shares you have, that’s the number of rights you have – if you put a cap on this it would be the same as putting a cap on $ of dividends you receive o if clauses in articles contrary to act, particularly with respect to shareholders rights, act prevails o if company has different classes of shares, then you can add different details Other rights that may be attached to shares Rights (and restrictions) must be included in the Articles, except for voting: if the Articles are silent on voting, we presume that voting is a right attached to all shares 1. Pre-emptive rights • 2. 3. 4. 5. Directors must offer existing shareholders opportunity to buy more shares, in proportion to current holdings (the number that would allow them to keep the same overall % of the company) • eg. on a takeover bid, directors may be tempted to issue more shares to defeat the bid • Prevents dilution – e.g. can be found on page 581, final paragraph Dividends (company pays $ to shareholders, at a fixed amount per share) • Shares that receive dividends are called “participating” • Articles must say whether Dividends are: • declared at the directors’ discretion, or according to a set schedule (annually/quarterly, and/or fixed rate) • declared on one class independently of others, or on all classes • paid to one class in priority over another class • cumulative (catch up) or non cumulative (skip over if not given one year – no double dividends next year) Priority Dissolution • When the company dissolves, who gets their $ first? In what order do classes receive their $ back, if there is anything left? The Articles must say, otherwise all shares rank equally Conversion (converting shares to a different kind e.g. non-voting to voting eg. Pente) Redemption / Retraction • Redemption = corp. can demand to buy back shares from you • Retraction = shareholder can demand the corp. buy back shares from shareholder • Retraction may put a corp. out of business if cash is not available Shareholder meetings • It is the Directors who call (or “convene”) the meetings of shareholders • Two types of shareholder meetings 1. Annual = AGM • Rules are set out in s 182 BCA • Elect Directors • Appoint or waive the appointment of auditors • Present financial statements and auditor’s report (if any) to the shareholders • Other business 2. Special (s 167) • Deals with business that arises between annual meetings • eg. Directors are contemplating a fundamental change that requires shareholder approval Definitions related to shareholders’ meetings: • Consent resolution – actual meeting need not take place if: • Ordinary resolution – special majority consented to in writing • Any other – unanimous resolution in writing • S 180 – deemed to be a proceeding at a meeting of those shareholders • Unanimous resolution – resolution consented to in writing by all shareholders entitled to vote on it Eisenberg v Bank of NS [1965] F: Bank gave loan to George Rideout for secured on assets of his company Rideout Real Estate • George was director/president and sole shareholder of the company I: can a unanimous resolution happen if there is only 1 shareholder? C: Court says yes you can A: Documents delivered to bank by employee; supervisor was familiar with people and recognized signatures • Whether an actual formal, duly convened meeting took place or not does not matter – it is the signature on the page (consent resolution) • it is true that no meeting was ever held to approve; all shareholders were mere nominees of George – so even if it did happen the result is a foregone conclusion; if he signed its all good Basic process for one person trying to incorporate The Record Book would show the Company’s Constitution: 1. NOA: • Class A Shares, No Maximum Number of Shares, No Par Value, No Special R&R 2. Articles are silent • Perhaps the incorporator chose the default Table 1 Articles 3. Incorporation Agreement • Incorporator agrees to buy 1 share for $1.00 4. The Central Securities Register would state: • Certificate number • Date of issue (or transfer) • Shareholder’s Full name and address • # of shares • Allotment (or transferred from whom?) • Issue price per share • Consideration received (money or other) 5. There would also be an Incorporator's Resolution appointing himself as Director and waiving the requirement of an auditor, and a Director’s Resolution issuing the shares to himself Block takeover bid by making company less attractive: poison pill • Flip-in: permits existing target shareholders (not the acquirer) to purchase additional shares at a discount o This right must already be stated in the Articles o This is attractive to existing shareholders (if they have the means to purchase more shares) because they get to buy cheaper shares of a lucrative company (can assume lucrative because acquirer wants it) o This could increase the existing shareholders’ % ownership o From acquirer’s point of view, the shares become diluted, and the acquirer’s bid becomes more expensive because they have make offers on more shares and they cannot decrease their offer price (because no one would accept a lower price than they had previously been offered) o Many reasons for hostile takeover – patents, property, change in management, etc. • Are PPs good/bad? It depends on your point of view. It is arguable whether: 1. PP are not good for shareholders, because it allows the current Directors to stay in power, and perhaps it is time that those Directors are replaced; or 2. In PP situation, the Directors are “sabotaging” corp’s value; or 3. PP are good for everyone involved: target shareholders receive more shares at a discounted price, the acquirer (if they eventually succeed) gets a corp with more capital, and shareholders who did not tender (buy shares) go along for the ride • What can the acquirer do? o acquirer could offer a “flip out” aka “flip over” which permits shareholders of the target to buy the acquirer’s shares, after the takeover, at a better rate than any one else o Acquirers hope that this will be attractive to shareholders of target, so they will happily sell to acquirer o This is something that has to be in the Acquirer’s Articles ahead of time, and the triggering event is the successful takeover bid Wall v London and Northern Assets Corp [1898] F: Majority wants to make resolution to sell assets of the company • Wall does not want this to happen, but is in a tiny minority o Voiced his opinion for a while at the meeting – demanded a poll but not enough people supported it o Wall is fighting this to the bone – Baron: almost a situation where minority is tyrannizing the majority A: Procedures have been followed – majority cannot be tyrannical, should listen to the minority for a reasonable time, but are not bound to listen until everybody is tired of talking and has sat down o As long as majority is acting in a bona fide manner, there comes a time when the minority must stop, and majority rule is what goes forward Shareholder meetings: • Normally, Directors set the agenda for shareholder meetings o However, a shareholder may make a proposal to add items to the agenda of a shareholder meeting o If criteria are met, the corp must allow the submitter to present the proposal at the shareholder meeting o S 188 – requirements for proposals • Shareholders may requisition a meeting for the purpose of transacting any business that may be transacted at a general meeting (directors calling a meeting = calling, convening; shareholders = requisitioning) s 167 BCA Varity Corp v Jesuit Father of Upper Canada [1987] F: Varity making application to court that they should not be compelled to include items in proposal for AGM • Proposal was for Varity to end its investments in South Africa • Note: BCA s.189(5)(d,e) = different from the statute in the case; If this was today in a BC company, shareholders may have had more success (Baron) A: Court does not say it is a bad proposal, the court is just saying the company does not have to print/mail it out/put it on their agenda (that Act allowed refusal if general purpose was to promote political/social/etc. causes) C: Varity has the power to refuse to circulate the proposal Airline Industry Revitalization Co v Air Canada [1999] F: 2 American companies are trying to use a subsidiary to buyout Air Canada and merge them with another airline • To this end, they want to change articles of the company, so they submit requisition for a shareholder meeting • But, the day before, Air Canada declared that they already have a meeting on record for January – so they claim they are not required to respond to the requisition for a meeting in November I: is Air Canada required to hold a special meeting? Should the court compel them to? A: The meeting on record does not fit in to the criteria for an exemption • The record date needs there to be a reasonable chance of the matter being heard there o The requisition was done properly according to the act o This is not a situation of a date already chosen to hear the matter – the ‘record date’ was completely unrelated and should not fit into the exemption o Record date = meeting already fixed prior to receipt of requisition but at which the requisitioners’ business may nonetheless be considered • DIY – instead of going to court here: o Government, by enacting legislation, has given you a procedure o Directors should have called a meeting – so instead of going to court, shareholders should have done ‘step 2’ when directors did not act appropriately (requisitioners call a meeting themselves) s 167(8) o “where there is a corporate remedy still open to a shareholder under the legislative scheme […] the court should be reluctant to step into the fray and impose its own solution The Audit Committee • s 223 – this Division does not apply to a company unless it is a public company (or a financial institution) • For private companies, the shareholders may waive the requirement of an auditor o But for publics/banks, must have auditor • Remember how the Directors wisely decided to create a special independent committee in Pente? o Here, the Audit Committee is an example of how Directors of a public company must set up a committee o The purpose is to review the company’s financial statements before the Directors sign them and present them to the shareholders (at the AGM)