Corporations: Formation, Structure, Finance, and Dissolution in Canada

Share Classes

To manage control and financial incentives, corporations divide ownership into different classes of shares:

1. Common Shares: These typically grant the holder the right to vote at shareholder meetings, receive dividends (if declared), and receive remaining property upon the corporation's dissolution.
2. Preferred Shares: These often carry no voting rights but provide a "preference" regarding dividends. This means preferred shareholders must be paid their dividends before any dividends can be distributed to common shareholders.

Unanimous Shareholder Agreements (USA)

In closely held corporations (those with few shareholders and shares not traded on a public market), a Unanimous Shareholder Agreement (USA) is a vital tool. A USA can restrict the sale of shares to outsiders, set valuation methods, or require unanimous consent for major corporate changes.

Corporate Finance and Funding

A corporation requires capital to operate, grow, and purchase assets. This funding generally comes from three primary sources:

1. Sales and Services: Revenue generated from the company's core operations.
2. Debt (Borrowing): Corporations can borrow from single creditors (like bank loans for purchasing equipment) or multiple creditors through instruments like debentures and bonds. Bondholders are considered creditors and do not have voting rights.
3. Equity (Shareholders): Funds are raised by selling shares. When a company is first incorporated, shareholders provide initial capital; when buying an existing business, shares are purchased at a value often determined by an accountant.

Dividends

Dividends are a distribution of profits to shareholders. It is important to note that shareholders have no inherent right to dividends; they only receive them if the corporation declares them.

Legal Note: Oppression Actions Minority shareholders may sue for "oppression" if they had a reasonable expectation of a regular income flow through dividends and that flow is suddenly stopped.

Dissolution of a Corporation

While a corporation can theoretically exist forever—such as the Hudson's Bay Company, which has existed since 1670—it may eventually undergo dissolution.

Dissolution can be:

• Voluntary: Decided internally by the shareholders/directors.
• Involuntary: Induced externally, such as through bankruptcy or the corporation's failure to file annual returns.

Selling Shares vs. Selling Assets

When a business is being exited, a critical legal distinction exists between selling the shares of the corporation and selling the corporation's assets:

• Selling Shares: The buyer acquires the entire legal entity, including all its liabilities and history.
• Selling Assets: The buyer acquires specific items (e.g., machinery, real estate, or intellectual property). In this scenario, creditors are entitled to be paid from the corporate assets before any remaining funds are distributed to shareholders.