Types of Shares That can be Issued in a Corporation

Types of Shares in a Corporation

To appreciate the different types of shareholders’ agreements that can be drawn, one must understand the different types of shares that can be issued in a corporation.

Shareholders may own common voting shares, non-voting shares, or preferred shares, each conferring a different level of power over how a company is run or dictating how dividends are distributed. Below you will find a list of different share types that are commonly issued in a corporation.

Voting Shares/Common Shares

Voting shares are most typically common shares that give the person who acquired them one vote per share they own. If you own these shares, you are a partial owner of the company. Issuing these types of shares generates a larger potential investor pool, gives investors more control over how the company is run, and inhibits the possibility for company owners to take advantage of the company’s resources. While this type of share entitles its holders to a number of rights, it does have one major drawback: common stock shareholders are the last in line to receive the company’s dividend payments–after preferred shareholders have been paid. It also means that if the company goes bankrupt, the common stock shareholders receive whatever assets are left over only after all creditors, bondholders, and preferred shareholders have been paid in full.

Non-Voting Shares

Non-voting shares are common shares that do not give the person who has acquired it the right to vote on issues regarding the management and operations of the company, while conferring the benefits of the distribution of profits. While this may reduce the potential investor pool, issuing non-voting shares preserves management and initial investors’ control of the company and its revenue-generating opportunities. Non-voting shareholders can protect the value of their shares by having provisions in the shareholders agreement regarding a hostile takeover of the company by the shareholders and/or Board of Directors.

Preferred shares

Preferred shareholders always receive their dividends first, and, in the event the company goes bankrupt, preferred shareholders are paid before common stockholders. Like common stock, preferred shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common shareholders. Preferred shareholders are normally issued to investors.

Consideration shares

Consideration shares are issued in consideration of its non-monetary value, typically to purchase non-cash tangible and intangible assets, such as property, land, buildings, vehicles, skilled workers, top-level professionals etc. For example, if a company wants to purchase land, it can acquire it in exchange of company stock instead of cash. While this is a common practice, it is often difficult to establish valuation. The general rule is to record these transactions on the basis of fair market value of the non-cash asset acquired or the fair market value of the stock issued, whichever can be more reliably determined.

A lawyer at Kalfa Law Firm is prepared to draw up a shareholders agreement that protects shareholders’ interests while ensuring the viability and durability of your corporation. Understanding how to manipulate various types of shares and their differing attributes are only a part of what you need to consider. Contact a lawyer at Kalfa Law Firm today to secure qualified and experienced legal counsel for your shareholders agreement.

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F.A.Q’s:

What are voting shares?

Voting shares are a category of common shares that give the person who acquired them one vote per share they own. If you own these shares, you are partial owner of the company.

What rights are conferred on those who hold voting shares?

If you own these shares, you are partial owner of the company. Issuing these types of shares generates a larger potential investor pool, gives investors more control over how the company is run, and inhibits the possibility for company owners to take advantage of the company’s resources.

What are the disadvantages to holding voting shares?

While this type of share entitles its holders to a number of rights, it does have one major drawback: common stock shareholders are the last in line to receive the company’s dividend payments--after preferred shareholders have been paid. It also means that if the company goes bankrupt, the common stock shareholders receive whatever assets are left over only after all creditors, bondholders, and preferred shareholders have been paid in full.

What are non-voting shares? Why would a corporation prefer to issue non-voting shares?

Non-voting shares are common shares that do not give the person who has acquired the right to vote on issues regarding the management and operations of the company. While this may reduce the potential investor pool, issuing non-voting shares preserves management and initial investors’ control of the company and its revenue-generating opportunities.

What are preferred shares and what is the advantage of having these over voting shares?

Preferred shares have priority in respect of distribution. Preferred shareholders will receive a distribution of profits prior to the distribution to the common shareholders.

What are consideration shares and how can I determine their value?

Consideration shares are issued in consideration of its non-monetary value, typically to purchase non-cash tangible and intangible assets, such as property, land, buildings, vehicles, skilled workers, top-level professionals etc. While it can be difficult to determine the value of consideration shares, the general rule is to record these transactions on the basis of fair market value of the non-cash asset acquired or the fair market value of the stock issued, whichever can be more reliably determined.

-Shira Kalfa, BA, JD, Partner and Founder

Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.

The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.