This article provides an overview of the steps involved in issuing shares, once the negotiations with investors have been completed. To summarize, the process includes the following steps:

1) Subscription Agreement
– At a minimum: Set out number and kind of shares incoming shareholder is buying and price per share
– Ensure that purchaser qualifies for a prospectus exemption under applicable securities laws and has provided the appropriate declaration and paperwork
– Complexity varies by context of situation
– Sign and provide consideration (binding contract) – see here for more on contracts

2) Directors resolution
– Declare acceptance
– Authorize value of shares and issuance

3) Update corporate records (including share capitalization tables)

4) Create share certificate for shareholder containing the following adhering to form set out by board of directors
– Identifiers
– Transfer Restrictions

 

Make sure you’re serving up slices of the corporate pie the right way!

 

To grow beyond a certain point, most businesses must issue shares. However, the process is a minefield of regulations. The following aims to provide a step-by-step outline for what needs to be done to minimize the chance of procedural errors.

The first step in issuing shares is negotiating and signing a Subscription Agreement with each party (individual or other corporation) that wishes to become a shareholder in your corporation. At a minimum, the agreement should set out the number and class of shares the incoming shareholder is buying (the classes and rights attached thereto should be consistent with those set out in your Articles of Incorporation), and clearly set out the the price per share. The method and timing of payment should also be included. If payment has been made, the corporation should issue a receipt for payment.

If you are relying on an exemption from prospectus requirements, the applicable exemption must be clearly stated, and supporting documentation (eg. a shareholder declaration) must be attached as an exhibit to the subscription agreement. If there is a shareholders’ agreement, the subscription agreement will usually contain a provision requiring the shareholder to adopt the shareholders’ agreement as a condition to the share transfer.

The second step is to pass a Directors’ Resolution approving the transaction. In some corporations, the shareholders’ agreement may also require approval by the shareholders for the issuance of shares, so be sure to check the articles of incorporation, the shareholders’ agreement, and the by-laws for the voting and meeting requirements. The resolution should contain an approval of the terms and conditions of the subscription agreement, (attached as an exhibit to the resolution), as well as authorize the specific share issuance pursuant to the agreement, with details as to the names of the new shareholders, the quantity and price of the shares.

If the share issuance requires an amendment to the articles of incorporation, resolutions by both the directors and the shareholders is likely to be required for approval of the amendment. Approval should be obtained before the articles of amendment are filed.

The resolutions approving the share issuance should also approve an updated share capitalization table which reflects the share issuance, (attached as an exhibit to the resolution). The final step is to issue share certificates, if share certificates are to be issued.

Take-away:

  • Follow the proper procedures to issue shares
  • Make sure that all the proper approvals have been received before the shares are issued
  • Prepare an accurate and updated share capitalization table that is approved by the directors and kept in the Minute Books to avoid disputes about share ownership

Author: Sahil Kanaya

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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