A common question that entrepreneurs have when incorporating is how to structure their business. The options for structuring a business can be overwhelming, especially when it comes to determining the number of share classes to include in your corporation. Generally, founders will initially want to issue shares to themselves, their investors, and certain employees.
This share issuances will typically be governed by a Shareholders’ Agreement and, if necessary, an Employee Stock Option Plan (ESOP).
Why employees, you ask?
Offering employees (or contractors) an option to purchase shares from the start of the company incentivizes employees to grow the company as if it’s theirs. It also works as a retention tool - encouraging the employee to stay with the company long-term.
What kind of shares should you issue to your employees?
Businesses usually issue non-voting shares to its employees. Issuing shares proves to drive the performance of employees, but founders still want to maintain control over critical decision-making for the business.
Are non-voting shares really non-voting?
Although called ‘non-voting shares’, there are certain situations where the legislation under which the corporation was incorporated will give non-voting shareholders the right to vote.
For example, Sections 170(1) and (3) of the Ontario Business Corporations Act (OBCA) states that non-voting shareholders may vote on resolutions to amend the corporation’s articles of incorporation if the amendment is related to:
- Changing the maximum number of authorized shares of the non-voting class;
- Changing the rights, privileges, restrictions or conditions attached to the shares of the non-voting class, or equal to or greater than the non-voting shares class;
- Changing restrictions related to the issue, transfer or ownership of the shares of the non-voting class;
- Increasing the maximum number of authorized shares of a class having rights or privileges equal to or greater than the non-voting shares class;
- Exchanging, re-classifying or cancelling shares in the non-voting class;
- Creating a new class of shares equal to or greater than the non-voting share class; or
- Allowing a class of shares to be exchanged for the non-voting class shares.
They will also be able to vote on proposed amalgamations that will affect their share class.
In short, non-voting shareholders will have a right to vote on resolutions that will have an impact on the rights attached to their share class (but not necessarily on all resolutions that will have a business impact on them as shareholders). The reasoning behind these exceptions is to prevent the voting shareholders from impairing the rights of the non-voting shareholders, and to prevent the voting majority from oppressing the non-voting shareholders in this way.
For more information, check out these blog posts: