The rights and obligations attaching to different types of shares in Canada is the source of a great deal of confusion. Much of this stems from the fact that Canadian and US securities laws are quite different, and much of the knowledge about securities law generally (online and elsewhere) relates to US laws, which is not necessarily accurate in the Canadian context.
One key source of confusion relates to the difference between common and preferred shares. Fundamentally, this is a challenging issue to address because, under Canadian corporate law, the terms “common shares” and “preferred shares” (or shares of any name for that matter), do not have any inherent meaning. The rights and obligations attaching to any share of any kind are defined in the articles of incorporation. Meaning, you can give any share any rights that you want, and furthermore, any name that you want.
That said, the descriptors “common” and “preferred” are nevertheless still frequently used, and they have certain generally understood rights that should and often do attach to them.
They key differences between common and preferred shares relate to the value that those shares accumulate over time. Typically, common shares provide the holder with the right to vote at meetings, to receive dividends and to share in a portion of the assets of the corporation if and when it is dissolved.
Preferred shares typically do not have the right to attend and vote at shareholders’ meetings, but they take priority over common shareholders in respect of receiving dividends and assets on dissolution, and they are typically entitled to fixed dividends, not discretionary dividends like common shares. This means that common shareholders cannot be paid dividends until preferred shareholders have been paid and the return on investment is more certain for preferred shareholders than common shareholders. That said, the amount paid out to preferred shareholders on dissolution is often limited to the amount invested, plus declared and unpaid dividends, where common shares split the remainder of the assets amongst them.
Preferred shares are offered to attract investment into the company, and as a result, the rights and obligations that attach to them will depend on the circumstances of the investment. For instance, it is common that a serious investor in a start-up company will dictate the terms of the preferred shares and include all sorts of rights that are in their personal interest. Whereas a smaller investor in an established company will be expected to purchase shares with more limited rights.
The key takeaway is that although there are certain norms around what constitutes a common and preferred shares, it is absolutely crucial to carefully review all the relevant documentation before deciding to invest, since each company will have its own view on what these shares should comprise.
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Hugues today. 613-747-2459 ext.304, hb[email protected]