In “When Non-voting Shares Get to Vote” we looked at how calling a share a ‘non-voting’ share is a bit of a misnomer. Under Canadian corporate statutes even non-voting shares have the right to vote in certain circumstances and at best should be called ‘mostly non-voting shares’. This can cause unexpected problems for companies that do not consult their lawyers and who assume non-voting shares can be widely issued without concern to the voting interest in the company they may represent.
In this article we are looking at a second voting issue that can arise with non-voting shares – shareholder votes that must be conducted by class. For the purpose of our discussion lets a assume a fairly simple share structure consisting of two classes of shares (1) 900,000 regular voting common shares held by a founder, and (2) 100,000 non-voting common shares issued as an incentive to a senior employee.
When a company has more than one class of shares, there are two ways a shareholder vote may be structured depending upon the matter being considered: (1) all shareholders voting as a single class, or (2) each group of shareholders voting as a separate class. When this is combined with one of those classes being non-voting shares, we end up with three different voting configurations depending upon the nature of the matter to be approved:
- Regular shareholder matters, such as electing the board of directors or approving the auditors, which are approved by holders of voting shares.
- Single class vote fundamental changes, such as creating preferred shares, which must be approved by holders of all classes of shares, even non-voting shares, but which may be voted upon as a single class if provided for in the articles.
- Separate class vote fundamental changes, such as a capital reorganization, which must be approved by holders of all classes of shares, even non-voting shares, voted upon as separate classes.
In the first two scenarios the outcome of the vote is in the hands of the founder, as he or she intended, because the founder holds all of the voting shares (scenario 1) and 90% of all issued shares (scenario 2). However, in scenario 3, where the vote is by separate class, the outcome is outside the founder’s control because two separate votes are required. And while the founder holds 100% of the voting shares, he/she holds 0% of the non-voting shares. If the employee shareholder is not on board with the capital reorganization (scenario 3), the founder wins the first vote 900,000 to 0; but loses the second vote 0 to 100,000 and the resolution does not pass.
The obligation to hold certain votes by separate class, when combined with the right of holders of non-voting shares to vote in certain circumstances can create unintended roadblocks if not planned for in advance. For example, there are thirteen different scenarios in Ontario’s Business Corporation Act, in which holders of non-voting share may, depending upon the specifics of the transaction, be granted not only the right to vote, but the right to vote as a separate class. These include:
- Creating a class of shares, such as preferred shares, that are superior to the non-voting shares
- Changing the attributes of the non-voting shares, or any class of shares that is equal or superior to the non-voting shares
- Capital restructurings
- Selling all or substantially all of the company’s property (i.e. and asset sale)
- Approving articles of amendment
- Approving a plan of arrangement
So, what is the takeaway – am I against non-voting shares? No. They make perfect sense in the right situation. However, if your goal is to grant someone a financial stake in your business without giving them voting rights, you should consult with one of our lawyers to make sure your corporate structure and voting agreements take into account the voting rights of non-voting shares.
As founding partner, Glenn Rumbell brings almost 30 years of business law experience, a distinguished top legal firm background and a passion for helping startups. Since the early 1990s, he has forged a successful and varied career as a lawyer, entrepreneur and investor in Canada’s legal, investment and technology industries.