How does share structure affect the sale of a private business?

A private company’s shares are what a buyer is paying for in a share sale, so how they are structured shapes the whole deal. This page looks at three features: the classes of shares, who holds them, and any restrictions on transferring them.

Classes and their rights

Under the Canada Business Corporations Act, a company with one class of shares gives every holder equal rights to vote, to receive declared dividends and to receive the remaining property on dissolution. If the articles create more than one class, they must set out the rights, privileges, restrictions and conditions attaching to each, and each of those three rights must attach to at least one class, though not all to the same one. The class you hold therefore decides what you are entitled to.

Share sale or asset sale

In a share sale each shareholder decides whether to sell their own shares, so the number of holders, and any agreement among them, determines how easily a buyer can acquire all of them. In an asset sale the company sells, and a sale of all or substantially all its property outside the ordinary course needs shareholder approval by special resolution. Every share votes on it, whether or not it otherwise carries a vote, and a class votes separately only if the sale affects it differently. A dissenting shareholder who follows the Act’s procedure is entitled to be paid the fair value of their shares, subject to a solvency limit in s.190(26).

Changing the structure before a sale

Corporations Canada says creating or eliminating share classes, modifying existing classes, and adding or removing transfer restrictions all mean amending the articles by special resolution at a special meeting. Some of those changes, such as adding or removing a transfer restriction, give a shareholder the right to dissent, so plan them well before a buyer is involved.

Questions to answer before you list

• Which classes exist, and who holds each?
• Do the articles restrict transfers?
• Is there an agreement among all the shareholders?

BDC notes that an accountant can help structure the transaction to minimize tax, so take your answers to yours early.