Reduction of stated capital

An owner may meet this step if a company distributes capital to shareholders, for example before a sale. This entry covers the Canada Business Corporations Act (CBCA) and Ontario’s Business Corporations Act (OBCA); check the statute that governs your corporation. For the account itself, see stated capital.

What the two Acts say

• CBCA s.38(1) and OBCA s.34(1) allow a reduction by special resolution, subject to CBCA s.38(3) and OBCA s.34(4), and the resolution must specify the stated capital account or accounts it comes from (CBCA s.38(2); OBCA s.34(3)).
• A reduction for any purpose other than declaring capital not represented by realizable assets is barred where there are reasonable grounds for believing the corporation is or would be unable to pay its liabilities as they become due, or its assets’ realizable value would be less than its liabilities (CBCA s.38(3); OBCA s.34(4)).
• A creditor may apply to court for an order compelling a shareholder or other recipient to pay back to the corporation what was paid or distributed contrary to the section (CBCA s.38(4); OBCA s.34(5)).

What to ask

Under OBCA s.34(2), the holders of a class or series affected differently from another are entitled to vote separately on the reduction, whether or not their shares otherwise carry a vote. Ask for the resolution, the solvency analysis behind it and how it fits the share structure. Tax treatment is separate; see paid-up capital.