Transfer restrictions on private shares

A buyer of shares in a private company does not always get to simply sign and register the transfer. The corporation’s articles can limit who may hold shares or require approval first, so both sides of a share sale need to check them before the transfer. See also right of first refusal.

Where the limits sit

Under section 173 of the Canada Business Corporations Act, subject to sections 176 and 177, a corporation’s articles may be amended by special resolution to add, change or remove restrictions on the issue, transfer or ownership of shares. Corporations Canada’s guidance says transfers must conform to any conditions or restrictions that apply to the corporation’s shares. Provincial Acts, such as Ontario’s Business Corporations Act, have their own rules; its section 42 says an offering corporation, meaning one offering its securities to the public, shall not impose restrictions on the transfer or ownership of shares except those authorized by its articles.

The securities side

Securities law can also apply. Describing Alberta securities law, the Alberta Securities Commission notes that the private issuer exemption, which is for non-reporting issuers only, allows transfers of securities among the list of permitted investors. In Alberta, check whether a transfer to someone outside that list needs another exemption, and in other provinces check that province’s own securities rules.

What to check or ask

• Whether the articles require director approval or another condition
• Whether a shareholder agreement adds its own limits
• Whether the buyer fits a securities exemption