An Ontario business corporation must be authorized to issue at least one class of shares and if the corporation’s articles authorize more than one class of shares, the articles must specify the rights, privileges, restrictions, conditions and voting rights attaching to each class.
The provisions for a non-voting class of shares usually state that shareholders holding such shares are not entitled to receive notice of, attend at or vote at any meeting of the shareholders of the corporation. But despite being called a “non-voting” shareholder and the perceived absence of voting rights, such shareholders continue to have limited voting rights under the Ontario Business Corporations Act (OBCA). While non-voting shareholders may not influence governance, non-voting shares often come with other significant benefits. Non-voting shareholders can vote when changes to the corporation’s articles may have significant adverse impact on their rights. Also, non-voting shares allow investors to participate in a corporation’s financial success, through dividends or capital appreciation. Such shares are commonly used for employee stock ownership plans as well as tax and estate planning.
Voting Rights for Non-Voting Shareholders
Section 170(1) of the OBCA includes certain protections for non-voting shareholders, granting them the right to vote separately as a class if the corporation proposes to amend its articles in a way that changes the rights or conditions attached to their shares. In summary, non-voting shareholders can vote separately as a class or series under Section 170(1) with respect to amendments to the articles that contemplate:
- A change in a number of authorized shares of the non-voting class or increase in maximum number of shares that are equal to or superior to the non-voting shares.
- Exchange, reclassification or cancellation of shares of their class.
- Amendments that could prejudice the rights of non-voting shareholders, such as removal or reduction of the following rights attaching to their shares:
- The right to accrued or cumulative dividends;
- Rights or sinking fund provisions;
- Liquidation preference or dividend preference; and
- Conversion privileges, options, transfer and pre-emptive rights, voting rights or rights to acquire securities of a corporation.
- Addition of rights or privileges to another class of shares that is equal to or superior to the non-voting class.
- Creation of a new class of shares with rights equal to or superior to the non-voting shares.
- Making equal or superior the rights of the other shares that are inferior to the shares of such non-voting shareholder.
- Exchange of shares or changes to restrictions on the issue, transfer, or ownership of non-voting shares also give non-voting shareholders the right to vote separately.
Voting Rights in Amalgamations
Section 176(3) of the OBCA provides protection for non-voting shareholders during corporate amalgamations. To amalgamate, the corporations may be required to enter into an amalgamation agreement. Such agreements, much like the articles of amendment, may include provisions that impact the rights of the shareholders. Non-voting shareholders will have a right to vote separately if the amalgamation agreement includes provisions that affect their rights in a way described in Section 170(1), as if it were an amendment to the corporation’s articles.
Modifying Non-Voting Shareholder Statutory Rights
The same Section 170(1) that grants voting rights, also provides that some of these rights can be removed as long as this is expressly set out in the corporation’s articles. The statutory voting rights that can be removed are those changes to the articles which effect: the number of authorized shares (see item 1 above), exchange, reclassification, or cancellation of the shares (see item 2 above) and creation of new share classes that are superior in rights (item 5 above). The articles must contain these restrictions before the shares are issued.
Practical Implications for Non-Voting Shareholders
By offering the ability to vote separately as a class, the OBCA acknowledges the potential impact of corporate changes on non-voting shareholders and grants them mechanisms to safeguard their investments. It is important for non-voting shareholders to understand that while the OBCA ensures protection, the ultimate decision-making power still rests with the voting shareholders. While non-voting shareholders cannot modify their rights on their own, the OBCA allows for transparent processes that protect them from unfair alterations. By understanding these rights, both non-voting and voting shareholders can navigate the complexities of corporate governance with confidence.