Corporate shares are infinitely variable, and the law provides sufficient flexibility. But all actions have consequences, and it is necessary from time to time to go back to basics, and to refresh the underlying principles.

What is a share?

A share represents a bundle of rights which the holder of such share has in respect of a company that issued them. Ownership of a share does not represent a direct interest in the company’s assets but rather a proportionate ownership of rights in the company represented by the number of shares held. There are four fundamental rights attached to the ownership of a share:

• the right to control the management and decision-making power of the company by voting to elect and remove the directors of the company;
• the right to receive dividends paid by the company (which generally represent the company’s net after-tax profits);
• the right to participate in the equity of the company on a liquidation, dissolution or winding-up of the company or on the redemption or retraction of shares of the company; and
• the right to sell or exchange the holder’s shares.

Any of the four rights may be restricted, varied or limited for any particular share. Shareholders and the company may also create additional rights and restrictions by contract or by provisions contained in the company’s articles.

What are “common” and “preferred” shares?

a. Business Corporations Act (British Columbia)

The Business Corporations Act (British Columbia) (the “BCABC”) does not distinguish between common shares and preferred shares. Instead, under the BCABC the attributes attached to a share are determined by the special rights or restrictions attached to that share as set out in the company’s articles.

The term “special rights or restrictions” is defined in subsection 1(1) of the BCABC as follows:

“special rights or restrictions”, in relation to shares of a company, includes special rights and restrictions, whether preferred, deferred or otherwise, and whether in regard to redemption or return of capital, conversion into or exchange for the same or any other number of any other kind, class or series of securities of the company or of any other corporation, dividends, voting, nomination, election or appointment of directors or other control, or otherwise, and for the purposes of this definition the words "special rights" and the word "restrictions", when used in this Act, whether together or separately, have a corresponding meaning.

The BCABC’s general approach to special rights and restrictions can be summarized as follows:

• if the articles are silent then certain basic provisions apply, however, these basic provisions can be expressly overridden by the special rights or restrictions set out in the articles of the company; and
• certain provisions regarding special rights or restrictions are specified in the BCABC and cannot be overridden by the articles of the company.

Where both the BCABC and the articles of the company are silent with respect to a particular share right, it may be necessary to determine the rights attached to such share by reference to the common law rules and presumptions that have developed over the years.

b. Common Law

There is a general common law presumption that, in the absence of particular provisions stating otherwise, all shares of a company confer the same rights and obligations on the shareholders. If there are no express provisions regarding the rights, conditions, privileges and restrictions which are attached to a particular class of shares, then the presumption follows that each class of shares has the same rights as the holders of other classes of shares in respect of:

• the right to vote and attend at general meetings;
• the right to receive dividends; and
• the right to a return of capital on dissolution, liquidation or winding-up.

The courts have also adopted the presumption of exhaustion, which provides that once a special right has been established in the articles of a company, it is prima facie exhaustive of that particular type of right. Canadian case law generally applies the presumption of exhaustion where any of the share rights are clearly specified and expressly stated without further stipulation. For example:

• where shares are given a preferential dividend, it is presumed that they are non-participating with respect to further dividends;
• where shares are given a preferential right to a return of capital, it is presumed that they are non-participating with respect to surplus assets;
• where shares are given the right to vote in certain circumstances, it is presumed that they do not have the same right in other circumstances;
• where share rights are silent as to whether dividends are to be cumulative or non-cumulative, they are presumed to be cumulative.

c. Income Tax Act

The Income Tax Act (Canada) (the “ITA”) defines a “common share” in subsection 248(1) of the ITA as “a share the holder of which is not precluded on the reduction or redemption of the capital stock from participating in the assets of the corporation beyond the amount paid up on that share plus a fixed premium and a defined rate dividend”.

A “preferred share” is broadly defined in subsection 248(1) of the ITA as “a share other than a common share”. Thus under the ITA the primary distinction between common and preferred shares is the ability to participate in the equity of the company.

What share rights are associated with “common” shares and “preferred” shares?

The share rights typically associated with common shares include:

• voting;
• entitled to receive dividends;
• entitled to participate in the profits and assets of the company on liquidation, dissolution or winding-up of the company; and
• no redemption rights.

The share rights typically associated with preferred shares include:

• non-voting;
• fixed or limited dividend entitlement;
• a higher ranking over common shares in the event of liquidation, dissolution or winding-up;
• no opportunity to participate in the growth of the company; and
• redeemable by the company and/or the holder.

Classes and series of shares

A company’s share capital can be divided into several different classes or series of shares within a single class, whereby particular special rights or restrictions may be attached to each such class or series. It is common to allocate or restrict share rights among different classes of shares so that the holders of certain classes of shares will have certain rights and the holders of other classes will have other rights. In many cases, certain classes may have priorities over other classes in respect of dividend participation and return of capital on liquidation or winding up.

Sections 59 and 60 of the BCABC govern classes of shares and series of shares, respectively. Subsection 59(4) of the BCABC requires that within a class of shares, each share of that class must have attached to it the same special rights or restrictions as are attached to every other share of that class of shares, subject to the special rights or restrictions attached to a series of shares within a class.

Similarly, subsection 60(4) of the BCABC requires that within a series of shares, each share of that series must have attached to it the same special rights or restrictions as are attached to every other share of that series of shares and the special rights or restrictions attached to shares of a series must be consistent with the special rights or restrictions attached to the shares of the class of which the series is a part.

The creation of different classes or series of shares with different share rights or restrictions results in each class or series or shares having a particular “bundle of rights”, which may include:

• the right to vote at general meetings of the company;
• the right to participate in the profits of the company;
• the right to participate in the return of capital of the company on winding-up;
• priorities or preferences with respect to income and capital participation;
• pre-emptive rights;
• rights of redemption and/or retraction; and
• the right of conversion.

How are share rights created and changed?

Pursuant to subsection 58(2) of the BCABC, special rights or restrictions are created, varied or deleted by the type of shareholders’ resolution specified by the articles of the company, or, if the articles do not specify a type of resolution, by a special resolution of all of the voting shareholders of the company.

Shareholders other than the voting shareholders that hold a class or series of shares whose special rights or restrictions are interfered with must consent to the