There are two methods of describing share capital. There is Authorized Share Capital and there is Issued Share Capital.
What is Authorized Share Capital
A definition of authorized share capital would be the number and class of shares for which an incorporated company is authorized to issue. When a company is incorporated it must set out in its Articles of Incorporation what shares the company will be authorized to issue. A company cannot issue shares of a specific class unless its Articles indicate so.
Examples of Authorized Share Capital as Outlined in Articles
Examples of the wording in the Articles relating to authorized capital would be “an unlimited number of common shares”. This means that there is no limit as to how many common shares can be issued.
Another example of authorized share capital would be 1,000 Class A preference shares. If a company’s Articles indicate 1,000 Class A preference shares as part of the authorized capital, this means that the company can only issue 1,000 shares of that class.
Where a corporation has share capital consisting of one class of shares those shares are normally called common shares.
What is Issued Share Capital
Ownership of a company is divided into shares which is sometimes called stock. The issued share capital of a Corporation is the total of the corporation’s shares that are held by shareholders. Shares can only be issued up to the full amount of the authorized share capital. When a shareholder wishes to buy shares in a company, it is said to be subscribing for shares.
An example would be a 50/50 ownership where one person is allotted 50 common shares for $1.00 per share and the other person is allotted 50 common shares for $1.00 per share, creating an equal ownership in the company. The issued share capital would be 100 common shares.
Another example would be:
John Doe 51 voting common shares
Susan Doe 49 voting common shares
John Doe would be said to be the majority shareholder because he holds more than 51% of the issued and outstanding common shares and the issued share capital consists of 100 common shares.
How are Shares Issued
Shares can be issued for cash, in exchange for property or in exchange for services, however, the consideration for the allotment of shares must be paid at the time the shares are issued. Shares cannot be issued for a promise to pay.
Different Names for Authorized Share Capital
Below is a more detailed list of some of the different types of shares that can form the authorized share capital:
In the case where a class of shares has multiple subclasses of the same class of shares you may see the following types of shares included in the authorized share capital:
Class A common, Class B common, Class C common
Class A special, Class B special, Class C special
Class A preference, Class B preference, Class C preference
There is no set rule for naming different classes of shares. Above are some of the standard names that are used.
What are the Share Attributes
Different classes of shares can be created for many reasons. Each class of shares has its own share attributes. Those attributes are created to provide that when a person/business subscribes for a specific class of shares of a company, those shares will have certain rights and conditions attached to them that the corporation is obligated by law to honour.
The authorized capital of a corporation and the attributes for the authorized shares can be amended upon occasion by filing articles of amendment.
The attributes of a class of shares are the rights, privileges, restrictions and conditions attaching to a class of shares.
For instance, one class of shares may have the right to one vote per share, while another class of shares may have the right to vote where the shareholder would have 100 votes per share, and still another might have a restriction on voting and have may have no voting rights at all.
Depending on what the person/business’s relationship will be with the company will govern what type of shares will be issued to that person.
Standard Share Attributes
If a corporation has only one class of shares those shares are normally designated as common shares. In this case, those common shares automatically have the following three rights:
The right to vote – The standard voting provisions, unless varied in the Articles, is one vote per share. Therefore, if one person holds 100 common shares and another shareholder holds 50 common shares, the person that holds 100 common shares has more voting power.
The right to the remaining assets upon dissolution – This means that if a company is going to wind up and dissolve, when it disburses the remaining assets of the Corporation, the common shareholders will receive this property, if any, in proportion to the number of shares owned in the Corporation.
The right to discretionary dividends – If a company wishes to declare a dividend, the common shareholders shall have a right to receive such monetary dividend equally with all other common shareholders in proportion to the number of shares held.
In the case of one class of shares and depending on the legislation of the particular jurisdiction (i.e. province, country, state, etc.), the Articles do not actually have to outline those three rights because they are “understood” rights. If a corporation were to outline the standard common share rights in the Articles, the language would be as follows:
Dividends – Common Shares – The holders of the common shares shall be entitled to receive and the Corporation shall pay thereon, as and when declared by the board of directors of the Corporation out of the moneys of the Corporation properly applicable to the payment of dividends, such non‑cumulative dividends as the directors may from time to time determine.
Participation in Assets on Dissolution- Common Shares – The holders of the common shares shall be entitled to receive the remaining property of the Corporation upon dissolution of the Corporation.
Voting Rights – Common Shares – The common shares shall entitle the holders thereof to one (1) vote in respect of each common share held at all meetings of the shareholders of the Corporation.
When a Company has more than One Class of Shares
If a corporation has more than one class of shares then these rights can be varied and additional rights can be added since special or preference shares frequently have additional rights in addition to the three rights given to common shareholders. In the case of a corporation that has more than one class of shares those attributes and rights must be clearly set out in the Articles of Incorporation and/or Articles of Amendment for the corporation. There are many attributes and conditions that can be attached to shares. As well, different priority rights can be given to one class of shares over another. However, below is a summary of some of the common share attributes given to special or preference shares.
Right to Redemption by the Corporation – Redeemable shares are shares that can be repurchased by the Corporation from the shareholder who owns the shares. Usually redeemable share attributes will specify the amount per share which the shareholder will be paid when the shares are redeemed and the method pursuant to which the corporation may request the shares be redeemed. The corporation has the right to take these shares back regardless of whether the shareholder wishes to have its shares redeemed. Common shares are not redeemable. Once those shares are redeemed by the corporation, that shareholder no longer has any rights to those shares.
Right to Retraction by Shareholder – In a case where a shareholder holds special or preference shares, if the shares have the right to be retracted, the shareholder will have the right to request the corporation to redeem (or buy back) his or her shares and to pay that shareholder the amount each share is worth as outlined in the Articles. The corporation cannot refuse to buy back the shares if it is requested to do so. Common shares are never retractable.
Rights to Voting and Non-Voting – Shares can be either voting or non-voting. Non-voting shares limit the manner in which a class of shares can be involved in a company’s day to day business. In certain cases a person/business may not wish to have voting rights or the current owners of a company may not wish the person/business investing in the company to have voting rights.
Purchase for Cancellation – Redemption and retraction provisions in Articles give a company or the person who owns the shares the right to trigger a purchase or sale of the shares at a share price that is specifically outlined in the Articles. Sometimes a company may wish to repurchase shares owned by a shareholder at a price that is different from the redeemable or retractable price. The corporation has the right by legislation to purchase issued shares for cancellation.
Right to Convert Shares of One Class into Another Class of Shares – Sometimes there may be a provision in the Articles that provides for a specific class of shares to be able to convert their shares into another class of shares under certain circumstances.
These are only a few of the share attributes that can be given to a class of shares.
What Evidence Does a Person have when He or She Buys Shares of a Company
When a person/business is issued shares in a company, the company will issue that person a share certificate. It is not always mandatory that a share certificate be issued. Sometimes shares are issued electronically. However, if a person/business wishes to have a share certificate issued then the shareholder has a right to receive a share certificate except in the case where a public company has electronic shares.
Who Has the Right to Own Shares in a Corporation
Shares of a corporation can be issued to a person, to another corporation, to a trust, to a partnership, etc.