Chapter 23- Share Captial

Question 1

Definition of Share Capital

Answer 1

Equity financing: Funds received from shareholders in exchange for shares.

Divided into:

Authorized capital (what articles permit).

Issued capital (what is actually sold).

Stated capital account: reflects amount received by corporation for issued shares.

Question 2

Share Certificates & Registers

Answer 2

Evidence of ownership (not title itself).

Certificates include:

Corporation name.

Shareholder’s name.

Number/class of shares.

Rights/restrictions.

Transfers are effective when recorded in share register, not just when certificate changes.

Electronic shares also allowed — no need for physical certificate.

Question 3

Acquisition of Shares by Corporation

Answer 3

Corporation may redeem, purchase, or otherwise acquire its own shares only if:

Authorized by articles.

Solvency test met (assets > liabilities + capital; able to pay debts).

Acquired shares must be cancelled (cannot hold treasury stock in Ontario).

Question 4

Reduction of Stated Capital

Answer 4

Permitted if solvency test is satisfied.

Used to restructure or return capital.

Must notify shareholders and sometimes creditors.

Directors may face liability if done improperly.

Question 5

Dividends (Revisited)

Answer 5

Declared by directors’ resolution.

Paid out of profits or surplus — cannot impair solvency.

Liability: Directors personally liable if dividend paid contrary to solvency rules.

Question 6

Financial Assistance

Answer 6

Old rule: corporations restricted from giving financial assistance (loans, guarantees, security) to help purchase their shares.

Modern statutes (OBCA, CBCA): general prohibition repealed.

Now allowed if solvency test met and assistance is in corporation’s best interests.

Question 7

Share Classes & Flexibility

Answer 7

Articles may create multiple classes with distinct rights.

Minimum requirement: one class must always have all 3 rights: vote, dividends, residual assets.

Preferred shares often structured with:

Priority dividends.

Liquidation preference.

Redemption/retraction rights.

Question 8

Share Transfers (Expanded)

Answer 8

Shares are personal property.

Restrictions:

In articles (binding on all).

In shareholder agreements (contractual).

Transfer restrictions must be clear to be enforceable.

Public vs Private:

Public = free transfer (TSX/OSC rules).

Private = typically restricted to maintain contro

Question 9

Shareholder Remedies in Capital Issues

Answer 9

Improper issuance below fair market value → directors liable to make up difference.

Improper dividend → directors liable to repay.

Improper redemption/acquisition → directors liable for difference.

Question 10

Paid-Up Capital (PUC)

Answer 10

Definition: Tax/accounting concept — amount originally paid to the corporation for shares, adjusted for certain transactions.

Tracks the shareholder’s “tax cost base” in the corp.

Important because return of PUC to shareholders is tax-free (not a dividend).

Reducing PUC improperly = potential tax consequences.

Question 11

Adjusted Cost Base (ACB)

Answer 11

Definition: Tax concept — the shareholder’s cost of their shares, adjusted for various additions/reductions.

Used to calculate capital gains/losses on sale.

Formula: Sale price – ACB – expenses = capital gain/loss.

Not the same as PUC → ACB is personal to the shareholder, PUC is corporate.

Question 12

Preferred Shares

Answer 12

Definition: Shares with special rights (priority dividends, liquidation preference).

Usually have restricted or no voting rights.

May be redeemable, retractable, convertible.

Often used in tax planning (estate freezes, reorganizations).

Must be authorized in articles.

Question 13

Share Capitalization

Answer 13

Definition: The structure of a corporation’s equity financing, i.e.:

Classes of shares authorized in articles.

Number of shares issued.

Rights and restrictions attached.

Determines who controls, who profits, who bears risk.

Can be restructured by amending articles (special resolution required).

Question 14

Acquisition of Corporation’s Own Shares

Answer 14

Corporation may redeem, purchase, or otherwise acquire its own shares if:

Authorized by articles.

Solvency test satisfied:

Assets ≥ liabilities + stated capital of remaining shares.

Corp can still pay debts as they come due.

Once acquired → shares cancelled (Ontario/Canada do not allow “treasury shares”).

Question 15

Dividends:

Answer 15

Directors declare them.

Can only be paid if corporation passes solvency test:

Assets > liabilities.

Can still pay debts as they come due.

If illegal dividend is paid, directors can be personally liable.

Question 16

PUC vs ACB:

Answer 16

PUC (Paid-Up Capital): Corporate record of how much was paid in for shares. If corp returns PUC → tax-free to shareholder.

ACB (Adjusted Cost Base): What the shareholder personally paid for their shares. Used to calculate capital gains/loss on sale.

Question 17

What is share capital?

Answer 17

It’s the money (or property/services) shareholders give the corporation in exchange for shares.

It represents ownership in the company.

Question 18

Types of shares:

Answer 18

Common shares: Basic ownership, voting rights, dividends (if declared), last in line on liquidation.

Preferred shares: Special rights — usually get dividends or liquidation money first, often no vote.