Should You Buy Preferred or Restricted Shares in a Corporation?

Are you considering buying shares in a corporation?  If so, be aware that a corporation may have various classes of shares, and not all shares are equal.  This is well illustrated in a recent decision of the Alberta Court of Appeal (1891868 Alberta Ltd. v Central Fund of Canada Limited, 2015 ABCA 331).

1891868 Alberta Ltd. (“1891868”) held 1,586,000 Class A non-voting shares in Central Fund of Canada Limited (“CFCL”).  In total, over 80,000 shareholders held more than 254 million publicly traded Class A shares.  In contrast, the common shareholders held 40,000 non-publicly traded shares, equal to less than .0002% of all issued shares.  But it was these common shareholders who controlled the corporation because they were the only shareholders entitled to vote at shareholder meetings. 1891868 was aware of the voting restrictions when it purchased its shares, but, nevertheless, when 1891868 disagreed with a particular agreement entered into by CFCL management, 1891868 attempted to Requisition a meeting of shareholders under s. 142 of the Business Corporations Act (Alberta) (the “BCA”) in order to terminate the agreement, replace the Board, and change the voting rights of the Class A shareholders. Unfortunately for 1891868, the Court correctly interpreted the BCA to say that the Class A shareholders had no right to Requisition such a meeting because they had no right to vote on these issues.  Section 139 of the BCA requires that each share of a corporation entitles the holder of it to one vote at a meeting of shareholders unless the articles of the corporation say otherwise.  In this case, the articles clearly stated that Class A shareholders had no right to vote.  Thus,1891868 could not force the Board to call a meeting to consider 1891868’s complaints.

What does this mean for you if you are considering buying preferred or restricted shares in a corporation?  It is essential you understand the rights and limitations of all classes of shares, including yours, before you buy, because these rights determine not just who makes the decisions for a corporation and how, but also what happen when things go wrong. If you already own shares in a corporation which has more than one class of shares, it is vital that you understand the restrictions on your shares and the rights granted to each class of shares, particularly yours, keeping in mind that limited share rights may affect the value and marketability of those shares if you decide to sell them.

Ian Weiss

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