How to Structure the Share Provisions of a Corporation

This How-To Brief consists of the following:

1. Part One — Understanding share capital: This part summarizes the various concepts and issues relating to share capital.

In this Part One, the Ontario Business Corporations Act is referred to as the "OBCA" and the Canada Business Corporations Act is referred to as the "CBCA." The OBCA and the CBCA are sometimes referred to together as the "legislation." The Income Tax Act is referred to as the "ITA"; a reference to the ITA generally includes parallel provincial corporate tax legislation.

This How-To Brief deals with business corporations only (share capital corporations); it does not deal with non-share capital corporations (such as social clubs, charities and non-profit corporations) or "professional" corporations (see ss. 3.1–3.4 of the OBCA).

1) Understanding Share Capital

What is a "share"?

• A corporation is a legal entity created by articles of incorporation ("articles") issued by a province or by the Government of Canada. In the case of an Ontario corporation, the issuing authority is the Ministry of Government and Consumer Services (Companies and Personal Property Security Branch); in the case of a Canada corporation, the issuing authority is Industry Canada (Corporations Canada). (See links in the Resources section of this How-To Brief.)
• Unless restricted by its articles, a corporation has the same capacity as a natural person to carry on a business (OBCA, s. 15; CBCA, s. 15).
• A corporation's undertaking will typically consist of assets, liabilities and equity (sometimes referred to as "net worth"). This is the typical structure of a corporation's balance sheet with assets appearing on the right side of the balance sheet and liabilities and equity appearing on the left side. Assets minus liabilities equal equity. Equity is the book value of the corporation to its owners and typically consists of the total amount invested in the corporation by its owners plus any surplus earnings left in the corporation by its owners (called "retained earnings").
• Ownership of a corporation is divided into "shares." In other jurisdictions, notably the United States, shares are sometimes referred to as "stock." Historically, corporations were originally called "joint stock companies" because business people would pool inventory (i.e., stock) in a joint venture, such as a merchant ship trading in India or the so-called New World—hence the term "stock." Accordingly, a share or stock is a fractional part of the ownership of a corporation—typically, one unit of ownership interest in the corporation. A person who owns a share or stock is called a "shareholder" or "stockholder." Shares and stocks fall under the general classification of a "security" (see OBCA, s. 1(1); CBCA, s. 2(1)).
• The ownership of a share or shares is normally represented by a share certificate issued by the corporation.
• A corporation can distribute its earnings to its shareholders by paying a "dividend." Dividends are paid out of corporate surplus after income taxes paid by the corporation. Under the ITA, a shareholder who receives a dividend from a Canadian-controlled private corporation ("CCPC") (see the link in the Resources section of this How-To Brief) is entitled to a "dividend tax credit." The purpose of the dividend tax credit structure is to provide full integration between corporate and personal income taxes; that is to say, it is intended that a dividend from a CCPC will not attract combined corporate and personal taxation than would have been paid by the shareholder had the shareholder received the payment directly (i.e., without the funds having passed through the corporation thereby attracting corporate income tax). In reality, however, the effect of the dividend tax credit is that the shareholder pays a lower rate of tax on the dividend income than would be paid on ordinary income (for example, employment income).

What is "share capital"?

• "Share capital" is that portion of a corporation's equity obtained from issuing shares in return for cash or other consideration (see OBCA, s. 23; and CBCA, s. 25).
• The articles of a corporation can permit an unlimited number of shares or can limit the number of shares that a corporation can have. The number of shares that a corporation can have is called its "authorized capital." "Issued capital" is that part of the authorized capital that has been issued to the shareholders (see OBCA, s. 23; CBCA, s. 25).

Classes of shares

• A corporation can have more than one type of share; different types of shares are called "classes" of shares (see OBCA, s. 22(4); CBCA, s. 24(4)).
• Where a corporation has only one class of shares, the shares are usually designated as "common shares." Where a corporation has more than one class of shares, the additional classes of shares are sometimes designated as "special shares" (see for example OBCA, s. 25 and s. 170(1)) or "preferred shares." There is no rule, however, that requires any class of shares to be designated by any particular name or description. Furthermore, there is no rule that requires any class of shares to have specific attributes. Where the corporation has only one class of shares, however, the rights of the holders of that class must be equal in all respects and include the right to vote at all meetings of shareholders and to receive the remaining property of the corporation upon dissolution (see OBCA, s. 22(3)) and, in the case of a CBCA corporation, the right to receive any dividend declared by the corporation (CBCA, s. 24(3)).

The capital clause

• The articles will contain a "capital clause" (paragraph 6 in OBCA articles; paragraph 3 in CBCA articles). The capital clause will set out the corporation's authorized capital.
• Examples of capital clauses are set out in Appendix "A." (See the link in the Resources section of this How-To Brief.)

Par value vs. non-par value

• Historically, shares could have a face value printed on the share certificate; this was called "par value." Typically, this value represented the amount for which the shares had originally been issued by the corporation. Immediately after issue of the shares, the marketplace would set the value of the shares, and accordingly, the par value became meaningless. In fact, par value was considered to be misleading. For that reason, Ontario and Canada corporations are no longer permitted to issue par value shares (see OBCA, s. 22(1); CBCA, s. 24(1)).

Stated capital vs. paid-up capital

• A corporation must maintain a separate stated capital account for each class of shares (see OBCA, s. 24; CBCA, s. 26). "Stated capital" is, essentially, the amount of the consideration received by the corporation on the issue of the shares (see OBCA, s. 24(2); CBCA, s. 26(2)).
• "Paid-up Capital"("PUC"), on the other hand, is an ITA concept and is not necessarily the same as stated capital. Stated capital can be withdrawn from the corporation tax-free. PUC is stated capital further adjusted by various rules in the ITA designed to prevent inflation of the share's stated capital (and therefore the amount that can be withdrawn tax-free) on a corporate reorganization.

Share attributes

• Where a corporation has more than one class of shares the articles must set out the rights, privileges, restrictions and conditions attaching to the shares of each class (see OBCA, s. 22(4); CBCA, s. 24(4)). In OBCA articles, the share attributes are set out in paragraph 7. In CBCA articles, the share attributes are set out in paragraph 3.

Classes of shares other than common shares are used to achieve various ends. Some examples are as follows:

• Income splitting:
  • Under the ITA, higher rates of income tax apply to higher levels of taxable income. Taxpayers can save money by splitting income with other taxpayers in lower tax brackets. For example, Taxpayer "A" owns all of the issued shares of XYZ Company Inc. Taxpayer "A" is married to Taxpayer "B" who is a homemaker with no taxable income. Taxpayer "B" can purchase shares in XYZ Company Inc. (usually for nominal consideration). A portion of the corporation's earnings can then be paid to Taxpayer "B" by way of dividend. The income received from XYZ Company Inc. is thereby split between Taxpayer "A" and Taxpayer "B," and the aggregate income tax paid by Taxpayer "A" and Taxpayer "B" is thereby reduced because Taxpayer "B" is in a lower tax bracket.
  • Similarly, shares can be issued to the children of Taxpayer "A" and Taxpayer "B" thereby facilitating further income splitting. This is typically referred to as "dividend sprinkling." Note: When structuring a corporation's share capital to facilitate income splitting, care must be taken to not run afoul of the "attribution rules" and the "kiddie tax," which are intended to prevent income splitting. For further information, see The Lawyer’s Guide to Income Tax and GST/HST 2010 Edition by David M. Sherman at §10.3.
  • To avoid losing control of XYZ Company Inc., however, Taxpayer "A" does not give common shares to Taxpayer "B" or the children but, instead, gives special shares that do not have the right to participate in the management of the corporation but do have the right to receive dividends.
• Capital gains exemption:
  • The ITA provides a $375,000 lifetime capital gains deduction (1/2 of a $750,000 capital gains exemption) on the sale of shares in a qualified small business corporation. "Qualified small business corporation shares" are shares in a CCPC substantially all the assets of which are used principally in active business carried on in Canada ("substantially all" is interpreted by the Canada Revenue Agency ("CRA") to mean 90% or more). In addition, the shareholder must have owned the shares for two years, and throughout the two-year period, more than 50% of the assets of the corporation must have been used in active business carried on in Canada. See CRA’s Guide T4037(E), Capital Gains, 2011. (See the link in the Resources section of this How-To Brief.)
  • In the example under "Income splitting," above, if Taxpayer "A" has caused XYZ Company Inc. to issue shares to Taxpayer "B" and two children, then Taxpayer "A" has effectively increased the aggregate capital gains exemption available to the family by four times. Put another way, on the sale of the shares of XYZ Company Inc., each of Taxpayer "A," Taxpayer "B" and the two children can receive up to $750,000 tax free. See The Lawyer’s Guide to Income Tax and GST/HST 2010 Edition at §11.3.2.
  • Again, to avoid losing control of XYZ Company Inc., Taxpayer "A" does not give common shares to Taxpayer "B" or the children but, instead, gives special shares that do not have the right to participate in the management of the corporation but do have the right to participate in the equity of the corporation.
• Estate freeze:
  • An "estate freeze" is a tax planning process by which a shareholder fixes the value of his/her shares at a point in time and any future increase in the corporation's equity accrues to other shareholders, usually the first shareholder's children. The result is that taxable capital gains on the death of the first shareholder are calculated as at the date of the freeze and are not calculated on any increase in the value of the corporation between the date of the freeze and the death of the shareholder.
  • By way of example: Taxpayer "A" owns XYZ Company Inc. and intends to leave the corporation to her children on her death. Taxpayer "A" owns all of the common shares of XYZ Company Inc. which she acquired for nominal consideration when the corporation was incorporated. Today XYZ Company Inc. has equity of $500,000, and accordingly, Taxpayer "A"'s shares are worth $500,000. Taxpayer "A" exchanges her common shares for special shares which have a fixed value of $500,000; this can be done tax free under s. 86 of the ITA. Taxpayer "A"'s children then subscribe for new common shares in the corporation for nominal consideration. Since all of the equity in XYZ Company Inc. at that moment of time is frozen (i.e., fixed) in the special shares, the new common shares have no value for tax purposes. Five years later, XYZ Company Inc. is worth $1,000,000. Taxpayer "A"'s special shares are still worth $500,000; however, the common shares owned by the children are now worth $500,000. Accordingly, Taxpayer "A" has transferred the growth in the value of XYZ Company Inc. to her children without incurring any tax on the transaction. See The Lawyer’s Guide to Income Tax and GST/HST 2010 Edition at §8.3.1.
• Angels and venture capital:
  • An "angel investor" is a private wealthy individual who invests his/her private money into a promising business opportunity owned and operated by others (often start-up businesses).
  • A "venture capitalist" ("VC") is a professional, equity-based corporate investor. The VC manages one or more venture capital funds looking for high-reward investments. VC investments are normally made in riskier start-up or expansion ventures. Being high-risk investors, VCs normally look for a substantially higher rate of return than might be realized in more traditional investments.
  • Angel investors and VCs usually receive preferred shares that give the them rights, privileges and priorities over the common shareholders.
  • In each of the above examples, the special shares and preferred shares will have share provisions specifically tailored to the situation.

Examples of typical special/preferred share provisions are as follows:

• Non-voting:
  • The shares may be non-voting (except in certain situations provided for in the governing legislation). In the "Income splitting" example, above, the shares given to Taxpayer "B" and the children are likely to be non-voting special shares so that Taxpayer "A" does not lose control of XYZ Company Inc.
  • In the "Estate freeze" example, above, Taxpayer "A" will likely receive voting special shares so as to retain control of XYZ Company Inc.
• Redeemable:
  • Redeemable shares are shares that can be reacquired by the corporation from the shareholder at the corporation's option usually at any time (in effect, a "call" provision). In the "Income splitting" example, above, the shares given to Taxpayer "B" and the children are likely to be redeemable special shares so that Taxpayer "A" can eliminate Taxpayer "B" and or any or all of the children as shareholders in the event of a matrimonial or family dispute.
  • In the "Income splitting" example, above, the special shares would typically be redeemable at the nominal consideration originally paid by the shareholder to acquire the shares so that the redemption by XYZ Company Inc., in effect, costs the corporation nothing. In the "Estate freeze" example, above, however, the special shares would be redeemable at the value of the shares on the date of the freeze (in the example, $500,000).
• Retractable:
  • Retractable shares are shares that give the shareholder the right to require the corporation to buy back the shares from the shareholder at the shareholder's option usually at any time (in effect, a "put" provision—the mirror opposite of a redemption provision). In the "Estate freeze example, above, the special shares would be retractable at the value of the shares on the date of the freeze (in the example, $500,000). This gives Taxpayer "A" considerable indirect control over XYZ Company Inc. whether or not the special shares received by Taxpayer "A" on the freeze are voting or non-voting.
• Purchase for cancellation:
  • Redemption and retraction provisions give the corporation or the shareholder the right to trigger a purchase/sale of the shares at a share price specified in the provision. In certain circumstances, it may be desirable for the corporation to repurchase the shares at a share price that is different from the redemption or the retraction price; for example, the corporation is in financial difficulty and the shares are worth less than the redemption or retraction price.
  • The legislation gives the corporation the power (but not the unilateral right) to repurchase its issued shares (see OBCA, s. 30; CBCA, s. 34). Where a corporation purchases its issued shares, the shares must be cancelled or, if the corporation's articles limit the number of authorized shares, the repurchased shares may be restored to the status of authorized but unissued shares (see OBCA, s. 35(6); CBCA, s. 39(6)).
  • Strictly speaking, it is not necessary to include a provision in the articles for purchase for cancellation. Nevertheless, some articles do include such a provision either to expand on the statutory provisions or simply to highlight the prospect.
• Dividends:
  • Dividends may be fixed or variable:
    • A fixed dividend will require or permit the corporation to pay a dividend on the shares typically calculated as a percentage of the amount originally paid for the shares (i.e., the stated capital). Fixed dividends can be "cumulative" or "non-cumulative." Cumulative dividends accrue annually; if the corporation fails to pay the dividend in any year, the dividend becomes a debt due from the corporation to the shareholder. Non-cumulative dividends do not accrue annually and are only payable in the years in which the directors declare such a dividend to be payable. Where a non-cumulative dividend is not paid in any given year, no obligation to pay the dividend is carried forward into subsequent years.
    • A variable dividend allows the corporation to pay a dividend at a time and in an amount that is in the directors' discretion.
  • One of the advantages of using different classes of shares is that a dividend may be declared and paid on one or more classes to the exclusion of the other classes. In the "Income splitting" example, above, and assuming Taxpayer "A" and Taxpayer "B" have two children, Taxpayer "A" could have caused XYZ Company Inc. to issue Class A shares to Taxpayer "B," Class B shares to child #1 and Class C shares to child #2 (with Taxpayer "A" holding the common shares). If subsequently child #1 requires money to fund, for example, university tuition, a dividend can be declared on the Class B shares without having to pay a like dividend to the holders of the other classes of shares.
• Liquidation, dissolution or winding-up:
  • This provision will determine the extent to which each shareholder will share in the corporation's equity. In the "Income Splitting" example above, if Taxpayer "A" wants to split income but does not want to otherwise share the value of XYZ Company Inc. with Taxpayer "B" and/or the children, then Taxpayer "B" and the children will receive special shares that can be redeemed for nominal consideration and therefore never have a value that exceeds such nominal consideration.
  • In the "Capital gains exemption" example, on the other hand, Taxpayer "B" and the children would receive special shares that participate equally with the common shares in the equity of XYZ Company Inc. By way of illustration, if Taxpayer "A" holds one common share, Taxpayer "B" and each of two children each hold one participating special share and the equity value of the corporation is $1,000,000, then the value of each shareholder's share is $250,000. This value would apply on the liquidation, dissolution, winding up or sale of shares to a third-party.
  • Finally, in the "Estate freeze" example, Taxpayer "A"'s shares are fixed (frozen) at $500,000. If the equity value of the corporation is $1,000,000, then on the liquidation, dissolution, winding up or sale of the shares to a third-party, Taxpayer "A" will receive $500,000 and, assuming two children, each child would receive $250,000.
• Price Adjustment:
  • In an estate freeze or similar tax-planned transaction, the determination of the fair market value ("FMV") of the shares on the date of the freeze is critical to the success of the structure. For that reason, a formal valuation of the shares as at the date of the freeze is usually obtained to support the freeze value in the event that CRA contests the value.
  • Estate freezes are non-arms' length transactions. Section 69 of the ITA deems non-arms' length transactions to take place at FMV. In the "Estate freeze" example, above, Taxpayer "A"'s share value is frozen at $500,000. If CRA subsequently determines that the FMV of Taxpayer "A"'s shares on the date of the freeze was $600,000, then Taxpayer "A" will have a taxable capital gain of $100,000. To deal with this contingency, it is normal to include a "price adjustment clause" in the share provisions of the "freeze shares" (in the "Estate freeze” example, the special shares received by Taxpayer "A" in exchange for her common shares). The price adjustment clause provides that if the FMV of Taxpayer "A"'s share value is assessed by CRA (or any other taxing authority) to be other than the amount provided for in the freeze transaction, then Taxpayer "A"'s shares are deemed to have an FMV as determined by CRA (as at the date of the freeze).
  • Appendix "B" (see the link in the Resources section of this How-To Brief) contains an example of share provisions for a corporation having two classes of shares: common shares and non-voting, redeemable, retractable, variable dividend and non-participating special shares. This structure might be used where Taxpayer "A" wishes to income split with Taxpayer "B" (Taxpayer "A"'s spouse) but does not want Taxpayer "B" to have any involvement in management or to share in the capital value of XYZ Company Inc.
  • Appendix "C" (see link in the Resources section of this How-To Brief) contains an example of share provisions for use in an estate freeze and includes a price adjustment clause.

Offering vs. non-offering

• An "offering corporation" is an Ontario corporation that is offering its securities (which includes its shares) to the public (see OBCA, s. 1(1)(6)).
• Under the CBCA, a corporation that is offering its securities to the public is called a "distributing corporation" (see CBCA, s. 2(1) and the Canada Business Corporations Regulations, 2001, SOR/2001-512, made under the CBCA, s. 2 as amended). Essentially, these are corporations that have filed a prospectus or registration statement under provincial legislation or the laws of a jurisdiction outside of Canada or that have securities that are listed or posted for trading on a stock exchange in or outside Canada. Offering corporations and distributing corporations are referred to together in this How-to Brief as "public companies."
• For the protection of the public, public companies are subjected to greater regulation and scrutiny under the OBCA, the CBCA and, more importantly, under the Securities Act (see the link in the Resources section of this How-To Brief). Note, for example, ss. 111 (mandatory solicitation of proxies) and 112 (information circular) of the OBCA and the equivalent sections of the CBCA being ss. 149 (mandatory solicitation of proxies) and 150 (management proxy circular).
• The Securities Act applies to all share issues in Ontario.
• The starting point of all securities regulation is that a corporation that proposes to sell shares must file a "prospectus" with the securities regulator and provide a copy of the prospectus to any proposed purchaser unless an exemption exists under the Securities Act. The purpose of a prospectus is to provide public access to information to permit the making of sound investment decisions. The securities regulator in Ontario is the Ontario Securities Commission ("OSC"). The OSC's mandate is to provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in their integrity.
• Since all issues of shares in Ontario are subject, in the first instance, to the prospectus requirement of the Securities Act, it is important to have at least a basic understanding of the Act and the prospectus exemptions under the Act.

Securities Act terms and system of regulation:

• A "security" includes a "share" or "stock" in a company.
• A "distribution" or a "trade" means a sale or disposition of a security for valuable consideration (such as cash).
• An "issuer" means a company or other business entity that has issued securities.
• A "reporting issuer" means a public company (essentially, a company that has issued securities in respect of which a prospectus was filed with the OSC and/or whose securities have been listed and posted for trading on a stock exchange).
• Securities regulation in Ontario is governed by the Securities Act, its regulations, rules and instruments. By virtue of s. 143.3(3) of the Act, the government has, effectively, delegated the power to make regulations to the OSC. Regulations made by the OSC are called "rules"; rules can, subject to Ministerial approval, amend or revoke regulations made by the government.
• The OSC is a member of an umbrella organization called the Canadian Securities Administrators (the "CSA"). The CSA seeks to achieve consensus among the provinces and territories in securities law rule making and to reflect that consensus in new rules and in streamlined procedures for dealing with regulators. Such rules are embodied in national instruments ("NI"), which are effective in all jurisdictions in Canada.
• Rules, national instruments and multilateral instruments are binding; OSC policies are not.

Prospectus exemptions:
History of regulation:

• Prior to November 30, 2001, the exemptions for "private placements" (i.e., trades and securities exempt from prospectus requirements) were found in the Securities Act itself and the primary exemptions relied on were the sophisticated investor exemption (the aggregate share acquisition cost was not less than $150,000) and the seed capital exemption (solicitations were made to not more than 50 prospective purchasers resulting in the sale of shares to not more than 25 purchasers). Note: In 2009 the lengthy list of prospective exemptions that had been set out in s. 72(1) of the Act and become redundant and confusing was removed from the legislation.
• On November 30, 2001, revised Rule 45-501 (exempt distributions) came into force and significantly amended the private placement laws then in existence in Ontario; primarily, the $150,000 sophisticated investor exemption was replaced with an "accredited investor" exemption and the seed capital exemption was replaced with a "closely held issuer" exemption.
• Effective September 14, 2005, Ontario adopted NI 45-106 and amended and restated Rule 45-501. NI 45-106 consolidates and harmonizes the prospectus and registration exemptions that had been previously contained in various provincial securities statutes and other instruments into a single national instrument. (See the link to NI 45-106in the Resources section of this How-To Brief.)

Current Prospectus Exemptions Most Commonly Relied On in Ontario (summarized and in some instances paraphrased):

• Accredited investor: NI 45-106,s. 1.1 and 2.3
  • An "accredited investor" is a person who purchases as principal (i.e., not as an agent for someone else) and includes
    • an individual who, either alone or with a spouse, beneficially owns, directly or indirectly, financial assets having an aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1,000,000
    • an individual whose net income before taxes exceeded $200,000 in each of the two most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the two most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year
    • an individual who, either alone or with a spouse, has net assets of at least $5,000,000
    • a company that has net assets of at least $5,000,000 as shown on its most recently prepared financial statements
    • companies entirely owned by accredited investors
• Private issuer: NI 45-106,s. 2.4
  • A "private issuer" is an issuer that
    • is not a reporting issuer
    • whose securities are subject to restrictions on transfer that are contained in the issuer's constating documents (such as articles of incorporation) or security holders' agreements (such as a shareholder agreement)
    • are beneficially owned, directly or indirectly, by not more than 50 persons, and
    • has distributed securities only to persons who purchase the security as principal and are
      • directors, officers, employees, founders, control persons of the issuer (essentially, a person who owns more than 20% of the outstanding voting securities), or
      • close relatives, close personal friends or close business associates
• Founder, control person and family: NI 45-106,s. 2.7
  • A person who purchases the security as principal and is a founder (essentially, a promoter), an affiliate of a founder, a spouse, parent, brother, sister, grandparent or child of an executive officer, director or founder or a control person is exempt.
• Minimum amount investment: NI 45-106,s. 2.10
  • The purchaser purchases as principal, the security has an acquisition cost to the purchaser of not less than $150,000 paid in cash at the time of the trade, and the trade is in a security of a single issuer. This is similar to the old $150,000 "sophisticated investor" exemption that was eliminated in 2001 but has now been reinstituted for consistency with other provinces.
• Employee, executive officer, director and consultant: NI 45-106,s. 2.24
  • A trade by an issuer in a security of its own issue, or a trade by a control person of an issuer in a security of the issuer or in an option to acquire a security of the issuer, with an employee, executive officer, director or consultant of the issuer or a related entity of the issuer, or a permitted assign of such person if participation in the trade is voluntary, is exempt.

Reference should be made to Companion Policy 45-106CP (see the link in the Resources section of this How-To Brief), which sets out the securities regulator's interpretation as to the application of the exemptions under NI 45-106.
Reporting requirement:

• If an issuer distributes a security in reliance on the accredited investor or minimum amount investment exemptions, the issuer must file a FORM 45-106F1 report with the OSC on or before the 10th day after the distribution. See ss. 6.1 and 6.3(1)(a) of NI 45-106 (the link to this is in the Resources section of this How-To Brief). See also CSA Staff Notice 45-308, Guidance for Preparing and Filing Reports of Exempt Distribution under NI 45-106, Prospectus and Registration Exemptions (the link to this is in the Resources section of this How-To Brief).

Articles provisions:

• In order to ensure that corporations would be treated as "private companies" for Securities Act purposes, articles often included the so-called "private company provisions," which typically states as follows:
  • The transfer of shares of the Corporation shall be restricted in that no shareholder shall be entitled to transfer any share or shares without either:
    1. the approval of the directors of the Corporation expressed by a resolution passed at a meeting of the board of directors or by an instrument or instruments in writing signed by a majority of the directors; or
    2. the approval of the holders of at least a majority of the shares of the Corporation entitling the holders thereof to vote in all circumstances (other than a separate class vote of the holders of another class of shares of the Corporation) for the time being outstanding, expressed by a resolution passed at a meeting of the holders of such shares or by an instrument or instruments in writing signed by the holders of a majority of such shares.
  • The number of shareholders of the Corporation, exclusive of persons who are in its employment and exclusive of persons who, having been formerly in the employment of the Corporation, were, while in that employment, and have continued after the termination of that employment to be, shareholders of the Corporation, is limited to not more than fifty, two or more persons who are the joint registered owners of one or more shares being counted as one shareholder.
  • Any invitation to the public to subscribe for securities of the Corporation is prohibited.
• The foregoing provisions essentially tracked the definition of "private company" in section 1(1) of the Securities Act which reads as follows:
  • "private company" means a company in whose constating document,
    1. the right to transfer its shares is restricted,
    2. the number of its shareholders, exclusive of persons who are in its employment and exclusive of persons who, having been formerly in the employment of the company, were, while in that employment, and have continued after termination of that employment to be, shareholders of the company, is limited to not more than fifty, two or more persons who are the joint registered owners of one or more shares being counted as one shareholder, and
    3. any invitation to the public to subscribe for its securities is prohibited