Adding a shareholder: practical considerations

It is possible at any time to add one or more shareholders to an existing company. The following is an overview of some practical considerations when adding a shareholder to your corporate structure.

Sale or issue of shares?

A shareholder can be added generally in two ways: the sale of shares already issued, or the issue of new shares. In the case of a sale, a shareholder disposes of part of his or her shares in return for a purchase price determined by the parties to the contract. The number of shares outstanding does not change: a shareholder holding 100 ordinary shares can, for example, sell 50 shares to a purchaser, and the total number of shares outstanding would remain at 100. If the sale price is higher than the price paid for the shares initially by the seller, this will create a capital gain for the seller.

In most cases, when a shareholder is added, it is more likely that shares will be issued instead of sold. The company and the shareholder will have to agree on the number of shares to be issued, and the price per share. The price per share will determine what the new shareholder will have to contribute in return for his or her shares. It is important that the issue is not made for less than the fair market value of the shares to be issued, in order to avoid tax implications.

Share class

When issuing shares, it will be necessary to determine which class of shares is being issued. In order to achieve an "equal" partnership between the shareholders, ordinary shares will be issued. However, it is possible (depending on the authorised share capital) to issue shares with certain restrictions or particularities. Will the shares issued be fully participating in the company's surplus? Will they be voting shares? Will they be redeemable at the option of the company?

Number of shares

The number of shares to be issued is important to consider, in order to achieve the desired percentage. Any new share issue will necessarily result in dilution of those holding shares in the company. For example, a single shareholder holding 100 ordinary shares will be diluted to 50% if 100 new shares are issued to another shareholder.

It may be useful, prior to a share issue, to subdivide or recast the outstanding shares in order to obtain the percentages desired by the stakeholders by avoiding, for example, fractional shares.

Closed transmitter and regulation 45-106

It is important, when bringing in a new shareholder, to ensure that he or she falls within the exceptions set out in NI 45-106 for exemption from filing a prospectus. Generally, a family member, a close friend, an accredited investor, an employee or a officer/director/founder of the company qualify for exemption from the prospectus requirement. There is also the residual category of "non-public" person.

Acquisition of control

From a tax point of view, the arrival of a new shareholder could lead to an "acquisition of control" under tax law, with the effect of ending the current tax year. It is recommended to consult a tax advisor in the circumstances to verify the tax effects of the transaction.

Shareholder agreement

It might be a good idea to conclude (or integrate if the agreement already exists) a shareholders' agreement with the new shareholder. This agreement will govern, among other things, the withdrawal from the business, the death of a shareholder and may provide a mechanism for ending a deadlock between shareholders ( shotgun clause).

If a "unanimous" shareholder agreement restricting the powers of the board of directors already exists, the new shareholder will automatically be subject to such a unanimous agreement. It will be important to notify the new shareholder of the existence of such a unanimous shareholder agreement, and to provide a copy of the agreement.

Intervention by the Board of Directors

Whether by issue of shares or transfer of shares already issued, it will be imperative to obtain the approval of the Board of Directors in order to authorise the issue or transfer of shares, as the case may be. A written resolution in lieu of a board meeting may be signed by all directors in office.