How unpaid shares work

Election of directors
October 24, 2023

The Quebec Business Corporations Act , unlike the federalincorporation regime and the regimes of most other Canadian provinces, permits the issuance of shares that are not "fully paid" at the time of issue. This means that the Board of Directors authorizes the issue of shares regardless of the amount received from the share subscriber. These shares will be subject to an instalment call and ultimate forfeiture, as we shall see later.

Why issue unpaid shares?

More often than not, the issuance of unpaid shares is a practical matter. The first share issues, i.e. those issued to the company's founders, are usually in fact made before any payment is received by the company. In many cases, the resolution authorizing the issue of shares will be passed before a bank account has been opened and the amounts due deposited.

This type of share issue can also be used when, for example, an investor proposes to pay for the subscribed shares in instalments. In this case, a contract may be signed between the company and the subscriber to set out the terms of payment for the shares.

In addition, when setting up a discretionary trust to subscribe for shares in a corporation, the possibility of issuing unpaid shares is very useful, particularly to prevent the subscription amount from coming from the settlor of the trust, which could have undesirable tax consequences.

What are the formalities to be completed?

In addition to an authorisation from directors, the law provides that the company must indicate in the securities register any balance owed by the shareholder on his shares. In addition, the share certificate (or the notice issued by the company in the case of uncertificated shares) must in principle state that the shares are not fully paid.

It should be noted that, in general, the holder of unpaid shares enjoys the same rights in respect of his shares as a shareholder who has paid for his shares in full. There may be exceptions to this principle, depending on the rights and restrictions set out in the Articles of Incorporation, for example when the dividend payable in respect of a class of shares is calculated on the amount paid on the shares.

How can the company demand payment?

By law, shareholders are indebted to the company for any unpaid amounts on the shares they hold. They are obliged to contribute to the company's capital up to the issue price of their shares.

If the share subscription contract does not contain specific payment terms, the Board of Directors may, by resolution, request payment by instalment call. A notice is then sent to the shareholder requesting payment in full or in part of the amount due on the shares. If the subscription contract contains payment terms, the company proceeds by formal notice.

If the shareholder fails to comply, the company will be entitled to confiscate the shares and sell them to a buyer. The proceeds of the sale will be given to the shareholder who had his shares confiscated (minus the amount he owed on the shares). Alternatively, the company can go to court to order payment of the outstanding balance on the shares.

Note that the obligation to pay unpaid amounts on shares "follows" the shares in question and is not attached to the original subscriber of the shares. In other words, the debt is passed on to any subsequent purchaser of the shares when there is a transfer of shares that are not fully paid.

Voting rights

The Quebec Business Corporations Act stipulates that a shareholder may not vote at shareholders' meetings if he or she is in default of payment following a call for instalments or according to contractual payment terms. In this context, it may be preferable not to include any terms of payment in the offer to subscribe made to the founders of a company, to prevent them from involuntarily finding themselves in default vis-à-vis the company.

Shares deemed paid

The law expressly prohibits unpaid shares from being considered as paid. We therefore believe that the practice of declaring shares as fully paid up in the resolution authorizing their issue, when in fact no payment has been made at that time, should be avoided.

 

 

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