Corporate legislation, both provincial and federal, allows for various changes in the share capital of a corporation, including share exchange and conversion. These two changes in share capital should not be confused, even though the result is often the same.
The share exchange is a transaction specific to the individual shareholder, and constitutes simultaneously a sale of shares to the company and an issue of shares by the company. The shareholder enters into a share exchange agreement whereby he or she surrenders his or her shares to the company and receives shares of another class that are part of the authorised share capital. A share exchange generally requires the following:
A share conversion is most often (but not always) aimed at all shareholders holding a particular class of shares and the procedure is different from a share exchange. A share conversion is the transformation of a share (its designation, rights and restrictions) into another class. For federal corporations, an amendment to the articles of incorporation by way of articles of amendment is required to effect a conversion. For provincial corporations, the law provides that a simple resolution of directors , approved by a special resolution of the shareholders, may be used to proceed with a conversion; however, an amendment to the articles may be necessary if a new class is to be created at the time of the conversion.
Share exchanges and conversions are often used for tax planning purposes, in particular to freeze the value of common shares and to bring in new shareholders, who will be able to subscribe to shares for a minimal amount. Various provisions in the Income Tax Act allow for the exchange or conversion of shares to be done without immediate tax impact, if all conditions are met.