Closed transmitter status

A major element that should not be overlooked in incorporation is the restriction on the transfer of shares and other securities, which is usually included in the articles of incorporation.

Generally speaking, a company issuing shares or other securities is obliged under the Securities Act to produce a prospectus, which is a complex document whose purpose is, among other things, to protect investors by informing them in detail of the company's financial situation.

However, the law provides for several situations under which a company is exempt from the prospectus requirement. One of the most frequently used exemptions is the private issuer exemption, which is set out in section 2.4 of Regulation 45-106 respecting Prospectus Exemptions. This exemption applies automatically as long as the various criteria are met, and does not require the filing of any form with the Autorité des marchés financiers (AMF). It is this exemption that is used by the vast majority of smaller private companies.

The following is a summary of the conditions to be met:

• The company must not be a reporting issuer (e.g. companies making a public offering) or an investment fund;
• The company's securities, except for non-convertible debt, are subject to restrictions on free transfer contained in the company's governing documents or in agreements between the holders of the securities;
• The company's securities must be beneficially owned by no more than 50 persons (excluding employees);
• The securities were only placed with persons covered by the regulations, including the founders, directors, officers of the company, and members of their families or close friends.

The provisions contained in the articles of incorporation of the company are therefore important in order for the company to have the status of a private issuer and to be able to issue shares or other securities without a prospectus requirement.

Generally, the articles of incorporation provide that any transfer of shares or other securities, except for non-convertible debt securities, is subject to the consent of the board of directors. In this way, in the event of a sale of shares, it will be imperative that the company intervenes to authorise the transfer. This is the way a share transaction between shareholders of private companies is generally conducted in Canada.

Alternatively, if the articles of association do not provide for such a restriction, the holders of the securities (the shareholders, in the case of shares) may contractually agree on a restriction on the free transfer of the securities.

Finally, it should be noted that for companies that only have a restriction on the transfer of shares in their articles, it is not necessarily mandatory to amend the articles to add a restriction on the transfer of securities. Indeed, if the company has only issued shares and no other securities, such as stock options or convertible debentures, the restriction on the transfer of shares alone is sufficient to comply with the regulation.