How to Transfer Shares in a Private Company in Canada

Growing a business can be challenging so it only makes sense to develop a plan that will not only ensure financial profitability but one that is also realistic. If it is true that it takes money to make money then developing a viable funding stream is essential if you expect to be successful.

Selling shares in a company is a common and effective way to raise capital. It allows businesses to fund and expand their operations. There are two ways this can be done. Either by issuing private company shares or selling stock as a public company through the stock exchange. In most cases, privately held companies are owned by its founders, management, or a group of private investors. They can be small organizations or large, big-name brands.

There are notable advantages to issuing stock as a privately held company. New businesses or those with low credit scores will typically face high interest rates when trying to raise start-up capital so selling shares allows you to avoid the liabilities of debt.

When you take on a loan, there will undoubtedly be stipulations on how the money can be spent. Not so with funds generated from selling shares in a company. As well, taking on debt not only requires you to use some of your revenue to make loan payments but it could also make you appear less attractive to investors. These investors generally compare a business’s debt load. If that debt is significant, your company could be seen as a risk. But if the amount of your company that is owned by investors is higher than the proportion held by lenders then the risk to investors will be presumed to be less. Issuing stock will also transform your company into a liquid asset that can be traded easily.

Of course, selling shares in a business is not without its drawbacks. While it is a proven method of raising capital, issuing stock also means you will own less of your business. You will have to share your profits with investors as well.

There are many things to consider when running a private limited company. In this blog, we will examine the best way to transfer shares. It can be complicated and a misstep can be costly. The forward-thinking corporate lawyers at GLG LLP can help you cut through the complex legal issues that you face as a business owner. We will work diligently to protect your interests while mitigating your exposure to risk.

What is Involved When Issuing Private Company Shares?

Each corporation in this country is regulated by its incorporating statue, for instance, the Canada Business Corporations Act or the Business Corporations Act (Ontario). There are restrictions when it comes to transferring or selling shares. For example, a business that wants to issue shares is presumptively required to provide a prospectus. It can be expensive to create this legal document, which includes such details as your business plan and finances. However, a prospectus will not be required if the issuance falls within certain enumerated exceptions.

Your board of directors will be responsible for deciding when to issue shares, their value and who will receive them. This can be a complicated procedure and it is prudent to seek legal advice.

To qualify as a private share issuer, transfers must be approved by your board or shareholder and you must fulfill all requirements stated in the articles of corporation or shareholder’s agreement. The shareholder’s agreement, the articles of incorporation or your by-laws must state that the corporation can issue shares as proposed by the transaction.

New shareholders will need to sign an agreement that sets out the number and the type of shares. Payment for the shares can be in cash or can also take the form of services or property. In return the shareholder receives a share certificate.

Are There Restrictions on Share Transfers?

If you are transferring shares you will need to find out what restrictions, if any, are placed on the transfer of the sharesLimitations can include the number of shares that can be transferred, who can buy or sell them and a right of first refusal that allows other shareholders the opportunity to purchase the shares before they can be offered to others.

There may be a provision in the Unanimous Shareholder Agreementthat requires shareholders to approve  the transfer. This would be effected by way of ashareholders’ resolution must be passed approving the transfer.

We Can Help You Navigate a Private Company Share Transfer

Due diligence is essential with any business move. At GLG LLP our skilled team of lawyers provide our clients with an uncompromising level of individual attention and personalized service in a wide range of legal matters including business asset/share purchases. We have the expertise and experience that allows us to identify risk and potential issues to ensure a successful transaction.