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Restrictions on transfer of shares

Region: Ontario Answer # 0251

Transferring shares refers to the purchase and sale of shares. When shares are transferred, the rights attached to the shares are also transferred. The rules and restrictions on the transfer of shares of a corporation depend on whether it is a private or a public corporation.

A private corporation has 50 shareholders or less, restricts the right to transfer shares, and prohibits the sale of shares to the public. In Canada, private corporations can be incorporated under provincial laws or federally. Each province has its own Corporations or Companies Act that sets out the general restrictions on the transfer of shares in privately held corporations, while the Canada Business Corporations Act sets out the rules for federally incorporated companies.

A public corporation refers to a company which offers its shares for sale to the public. Public corporations can be listed, meaning they are listed on at least one stock exchange where their shares are openly traded (bought or sold), or they may be unlisted, meaning they are not listed on a stock exchange.

Private corporations – transfer of shares

In privately owned corporations, when transferring shares shareholders must adhere to the restrictions and conditions that are set out in the corporation’s Articles of Incorporation and By-laws. If a shareholders agreement exists, it may also contain restrictions relating to share transfers. Restrictions can apply to all transfers or only to those in specific cases, such as transfers between spouses or other family members. Shares can usually be transferred to both individuals and entities, such as partnerships and corporations.

Common share transfer restrictions include:

  • who can buy or sell shares,
  • how many shares can be transferred,
  • a requirement that the existing shareholders must agree to the transfer, and
  • a requirement that a shareholders’ resolution approving the transfer be passed.

Share transfer requirements and restrictions in privately held corporations can be established for several reasons, but the most common is that the shareholders are usually also the directors, officers and employees of the company, and as such, they want to have a say about who they are going to do business with and work with.

If you are a shareholder of a private corporation, you have the right to see the corporate minute book. The minute book contains the Articles of Incorporation and the By-laws, which will set out the conditions for share transfers.

If you are considering buying the shares of a private company, it is a good idea to get legal advice from a lawyer. In such a case, it is advisable for you to do your ‘due diligence’ and investigate the corporation’s finances, assets, legal liabilities, business history, etc. For example, you will not want to purchase shares in a corporation that has no assets and is heavily in debt.

Public corporations – transfer of shares

For pubic corporations, the transfer of shares happens differently. Provincial Securities Transfer Acts set out the rules regarding the transfer of shares (also called securities), in public companies. Generally speaking, shares are openly traded on a stock exchange, such as: the Alberta Stock Exchange, Canadian Securities Exchange, Montreal Exchange, Toronto Stock Exchange, TSX Venture Exchange and the Vancouver Stock Exchange. In a public company there is no control over whom the shares are transferred to on the stock exchange.

Shares can be traded with help from professionals such as investment advisors, stock brokers, and investment dealers. Some people also choose to buy and sell shares on their own.

While shares can generally be transferred between shareholders with a written agreement, provincial laws may determine such things as:

  • the delivery procedures for the share transfer
  • the rights of the purchaser
  • endorsements and instructions of the transfer
  • liability of guarantor, endorser (person who signs security certificate) and originator
  • if a security certificate is required
  • duty of issuer to register the transfer
  • obligations of transfer agent, issuer, authenticating trustee.

In order to keep a record of the current shareholders (on the official master shareholder listing), public corporations usually hire transfer agents to keep track of all transfers. Transfer agents (also referred to as share registries, stock transfer agents or transfer agencies) are companies which cancel the name and certificate of the shareholder who sold the shares and substitute the new shareholder’s name.

For legal advice and assistance with your corporation, and for all other business matters, contact our preferred lawyers, Singer Business Law .




								

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