Adding a new shareholder to a BC company: issuing new shares or transferring existing ones

Bringing someone new into your company is a big decision, and the legal route you choose shapes the result. If the company issues new shares, the money goes to the company and everyone else is diluted. If an existing owner sells or gifts some of their shares, the money goes to that owner and the company's share count does not change.

This article compares the two routes under BC's Business Corporations Act, lists the records that need to be updated, and flags the side issues that tend to surface later.

Two routes, two different results

Issuing new shares (sometimes called a subscription or treasury issue) means the company creates and sells shares to the newcomer. The company receives the money or other value, and the percentage held by every existing shareholder goes down.

Transferring existing shares means a current shareholder sells or gives some of their shares to the newcomer. The seller receives the payment, the company receives nothing, and only the seller's percentage falls.

Which one fits depends on why the person is joining:

• An investor putting in capital usually subscribes for new shares, because the money is meant for the business.
• A partner buying into an existing owner's stake usually buys shares from that owner.
• A family member or key employee may receive either, but the tax treatment can differ sharply, so speak to your accountant before choosing.

Issuing new shares: what the Act requires

Under section 62, the directors decide when shares are issued and to whom, subject to the company's notice of articles and articles. For shares without par value, which most BC private companies use, section 63 lets the directors set the issue price by resolution unless the articles say otherwise.

Three rules often catch owners out:

• Shares must be fully paid before they are issued. Section 64 allows payment in money, property or past services. A promissory note from the newcomer does not count, and neither does a promise to work for the company in future. "Sweat equity" arrangements need a different structure, such as shares issued for value with a vesting or buy-back arrangement, or shares issued later for services already performed.
• The directors must be satisfied about value. Where property or past services are the payment, the directors must not value them above fair market value.
• The authorized share structure must allow it. The notice of articles sets out each class of shares and any maximum number the company may issue. If you need a new class, for example non-voting shares for an employee, or more shares than the maximum, the notice of articles and articles must be altered first, by the type of shareholders' resolution the articles require, or a special resolution if they are silent.

Issuing shares is also a distribution of securities under securities law. Private companies normally rely on a prospectus exemption, and some exemptions limit who the shares can be sold to or require a filing, so the newcomer's relationship to the company matters.

Transferring existing shares: check the articles and any agreement

A transfer is governed by the Securities Transfer Act and by the company's own documents. Many private company articles restrict transfers, for example by requiring the directors' consent. A shareholders' agreement may add a right of first refusal, giving the other owners the chance to buy before an outsider can. Our article on shareholders' agreements in BC explains how those clauses work.

The seller and buyer usually sign a share purchase agreement and a transfer, the directors approve the transfer if the articles require it, and the old share certificate is cancelled and a new one issued.

A transfer can have tax consequences for the seller, including a capital gain. Transfers to related people for less than fair market value can produce unexpected results, which is another reason to involve your accountant early.

The paperwork on either route

Whichever route you choose, the company's records need to show it. A complete file usually includes:

• The agreement. A subscription agreement for new shares, or a share purchase agreement for a transfer.
• Resolutions. The directors' resolution approving the issue and setting the price, or approving the transfer, and any shareholders' resolution needed to change the share structure.
• Share certificate or notice. A new certificate, or for uncertificated shares, the written notice the company must send under section 107.
• Central securities register. Section 111 requires every issue and transfer to be entered, with the date and particulars.
• Transparency register. If the newcomer will hold 25% or more of the shares or votes, they are likely a significant individual. The company must record new information in its transparency register within 30 days of becoming aware of it, and update entries for existing owners whose holdings change.

Update the shareholders' agreement

A new shareholder should sign the shareholders' agreement, or a joinder to it, at the same time as they receive shares. If there is no agreement, this is the moment to put one in place. Without one, there is no agreed answer to what happens if the newcomer leaves, stops contributing, separates from a spouse or dies.

Those last two points connect to other planning. Shares can be family property on separation, and shares held at death pass under the owner's will. Our guide to what happens to company shares when an owner dies explains why a will and a buy-sell clause should match.

Bringing in a new shareholder? Get the structure right before shares change hands

Our business lawyers can advise on whether to issue or transfer shares, prepare the agreements and resolutions, update the registers and transparency register, and amend your shareholders' agreement so it covers the new owner.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.