When incorporating a corporation provincially under the Ontario Business Corporations Act (“OBCA”) or federally under the Canada Business Corporations Act (“CBCA”), the corporation’s articles must authorize at least one class of shares with voting rights. However, for various strategic or structural reasons, corporations may choose to create one or more classes of non-voting shares, meaning, shares that do not carry the right to vote at shareholder meetings. In exchange for relinquishing voting rights, holders of non-voting shares are often compensated with enhanced economic benefits, such as priority entitlement to dividends or preferential treatment upon liquidation.
Despite their designation, the OBCA and the CBCA grant non-voting shareholders limited voting rights in specific circumstances. This article outlines when such rights to vote apply.
VOTING RIGHTS FOR NON-VOTING SHAREHOLDERS
Section 170(1) of the OBCA and Section 176(1) of the CBCA set out the specific situations in which non-voting shareholders are granted special voting rights. Generally speaking, these rights are triggered by proposed amendments to the corporation’s articles that would materially affect the fundamental terms under which such shareholders originally agreed to invest in the corporation’s shares.
Non-voting shareholders are entitled to vote separately as a class on a proposal to amend the articles to:
- increase or decrease any maximum number of authorized shares of such a class or series, or increase any maximum number of authorized shares of a class or series having rights or privileges equal or superior to the shares of the class or series;
- effect an exchange, reclassification or cancellation of the shares of a class or series;
- add to, remove or change the rights, privileges, restrictions or conditions attached to the shares of a class or series and, without limiting the generality of the foregoing, remove or change prejudicially rights to accrued dividends or rights to cumulative dividends, add, remove or change or change prejudicially redemption rights or sinking fund provisions, reduce or remove a dividend preference or a liquidation preference, or add, remove or change prejudicially conversion privileges, options, voting, transfer or pre-emptive rights, or rights to acquire securities of a corporation;
- add to the rights or privileges of any class or series of shares having rights or privileges equal or superior to the shares of such a class or series;
- create a new equal or superior class of shares;
- make any class or series of shares having rights or privileges inferior to the shares of such a class or series equal or superior to the shares of the class or series;
- effect an exchange or create a right of exchange of the shares of another class or series into the shares of the class or series; or
- add, remove or change restrictions on the issue, transfer or ownership of the shares of such a class or series.
Where special class voting rights apply, a special resolution amending the articles of the corporation must be approved by not less than two-thirds of the votes cast by each class of shares entitled to vote with respect to that resolution or consented to in writing by each shareholder.
ALTERING NON-VOTING SHAREHOLDER PROTECTIONS THROUGH ARTICLES
Section 170(1) of the OBCA and Section 176(1) of the CBCA also stipulate that items 1 (number of authorized shares), 2 (exchange, reclassification, or cancellation of shares) and 5 (creation of new classes that are superior in rights) of the above-listed rights can be removed, provided that such removal is expressly set out in the corporation’s articles prior to the issuance of the affected shares.
VOTING RIGHTS IN AMALGAMATIONS
Section 176(3) of the OBCA and Section 183(4) of the CBCA further protect non-voting shareholders during amalgamations. Under these sections, non-voting shareholders of an amalgamating corporation are entitled to vote separately as a class in respect of an amalgamation if the amalgamation agreement contains a provision that, if contained in a proposed amendment to the articles, would entitle such holders to vote separately as a class or series under section 170 of the OBCA or Section 176 of the CBCA.
EXEMPTION FROM AUDIT REQUIREMENTS
Additionally, pursuant to Section 148 of the OBCA and Section 163 of the CBCA, shareholders of a non-distributing (or non-offering) corporation may unanimously resolve not to appoint an auditor. Such a resolution must be approved by all shareholders, including those holding non-voting shares. This requirement reflects the underlying public policy that all shareholders, regardless of voting rights, are entitled to be informed of the corporation’s financial condition.
UNDERSTANDING THE IMPACT OF STATUTORY RIGHTS FOR NON-VOTING SHAREHOLDERS
The statutory provisions for separate class voting highlight the legislature’s recognition of the potential impact that corporate changes can have on non-voting shareholders. By granting limited but meaningful voting rights in specific circumstances, the OBCA and the CBCA provide a mechanism for these shareholders to protect their interests.
Despite these protections, non-voting shareholders should understand that ultimate control over corporate decisions typically remains with voting shareholders. Although non-voting shareholders cannot unilaterally modify their rights, both the OBCA and CBCA require that any significant changes affecting those rights be made through transparent, structured, and shareholder-inclusive processes.
If you require legal advice regarding shareholder rights or any other corporate guidance, Soloway Wright LLP’s experienced legal team is ready to help. Please contact any member of our Business & Corporate Group for more information.
AUTHOR BIO:
Clara Lockhart joined Soloway Wright in 2023 as a member of the Business & Corporate Group after summering and articling with the firm. Clara maintains a general corporate and commercial practice and assists clients with a broad range of transactions including incorporations, financing, asset and share purchases, non-profit matters, and corporate reorganizations.
