What are the different types of corporate actions?

Are you an entrepreneur or professional considering incorporation? Understanding corporate actions like the issuance of different types of shares is essential to strategically structuring your business. Your choice will affect the rights attached to the shares, the profits you receive, and your control over the management of the company.

Learn more about the different types of corporate actions, their specific characteristics and how they can change the way your company is managed.

What is an action?

A share represents a piece of the company and entitles its owner to certain privileges. Owners of shares become shareholders and are granted certain rights within the company. These rights often include the right to vote on important decisions at meetings, the right to receive dividends, and priority in the event of the dissolution of the company.

When companies issue different classes of shares, they define the rights according to their strategic objectives. For example, some shares may be intended for investors, while others may be designed to maintain control for the founders. In addition, companies may enhance their fundraising strategies by conducting a rights issue, which allows existing shareholders to buy additional shares at a discounted price.

Types of actions and their characteristics

When you decide to form a corporation, there are several types of shares you can create. Each offers a variety of solutions to meet the specific needs of companies and their shareholders. Understanding these options is essential to choosing the right structure for your needs and objectives.

Here's an overview of the main types of shares and their characteristics.

1. Common corporate actions

Common shares represent an ownership interest in a company and confer basic rights on their holders. This is the most common type of stock and often forms the basis of a company's structure. Holders of common stock, also known as shareholders, generally have voting rights at shareholder meetings, allowing them to participate in important decisions, such as the election of directors. They may also receive dividends, if the company chooses to pay them, although these depend on profits and are not guaranteed.

Advantages: These shares offer control over the management of the company and a share in its profits.
Limitations: They do not offer a guarantee of income, since dividends are paid only if profits are sufficient.

2. Preferred shares

Preferred stock is a class of stock that offers certain advantages, including greater security for its holders. Unlike common shares, they generally do not carry voting rights, which limits the influence of preferred shareholders on the company's strategic decisions. On the other hand, they offer distinct financial advantages: a fixed dividend, often paid regardless of the company's financial results, and priority in liquidation. This means that if the company is liquidated, preferred shareholders will be repaid before common shareholders.

Advantages: Greater security due to guaranteed dividends and priority in liquidation.
Limitations: No voting rights, which reduces influence on strategic decisions.

3. Restricted shares

Restricted shares are a class of shares designed to grant limited rights while allowing financial participation in the company's profits. They confer little or no voting rights, which reduces the holder's influence on key strategic decisions. These shares are particularly useful in certain contexts, such as the structuring of partnerships or the separation of powers between different groups of shareholders. They allow for a fair distribution of profits while keeping control in the hands of key decision makers.

Advantages: Ideal for structuring complex business relationships or balancing shareholder rights.
Limitations: Restricted rights, particularly with respect to voting and influence over strategic management.

4. Flow-Through Shares

Flow-through shares are a class of shares exclusive to Canada and are particularly popular in natural resource sectors such as mining and energy. These shares allow investors to benefit from substantial tax deductions as the issuing companies pass certain tax benefits to their shareholders. This mechanism makes them an ideal financial tool for financing high-return projects, although they often involve a degree of risk.

Companies that issue these shares transfer certain tax benefits to investors. These shares are often used to finance projects with high potential returns but with a certain level of risk.

Advantages: Substantial tax benefits for investors, making these shares very attractive.
Limitations: Limited to certain sectors, such as mining or energy.

5. Other types of shares

Some companies create custom share classes to meet specific needs:

• Multiple voting shares: These give their holders more control over the management of the company.
• Non-voting shares: used to attract investors without ceding strategic control.
• Participating shares: offer a variable share of profits based on the company's performance.

Advantages: Maximum flexibility to meet the needs of founders, investors or partners.
Limitations: Management complexity and risk of shareholder conflict if rules are not clearly defined in the articles of incorporation.

How to choose the right corporate actions for your company

The choice of share structure and shareholders will have a major impact on the management, finances and long-term growth of the company. Each type of share has its own specific objectives. To find out more, read our article on the benefits of incorporating for more information on making the right choice.

Alternatively, here's how you can align some of your choices with your priorities:

1. For beginners: If you prefer simplicity, common stocks are often the best choice. They allow you to maintain control while providing flexibility for the future.
2. For a growing company: If you want to attract investors while limiting their control, preferred stock is ideal. They guarantee their holders a fixed income and build their confidence.
3. For a publicly traded company: Companies in the financial markets often need to issue multiple classes of stock to balance the interests of stakeholders such as institutional investors and individual shareholders.

Your objectives drive your choices

Here are some questions to guide your thinking:

• Do you want to maintain control? Choose common stock with multiple voting rights.
• Do you want to attract investors? Flow-through and preferred shares are attractive for their financial security or tax advantages.
• Need to incentivize your employees? Issue participating or subordinated shares to reward their commitment without diluting control.

Why choose T2inc.ca for your incorporation?

Understanding corporate actions is a crucial step in structuring your business strategically. Whether you choose common shares for their flexibility, preferred shares for their security, or custom classes for unique needs, each decision shapes your company's future.

Are you thinking about structuring or incorporating your business? At T2inc.ca, we understand the importance of making the right choice. With our online incorporation service, our partner lawyers and accountants will help you determine the ideal share structure to achieve your goals.

Ready to get started? Contact us today to structure your business and make informed decisions for its success.