Corporate Share Structure Explained - By George Craven of Monarch Tax Law

The best way to look at shares is as a contract between the corporation and the shareholder...
The corporation sets the terms of the contract in the articles by listing the rights and restrictions of the various share classes and the shareholder agrees to abide by those terms when it holds those shares. Since it is a contractual relationship, the corporation can put whatever rights it wants into the different classes of shares. Under the Business Corporations Act, a share has all the rights associated with a share – voting, the right to dividends, the right to participate in the distribution of the corporation if it is wound up, etc. unless the articles limit those rights. So if you just say in the articles there is one class of shares, then by default, those shares will have all the rights. Therefore, the articles should say whether a share is voting or non-voting because if the articles say nothing the share is voting by default. Also if there is no restriction on the right to dividends in the articles, the share is entitled to as many dividends as the directors decide. 

The Name of the Class of Share is Totally Irrelevant – Rights and Restrictions in the Articles Govern the Type of Share it is.  
Since the share rights are really a contract with the shareholder, the parties can decide what they want those rights to be. There are no hard and fast rules, though there are conventions that are often followed. So you can call a share a common share but if it has the rights of a preferred share then it is really a preferred share. You can call a share a Mickey Mouse share if you like. The name is irrelevant. This points to a problem I see a lot in Articles where they designate two classes of shares and call them Class A Common Voting Shares and Class B Common Non-voting shares and then they do not put any rights and restrictions attaching to those shares. So what you have there is two identical classes of shares with all the rights and restrictions of shares including the right to vote because calling a share a non-voting share does not make it a non-voting share unless the right to vote is expressly removed. However if you just call a share a non-voting share, most people will treat it as a non-voting share even though strictly speaking, it only loses the right to vote if the articles say it has no right to vote.

Voting Shares vs. Non-voting Shares? Voting Shares Control the Corporation
As far as voting control is concerned, any share that has voting right, be it a preferred shares or a common share, can vote to elect the directors each year. The shareholders must hold a meeting at least once a year (or sign consent resolutions in lieu of a meeting) to elect the directors for the coming year. The ability to elect the directors is the indicator of control over the corporation because the directors make the important decisions, declare the dividends, hire and fire officers, must approve all borrowings, must approve all share transfers and can issue new shares. The ability to control the company is simply a numbers game – if you hold shares that entitle you to have more than 50% of the vote, then you control the company. Note that shares can be entitled to more than one vote if the articles say they do. So you could own just one super voting share with 10,000 votes attached to it and control a corporation that has 9,999 shares with just one vote each held by other shareholders. The main exception to the rule that voting power gives you control would be where there is a shareholder agreement which overrides the 50% +1 vote for electing directors for whatever reason.

Preferred Shares vs. Common Shares
So then what is the difference between a preferred share and a common share? Well, strictly speaking the only difference is one is called a preferred share and one is called a common share. Remember, it’s the rights and restrictions attaching to each class that are important, not the name. However by convention there are certain rights and restriction which usually attach to preferred shares that do not attach to common shares. There is no obligation to follow these conventions, which is why lawyers are so anal about reviewing share rights in case there is something out of the ordinary in them.

Common shares:

• Usually a right to participate in the profits by way of dividends in any amount as and when declared by the directors.
• Usually the right to participate in the assets of the corporation if it is wound up, but usually only after the preferred shares have been paid out first.
• Can be either voting or non-voting
• Usually no right to be redeemed by the corporation or the shareholder.
• Are usually issued at whatever value the directors say they should be issued at and do not have a fixed value attached to them

Preferred shares:

• Often issued for a fixed redemption price
• Can be voting or non-voting
• Often redeemable at the option of the shareholder and/or the corporation for the fixed redemption price
• Usually have set dividend rate that must be paid before any other dividends can be paid on the common shares
• Usually have the right to be refunded the redemption amount in priority to the common shareholders if the corporation is wound up
• There is usually a provision that says no dividends can be paid on the common shares if it would reduce the value of the corporation below the redemption amount of the preferred shares

Because preferred shares have a fixed redemption amount, a fixed dividend rate and a priority on the assets of the corporation on winding up, the preferred shares are never worth more than the redemption amount. This means that when looking at the value of a corporation, the preferred shares soak up the value of the corporation up to their redemption amount and the common shares soak up the rest of the value. So common shares go up and down in value with the value of the corporation, but preferred shares keep the same value unless the value of the corporation falls below the redemption value of the prefs. That is why preferred shares are useful for doing an estate freeze because their value can be frozen.

Section 85 of the Income Tax Act Allows the Transfer of Property to a Corporation without Immediate Tax Consequences
Also, preferred shares are often used in a section 85 rollover situation because the shareholder is transferring something with a specific value to the corporation and using preferred shares to pay for the assets means that the value of that asset can be isolated into those preferred shares. That is because preferred shares have a fixed value. Since common shares do not have a fixed value, if you issue common shares on a s 85 rollover, the common shares you issue better have the same value as the existing common shares otherwise all sort of nasty things happen. So if you already have 100 common shares and the company is worth $1million, that’s $10,000 a share. If you then transfer assets worth $2 million to the company under section 85 and issue another 100 common shares, then now you have 200 common shares worth $3 million or $15,000 each. You have in effect, transferred $2 million in assets to the company for 100 shares worth $1.5 million and increased the value of the existing common shares from $1 million to $1.5 million. That is not a good result. This problem goes away if you use fixed value preferred shares instead.

The redemption right also means that at any time, a shareholder can require the corporation to redeem the preferred shares and pay the redemption amount to the shareholder, and the corporation can require the shareholder to sell the shares back to the corporation for the redemption amount. This means that preferred shares have some of the characteristics of a debt instrument – a fixed amount owed, a fixed interest/dividend rate, the ability to pay back at any time. That is why preferred shares are sometimes used as a financing tool for investors who want a fixed return but do not need to participate in the growth in value of the corporation. Indeed, accounting rules can require preferred shares to be booked as debt rather than as equity, which drives lawyers mad because equity is always equity in our world view no matter what its substance may be.