Why do companies issue subordinate voting shares and non-voting shares?
This is a way for corporations to raise equity capital from investors without giving them equal voting rights to that of the existing outstanding shares.
Since several Canadian corporations are closely held -- ownership is in the hands of relatively few owners -- the issuance of these restricted shares is viewed as a way of getting more capital while also maintaining control. It is shareholders holding voting shares who have a say in how a company is run. For example, they elect the corporation's directors and approve bylaw amendments. The Ontario Securities Act defines three types of restricted shares:
- Subordinate voting shares which carry a right to vote, where there is another class or classes of shares outstanding that carry a greater voting right on a per share basis.
- Non-voting shares which have no right to vote, or a right to vote only in certain limited circumstances; and
- Restricted voting shares which carry a right to vote, subject to some restriction on the number or percentage of shares that may be voted by the owner.
The limited voting power of these three kinds of restricted shares is in contrast to common shares which have voting rights per share that are usually no less than the voting rights of other outstanding issues. These types of restricted shares carry an unlimited right to participate in the earnings of the corporation, after dividends and financial obligations. And these shares have the right to participate in the company's assets upon liquidation after all other creditors and prioritized securities. They also have basically the same risk as common shares. Companies with two or more different types of shares often distinguish between them by designating them as Class A or B shares. All share classes may not have voting rights and may differ in other respects, such as the dividends to which they are entitled. Make sure you are aware of exactly what voting rights, and dividends, come with the shares in which you are planning to invest. Rights and benefits that accompany a particular classes of restricted shares can be checked by referring to a company's charter, notes to its financial statements in the annual report and the governing corporate statute. In recent years the number of companies issuing restricted shares has increased substantially. Restricted shares generally trade at lower prices than voting shares of the same firm because of the lower value investors put on not having the right to vote. Consider seeking professional advice before making investment decisions.