Nov 13, 2014

Horizontal Equality: Voting Rights within a Class of Shares

Bowater Canadian Ltd. v. R.L. Crain Inc. (Ont. C.A.), 1987 CanLII 4037 (ON CA)

The articles of incorporation of Crain created a class of special common shares. 10 votes attached to the shares when held by the original purchaser, but only one vote per share once the share was transferred.

The Court held that the step-down provision in a company’s articles of incorporation is invalid. The provision can be severed from the articles of incorporation. The result is that 10 votes will attach to the special common shares regardless of who the owner is. The decision relies not on express provisions of the CBCA but on general principles of corporate law.

Bowater, a transferee, challenged the step down provision. It was conceded at trial that when purchasing the shares Bowater was aware of the step down provision.

The provision was invalidated because in the opinion of the Court of Appeal “. . . if there was not equality of rights within a class of shareholders there would be great opportunity for fraud, even though that is not a problem in this case.” The CBCA does not expressly prohibit a company from adopting a step-down provision.

The general principle of corporate law relied on is expressed in the Alberta Business Corporations Act (“ABCA”). Section 24(5) of the ABCA requires that “subject to section 27, if a corporation has more than one class of shares, the rights of the holders of the shares of any class are equal in all respects.”