Shareholder Liability In Alberta Businesses
Shareholders are people or corporations, that invest in a company. By investing, they are buying a financial, legal interest in that company. As a shareholder you are taking risk in your investment, but shareholder liability can extend past that. Shareholders do have certain responsibilities and must refrain from specific behaviours. Questions or concerns about your role as a shareholder? Read more or call today: 403-225-8810
Limited Shareholder Liability: A Fundamental Principle In Corporate Law
A founding principle in corporate law is that of limited liability for the shareholders of a company. Generally speaking the shareholders will only be liable to the extent of “at risk” capital that they contribute to the business. The “at risk” capital is generally the amount of money they pay for their shares. The company itself has a separate legal identity and is able to contract, and both initiate and defend lawsuits, without extending liability risk to the shareholders. This principle is also known as “shareholder immunity”.
Are There Exceptions To The Principle Of Limited Liability For Shareholders?
Yes, and the exceptions to the principle of shareholder immunity are explicitly set out in Section 46(1) of the Alberta Business Corporations Act (the “ABCA”). Also there is a general “common law” principle known as “piercing the corporate veil” for egregious acts of shareholders using the company as a front to perpetrate unjust, improper, or criminal behaviour.
Exception #1: Part 2.1 – Unlimited Liability Companies
The ABCA allows for a special type of company called an “unlimited liability company” or “ULC”. In a ULC the shareholders have full liability for the debts and obligations of the company. Why would anyone want to incorporate this type of company? Good question. The answer is that a ULC offers several tax advantages to US shareholders. These types of vehicles are often used in complex corporate structures when a foreign entity operationally establishes itself in Canada.
Exception #2: Section 38(4) Offenses – Reduction Of Stated Capital
Pursuant to Section 38(4) of the ABCA a shareholder can be held personally liable to a creditor for reductions in the stated capital of a company. The stated capital of a company is the full amount of consideration that the company receives for the shares it issues.
Exception #3: Section 146(7) Application – Liability Pursuant To A Unanimous Shareholder Agreement
When a unanimous shareholder agreement (USA) is in place in a company, and that USA acts to restrict or otherwise constrain the rights and responsibilities of the directors of a company, then the shareholders of the company will be exposed to the same liabilities and duties which were otherwise the jurisdiction (and liability) of the directors. There are many potential liabilities for directors of a company. Therefore a passive investor in a company, that has a USA in place, needs to speak with a lawyer to understand the extent of their liability exposure.
Exception #4: Section 227(4) Offences – Unlawful Distribution Of Property In A Corporate Dissolution
If you were distributed property, as a shareholder, in the context of a corporate dissolution, then you can be potentially liable to the claims of creditors that were initiated before the distribution of the property. This is a creditor protection statute that shareholders should be aware of when winding up their business.
Exception #5: Piercing The Corporate Veil – Criminal Acts Using The Corporation As A Shield
In very rare circumstances, by judicial review, the “corporate veil” (otherwise known as the shareholder liability protection) can be pierced, therein incurring personal liability to the shareholders, where the company is used as front to perpetrate criminal, unjust or improper activity. These types of actions are rare, but they do exist. Therefore it is imperative that you have proper legal counsel to ensure you are running your business correctly to avoid such liability exposure.
Calgary Lawyers To Help Understand Shareholder Liability
The corporate and business lawyers at Kahane Law Office in Calgary, Alberta can help you understand your duties and liabilities as a shareholder and help you to ensure that you avoid liability. We can be reached toll-free at 1-877-225-8817 (or 403-225-8810 locally in Calgary, Alberta), or email us directly here.