Anonymised, illustrative composite. The cap table said a minority shareholder had paid fifty thousand dollars for their shares. The bank records said no such deposit ever happened.
At a glance
A sponsor was acquiring a majority stake in a software company alongside its existing minority shareholders rolling a portion of their equity forward. Confirmatory diligence on the capitalization table — a routine reconciliation of who holds what, against what the corporation’s own securities register and bank records actually show — turned up a discrepancy on one of the four shareholders’ positions.
The minute book contained a board resolution from eight years earlier authorizing the issuance of shares to an early supporter of the business for fifty thousand dollars in cash. The share certificate had been issued. The securities register showed the shares as outstanding. The corporation’s bank statements from the relevant period showed no deposit in that amount, or any amount, from that shareholder around that date.
Under CBCA s. 25(3), “a share shall not be issued until the consideration for the share is fully paid in money or in property or past services that are not less in value than the fair equivalent of the money that the corporation would have received if the share had been issued for money.” The subsection is not aspirational; it is a precondition to a valid issuance. If the consideration was never actually paid, the share was, on the Act’s own terms, issued before it should have been.
One route out was closed before it opened. Section 25(5) provides that for the purposes of s. 25, “property” “does not include a promissory note, or a promise to pay, that is made by a person to whom a share is issued” — so the subscriber’s own undertaking to pay later could not have satisfied s. 25(3) even if one had been documented, which it had not been.
That created a genuine question the deal could not simply route around: were these shares validly outstanding at all? The purchase agreement’s capitalization representation — that the securities register accurately reflects all outstanding shares, validly issued, fully paid and non-assessable — could not be made as drafted while this position sat unresolved. The two halves of that stock phrase come from two different subsections and it is worth keeping them apart. “Fully paid” is the s. 25(3) precondition above. “Non-assessable” is CBCA s. 25(2), whose marginal note is Shares non-assessable and which says that shares issued by a corporation “are non-assessable and the holders are not liable to the corporation or to its creditors in respect thereof.” That is not a second source of the fully-paid requirement; it points the other way, and it shaped the cure. The corporation could not simply call on the shareholder for the missing $50,000 by virtue of holding the shares. Any claim to that money had to run through the subscription itself — which is exactly why the parties were left with the two paths below rather than a demand letter.
One shareholder, roughly 6% of the fully diluted cap table, fifty thousand dollars of never-paid subscription price against an enterprise value large enough that the dollar amount itself was immaterial — the risk was never the money, it was whether every other representation about the cap table could be trusted once one line of it did not reconcile.
The shareholder in question was still active in the business and cooperative once the discrepancy was raised, which narrowed the resolution to weeks rather than months; the shareholder simply had no memory, eight years on, of whether the payment had ever actually been made and no record of their own to check against.
The Act draws a real distinction worth being precise about. CBCA s. 118(1) makes directors who vote for a share issuance “for a consideration other than money” personally liable to make good any shortfall between what was received and fair value — but that provision, on its own wording, addresses non-cash consideration valued too low. It does not squarely address a share purportedly issued for cash that was simply never paid, which is a different defect: not an undervaluation, but a subscription that was never completed at all. Even if it had applied, s. 118(7) bars an action to enforce a liability under that section “after two years from the date of the resolution authorizing the action complained of” — and the resolution here was eight years old. Director liability was never the lever on this file.
Counsel presented the shareholders with the two available paths rather than assuming one. Either the shareholder paid the outstanding fifty thousand dollars, retroactively completing the subscription and curing the s. 25(3) defect as of the payment date, with the corporation and other shareholders acknowledging the shares as validly issued from that point forward; or the parties treated the shares as never validly issued, corrected the securities register accordingly, and the individual’s equity position was recharacterized — with everyone’s consent — as a smaller position reflecting only what had actually been contributed on other occasions.
The shareholder chose to pay. The corporation’s securities register was updated to show the subscription as completed on the actual payment date, not backdated to the original resolution, and the purchase agreement’s capitalization representation was qualified with a specific disclosure describing the defect and its cure, rather than being made as an unqualified statement the buyer could not verify.
The glossary carries the underlying concept at paid-up capital. A different securities-register defect, discovered the same way in an unrelated file, runs through a minute book that stopped in 2009.
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