Understanding Your Real Estate Corporation

 

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By Darren Richards

“I sold my house this week. I got a pretty good price for it, but it sure made my landlord mad.” – Garry Shandling

So who owns the real estate investments in your portfolio? Do you? Does someone else on your behalf (trustee)? Or does a funky government-created legal person? It makes a difference as it will determine, among other things, who has control and who can make decisions about those real estate assets. Although you might think you own something, if it’s really owned by “your” corporation, it’s legally owned by another “person”. That’s right. A funky government-created legal person (i.e. statutory entity) called a corporation is not “you” and therefore you may have limited powers to deal with the real estate property owned by that company.

There are a couple of ways investors can hold or own real estate assets: as an individual or through a corporate ownership structure (i.e. a corporation). There are others (co-ops for example) but those are rare, and it’s important to remember that a joint venture is not a legal person. In a joint venture, property is owned by an individual or corporation on behalf of others pursuant to the terms of the joint venture agreement.  If you own your real estate via a corporation, you need to know a little bit about how decisions need to be made. The law can be harsh – or it can be helpful. While each provincial jurisdiction has its own statutory regime and regulations, they are all fairly similar. I’ll primarily discuss this topic in the context of Alberta laws with the caveat that you should always consult your lawyer, wherever you are, before going too far.

The Hierarchy

Corporations are owned by shareholders. Shareholders make some decisions on fundamental corporate matters but Directors make most of the regular substantive business decisions. They also usually appoint officers (i.e. President, Secretary, Treasurer), who are given specific day-to-day responsibility to run the business. Shareholders appoint Directors, and Directors appoint Officers.

The Numbers

For Director Decisions: The Business Corporations Acts of various provinces (the “BCA”) typically specifies that a simple majority (greater than 50%) of the Directors who vote on a resolution is required to pass the resolution.

For Shareholder Decisions: The BCA specifies how many Shareholders are required to pass a resolution to authorize a Corporation to do certain acts. Generally, depending on the nature and importance of the decision, the BCA requires one of three degrees or levels of “majority”:

  1. Simple majority (usually referred to in the BCA as “Ordinary Resolution”) is an agreement (resolution) passed by more than 50% of the Shareholders who voted on the matter;
  1. Super majority (sometimes referred to in a BCA as “Special Resolution” or “Exceptional Resolution”) is an agreement (resolution) passed by not less than 2/3 of the Shareholders who voted on the matter (in some jurisdictions the bar is set at 3/4 of the Shareholders);
  1. Unanimity (referred to in the BCA as “Unanimous Resolution”) is an agreement (resolution) passed by all shareholders entitled to vote (or in some cases all Shareholders who voted on the matter).

The Nuances

Although the BCA provides that the various decisions corporations make (through its Directors and/or Shareholders) need one of the three majorities noted above, it also allows those majorities to be INCREASED by one or more of the following documents:

  1. Articles of Incorporation – NOTE: to amend the Articles to increase the majority needed for any particular decision requires a Special Resolution of the Shareholders;
  1. Bylaws – NOTE: to adopt Bylaws, or amend existing Bylaws, requires an Ordinary Resolution of Directors and an Ordinary Resolution of the Shareholders;
  1. Unanimous Shareholder Agreement (“USA”) – NOTE: to adopt an USA, or amend an existing USA, requires a Unanimous Resolution of Shareholders.

The Implications

So for example, if you create Bylaws that state that a certain number of Directors must be present for a Quorum (so that business can only be conducted and decisions made if that quorum exists), and you later discover that the quorum stipulated is too onerous (i.e. you rarely can get the number of Directors together that are required), then all you need is to get a simple majority of the Shareholders (who are present at a meeting properly called) and a simple majority of the Directors (who are present at a meeting properly called) – provided quorum is met for each such meeting – to agree to amend the Bylaws to reduce the number needed for a quorum.

However, if you had entrenched the quorum requirement into the Articles then you would need to get a special resolution passed (2/3 or 3/4 majority) in order to amend the quorum requirement. And if you had entrenched the quorum requirement in a Unanimous Shareholder Agreement then unanimity would be required to change the quorum requirements.

As you can see, before setting up (organizing) a corporation, and certainly before bringing in any new shareholders/directors, it is very important to understand what decisions require what kind of majority. This allows you to decide what decisions you would want made by something greater than a simple majority of Shareholders/Directors (e.g. with respect to the buying and selling of real estate assets) – and then decide what document you want to “entrench” that requirement. You should contact your lawyer to review your specific corporate situation.

Darren Richards is a partner with Richards Hunter Toogood. He focuses on both residential and commercial Real Estate and Corporate/Commercial Law serving both small and medium sized owner-managed business in the Edmonton and surrounding region. Mr. Richards also acts for major banking institutions and other lenders in relation to their commercial loan facilities. Reach him at: d.richards@rht-law.ca or or www.rht-law.ca

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