Often I will review agreements where clients are making representations that shares are fully paid upon their issuance. This practice has developed from US law and migrated north of the border over time, but the basis for it as a concern here is rather limited, even putting it charitably. Under Canadian law, shares cannot be issued at all unless fully paid. You may want a representation that the shares have been validly issued, but once you have that, asking for one saying they are fully paid does not actually get you any further. They can’t be the former without the latter.

This does, however, raise a question of what a fully paid share should look like, not in terms of the appearance of the certificate, but when you can count a share as fully paid so that it can be issued and you can close your transaction. Let’s take a look at the three most common ways to pay for shares:

  • Certified cheques: Certified cheques are cheques that, historically at least, included a certification by the bank that the funds are in the account from which the cheque is being drawn. Unlike regular cheques, this means that in theory, the money is available on the day the cheque is provided, as opposed to the up to 30 day hold period that can be applied to regular cheques. Unfortunately, the “certified” in certified cheque has come to mean less over time. Banks can still place holds on funds deposited or, in cases of suspected fraud, not stand by the certification at all. For this reason, we recommend that clients stay away from receiving or providing funds by certified cheque. It also saves the potential for a person providing funds accidentally providing a regular cheque instead of a certified cheque, which happens more often than one might think.
  • Bank drafts: With bank drafts, the bank also guarantees that the payor has the requisite funds in his or her account. However, rather than using the payor’s own personal cheque, the bank essentially issues a cheque on its own account and is thus on the hook to make payment to the intended recipient. Bank drafts are generally non-cancellable, but the deposit of funds is not immediate. Specifically, banks will often apply a hold on the draft for three to five days. As with certified cheques, this possibility for holds may render receipt of the bank draft alone as insufficient proof that shares have been fully paid.
  • Wire transfers: If funds are sent by wire, we often see clients asking to close on the receipt of wire confirmation details rather than the actual landing of funds. This is largely because wires take time to land, depending on how they are being routed. Theoretically, wire confirmations can be recalled, but in my years of practice, I have yet to actually see this happen and most clients don’t even know it can happen. Our preference is always to wait for the wires to land as opposed to closing on confirmations. Often we will suggest that the funds be sent a day early to be held in the account of counsel to the recipient, not to be released until the actual closing has occurred.

For this reason, we are increasingly encouraging clients to rely solely on wires for the payment of shares. We are always available to act as an intermediary for funds and it is a service we are happy to provide, so we or opposing counsel can receive funds and hold them until we are given your express approval to release them.

Of course, all of this could end up looking very different in a few years with the arrival of blockchain. Blockchain technologies such as smart contracts may facilitate and hasten payment for shares by eliminating many of the intermediaries in the payment processing system that may account for delays in receiving and issuing funds. An in-depth discussion goes a little beyond what I usually write about in these posts, but we do have a whole section on our website dedicated to it, so don’t let that stop you from exploring if you’re interested.

The author would like to thank Samantha Sarkozi, Articling Student, for her assistance in preparing this legal update.

Stay informed on M&A developments and subscribe to our blog today.