Basic Rights of Stockholders: Everything You Need to Know
The basic rights of shareholders is an important thing to consider when forming a new business.3 min read
Updated November 11, 2020:
The basic rights of shareholders is an important thing to consider when forming a new business. These rights are something due to the shareholders by nature, law, tradition, or a government body.
A shareholder is an essential part of any business as they invest the money to get and keep a business going in exchange for certain compensation and rights for their investment. The income that shareholders are entitled to is a result of their investment, which is the share of capital they give to the business. Payment to shareholders will usually take the form of dividends. These earnings can be distributed in many ways including:
- Dividends or interim dividends are known as stock
- Bonus shares
- Rights issues
These dividends must be received by the shareholder in a set time frame which will be established in meetings. Once dividends are earned they will be transferred by management to the shareholders' desired bank account.
If a shareholder has a right to receive bonus shares or issue of rights, they will usually be declared in the ratio of the shares the shareholder has.
Aside from how a shareholder will receive a return on investment, there are voting rights that a shareholder is entitled to based on the investment they put in. Some of the rights a shareholder enjoys include:
These meeting will be held at regular intervals and are referred to as:
- Annual General Meetings
- Extra-Ordinary Meetings
- General Meetings
The shareholder will need to be made aware of the company's voting procedures such as postal ballots. They are afforded the right to be able to vote personally or by proxy who is someone they choose to represent them when they cannot be present. They are entitled to speak before casting their vote. Additionally, the shareholder will have the right to demand a poll for voting if they feel a vote can be detrimental to the object or goals of the company.
Right to Appoint a Proxy
While shareholders do have the right to pick a proxy to vote on their behalf at meetings, the proxy does not have the right to speak during the meeting. Also, the other shareholders have the right to challenge the appoint if the proxy does not meet the company guidelines.
Other Shareholder Rights
While voting and dividend rights are probably the most important rights that a shareholder will posses there are other rights the get in return for their investment including:
- The right to access the company books and receive reports.
- The right to have copies of all audited financial statements.
- The right to reports filed by directors, auditors, and any other statutory reports.
- The right to review the minute books kept for company meetings.
- The right to file for an investigation into the affairs of the company.
- The right to file both criminal and civil cases against the management of the company if they are involved in illegal acts.
- The right to apply for the company to wind up if it is unable to satisfy its debts.
- The right to apply to the company's law board to investigate company affairs if illegal activity is thought to be occurring.
- The right to elect the board of directors. Owners or shareholders have the right to help choose the board of directors so that they can make sure the proper skill set is represented to run the company.
- The pre-emptive right to buy shares. If the company decides to issue new shares of stock, those who currently own stock will have the right to open more shares before they become available to the public.
- The right to receive their portion of the assets left during liquidation of the company.
- The right to speak and to stay informed or all policy decisions that affect the company.
Some states also include their own shareholder's rights such as Minnesota which prevents unfair or prejudicial practices against minority shareholders. In this state minority shareholders also have the right to inspect the company records.
Since it is the shareholders that provide the finances for the company treasury, they are in effect the owners of the company. They are restricted when it comes to the day-to-day involvement of the company, so it allows keeping management and ownership separate in a business.
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