What Are the Rights of Shareholders in a Corporation?
The exact rights of shareholders in a corporation will depend on the type of stock the shareholders own and the state laws.3 min read
2. Risks and Rewards of Shareholders
3. The 10 Basic Rights of Common Shareholders
The exact rights of shareholders in a corporation will depend on the type of stock the shareholders own and the state laws, which usually follow the Model Business Corporations Act.
Shareholders' Levels of Ownership Rights
Ownership of stock makes shareholders partial owners of the company and grants them certain rights. Three primary classes of corporate securities are:
- Preferred stock
- Common stock.
The rights of each class of the security shareholders are assigned in the order of absolute priority, i.e., a set of rules for distributing assets when a company goes bankrupt. In the event of a bankruptcy:
- Bondholders are the first in line for the company's assets.
- Preferred shareholders are next in line for the company's assets.
- Common shareholders are the last to claim the company's assets.
Risks and Rewards of Shareholders
Common shareholders may be at a disadvantage when a company suffers bankruptcy, as they receive only what is left after the distribution of assets among:
- Preferred shareholders.
In the opposite scenario, when the company thrives and generates profits, common shareholders get the most reward as their share price grows.
The 10 Basic Rights of Common Shareholders
1. The right to information: Shareholders have the right to investigate the company's administrative and financial records. While public companies have to make this information publicly available, private companies don't have to disclose any of it, not to the public nor to the shareholders. To review financial statements or governing documents, shareholders of private entities need to request those documents specifically.
2. The right to vote: During yearly meetings, shareholders can cast their votes to elect directors. They can choose to vote either for the director that the board of directors nominating committee proposes, or they could propose their own candidate. In the latter case, shareholders must provide justification for their choice and hand out their own proxy materials. The two standard voting methods are straight voting and cumulative voting.
- The straight voting method gives a shareholder one vote per share for each seat on the board of directors.
- To determine the number of a shareholder's votes in cumulative voting, you must multiply the number of the shares by the number of available director seats. The shareholder may use these votes to vote for one director or split them among several seats.
3. The right to influence the fundamental changes in a corporation: Any cardinal changes require the shareholders' approval.
- Mergers: When two companies become one, the shareholders of the entity being taken over must agree to the merger. The approval of the consuming company's shareholders might be necessary or not, depending on the bylaws. When two entities become an altogether new company, the shareholders of both companies must agree to the merger.
- Sale of assets: To sell any corporate assets, the company must get the approval of the shareholders.
- Dissolution: Unless it is an involuntary dissolution that the state initiated, the dissolution of a company requires the shareholders' approval.
4. The right to make changes in governing documentation: Shareholders can vote for any changes to the governing documents, such as the charter or the bylaws amendments.
5. The right to hold meetings: All corporations must hold yearly shareholder meetings to vote and to discuss any necessary governance actions. Directors and large shareholders have the right to request special meetings for any type of an issue.
6. The right to make proposals: Shareholders with 1 percent of outstanding shares can suggest topics for corporate meeting discussions and voting. Except for regular business operations, shareholders can make proposals pertaining to any other aspects of the company, such as environmental or labor practices, political spending, and other.
7. The right to dissent: Dissenter rights protect shareholders and allow them to sell their shares if they do not approve of the core corporate management or governance. This way, shareholders can make the corporation buy their shares back at “fair value.”
8. The right to transfer ownership: Shareholders can trade their stock on the exchange market.
9. The right to dividends: Shareholders are entitled to profits in the form of dividends. The board of directors determines the percentage of profits to be paid out.
10. The right to sue for wrongful acts: Executed in the form of shareholder class-action lawsuits, this right protects shareholders against poor management.
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