Rights of Stockholders in Corporations
Rights of stockholders in corporations are the benefits that come with purchasing shares, such as the ability to vote on certain issues.3 min read
Rights of stockholders in corporations are the benefits that come with purchasing shares, such as the ability to vote on certain issues. Many corporate shareholders are unaware of or fail to take advantages of these rights. As a shareholder, you are able to enjoy the financial benefits of corporate ownership without the personal liability and responsibility of owning your own business. However, your financial investment is at risk if the company goes out of business.
Levels of Shareholder Rights
Every company offers three main stock classes, each with its own specific rights:
- Preferred stock
- Common stock
When a company goes out of business, common shareholders are at the bottom of the list when it comes to asset distribution. First, creditors are paid with any remaining business funds. Then, anything left over is distributed to bondholders, preferred shareholders, and common shareholders in that order. This hierarchy is known as absolute priority.
Other hierarchal rights can be defined by the company's charter, such as voting privileges and distribution of dividends. The rights of bondholders are determined by the individual bond agreement.
Stockholding Role and Structure
Stockholders typically have a share of votes based on the percentage of the company they own. This allows them to weigh in on major decisions, including the election of the board of directors who manage the corporation's day-to-day operations. Dividends are also distributed based on each shareholder's ownership percentage.
Corporations can also opt to offer both voting and nonvoting stock shares, as well as shares with restricted voting rights. Other common classes include preferred stock (with or without voting rights), common stock with special dividend rights, and convertible shares.
These strategies provide shareholders that own higher stock percentage greater rewards in exchange for their higher level of risk.
Main Rights of Common Shareholders
All common shareholders have the right to share in the company's income and assets, influence management selections, purchase new shares, and vote in general meetings. The most common rights in these categories include:
- Electing directors
- Proposing changes such as liquidation or merger
- Voting at the annual meeting either in person, by mail, or by proxy
- Holding ownership of a valuable asset that becomes more valuable as the company generates profits
- Transferring ownership by selling their stocks on a public exchange
- Enjoying a higher level of liquidity than with other investments such as real estate
- Holding entitlement to profit sharing, including dividends
- Inspecting the corporation's records and books
- Suing the company for wrongful acts by directors and officers, such as breach of fiduciary duty
- Having priority to purchase newly issued shares over those who do not already own stock in the company (preemptive rights)
While U.S. corporations are governed at the state level, these laws are generally the same from state to state. However, some states, such as Delaware, give the legal advantage to those that run the company, while others, such as New York and California, focus on protecting shareholders.
Shareholder meetings are held annually or as dictated by corporate bylaws. At these meetings, shareholders elect directors and may also vote on other issues. Special meetings on specific matters can be called by those with authority to do so as dictated by the corporate bylaws.
For decisions made at the shareholder meeting to be legally binding, more than half the outstanding corporate shares must be represented (quorum). The corporate bylaws can increase or decrease the percentage that constitutes a quorum.
Shareholders who will not be present at the meeting can appoint proxies in writing to vote on their behalf. Shareholders may vote on matters that include but are not limited to:
- Changes to the articles of incorporation
- Asset sales
- Voluntary dissolution
- Corporate transactions, including those where a conflict of interest is present
- Amendments to bylaws
- Nonbinding governance recommendations
When new stock shares are issued, existing shareholders may have their ownership diluted. For this reason, preemptive rights to new stock are offered to existing shareholders. This allows them to retain their current ownership percentage.
Some states have a body of case law governing corporations, while other states have adopted the Uniform Business Corporations Act or the Model Business Corporation Act.
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