Shareholder Law: Everything You Need to Know
Shareholder law has rights for each shareholder such as voting power, partial ownership, right to receive dividends, and look over any corporate records.3 min read
3. Ownership Transfers
4. Dividend Entitlement
5. Corporate Record Transparency
6. Litigation Rights
7. Different Shareholder Levels
Shareholder law defines six main rights for each shareholder:
- Voting power.
- Partial ownership of the company.
- The ability to transfer ownership.
- The right to receive dividends.
- The chance to look over any corporate records.
- The ability to sue in the event of a wrongful act.
Shareholders need to be able to vote on all major issues, including things like:
- Electing directors.
- Company mergers.
- Company liquidations.
- Any other proposed fundamental change to the company.
Voting usually happens at an annual meeting. For shareholders who can't attend the meeting in person, they can send their votes in the mail.
Shareholders own a portion of a company, depending on the amount of shares they have. When that company is doing well financially, the shareholders have a claim on the assets they own. For example, if a person owns stock in a company, they'll see a return in their investment as the price of this stock rises.
Just because a shareholder previously invested in a company doesn't mean they are bound to that investment for life. Instead, they have the right to transfer their portion of ownership to someone else via their stock. This is an important right because it offers liquidity, which allows the stockholder to quickly buy or sell a company's stock in the market without greatly reducing or increasing the asset's price.
For example, if you're trying to sell your personal property, it could take months or years to settle on an agreement. However, with the liquidity of stocks, you can buy or sell your ownership in a company nearly instantly.
In addition to the right to claim assets, shareholders also have the right to any profits the company shares via dividends. Dividends are money that ownership distributes to shareholders when the company makes a profit at the end of the year. Owners can also decide to invest the money back into the company in the hopes of achieving greater profits in the future.
Shareholders can't demand to be paid dividends, nor can they decide how big the dividend should be. However, if the company announces they are distributing dividends, as a shareholder, you will get your cut.
Corporate Record Transparency
As a shareholder, you have the right to know how the company you hold partial ownership in is doing financially. That's why you have full access to the company's annual report and public filings. While most publicly traded companies are required to release this information to the public anyway, this right is extremely important if you're involved in a private company.
Do you think that ownership has led the company in a bad direction, causing you to lose part of your investment? If so, you have the right to create a class-action lawsuit for compensation.
An example of such a lawsuit involves the WorldCom accounting scandal in 2002. In this case, the company lied about how much they were earning, leading shareholders to believe the company was far better off financially than it really was. When the truth was revealed, shareholders used their right to litigation to hold the company accountable.
Another example is Wells Fargo & Co., which is also being targeted by lawsuits because it misled investors about its profits.
Different Shareholder Levels
Keep in mind that not all shareholders have the same rights. Every company has a hierarchical structure when it comes to its shareholders that's typically divided into three levels:
To fully understand the difference between these classes, it helps to imagine what happens if a company goes bankrupt. In this situation, the company will begin distributing assets, but it won't do so in an equal fashion. First and foremost, creditors will collect what they need to settle the company's debts.
The next group that gets a portion of the company's assets is those who hold bonds. Preferred shareholders come next, and if there is any money left at this point, common shareholders will have dibs. This system is called absolute priority.
There may be other differences between bondholders, preferred stockholders, and common stockholders. For example, most company charters mention that preferred stockholders receive dividends before common stockholders, while only common stockholders have the ability to vote on important issues.
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