Shareholder Rights in a Private Company
Shareholder rights in a private corporation depend on several factors, including the classes of stock offered by the company.3 min read
2. Levels of Shareholder Ownership Rights
Updated November 5, 2020:
Shareholder rights in a private corporation depend on several factors, including the classes of stock offered by the company. For instance, the owners of preferred stock will typically have more rights than shareholders that own common stock.
Stock Ownership Rights and Protections
When you purchase corporate stock, the stock that you own comes with certain rights. Corporations are different from other business entities, such as partnerships, in that a corporation's owners do not participate in operating the company. A corporation's shareholders have protection from the liabilities of the company, meaning their personal assets will not be at risk if the corporation is ever sued. The primary exception to this lack of liability is if a shareholder has personally guaranteed a corporate debt.
The drawback of stock ownership is that if the corporation fails, you can lose your investment. Most corporations in the United States last for only seven years, and many corporations fail even sooner.
Levels of Shareholder Ownership Rights
Purchasing stocks and becoming a corporate shareholder provides several privileges. It's important to remember, however, that there are different levels of shareholder rights. Corporations offer three different securities classes, each of which comes with specific rights:
- Common stock
- Preferred stock
You can understand the hierarchy of these classes by examining what happens when a company declares bankruptcy. Understandably, many people assume that common shareholders would be first in line to collect payment when a company goes bankrupt. In reality, the complete opposite is true, and the owners of common stock are last in line to get paid during the liquidation of a corporation. When a company declares bankruptcy, creditors take priority, meaning they will be the first paid from the company's liquidated assets. Next in line is bondholders, then preferred shareholders, and finally owners of common stock.
Absolute priority is what determines the hierarchy of these different classes of security. Essentially, these bankruptcy rules determine which party gets paid first and how much they will receive. Absolute priority is one of the many different rights that exist between these security classes.
For example, in most corporations, voting privileges are reserved for common shareholders. On the other hand, preferred shareholders take precedence when it comes to paying dividends. Bondholder rights are different from shareholder rights, as a bond represents a contract between the party that issued the bond and the bond owner. This contract determines the rights of a bondholder.
Some general rights enjoyed by shareholders include:
- Voting rights on important corporate issues.
- Rights to a corporation's assets.
- Rights to transfer stock.
- Rights to dividends.
- Rights to examine corporate books.
Corporations are generally required to hold an annual shareholders meeting. During this meeting, the shareholders can appoint a board of directors and may also vote on corporate issues. Some people in the corporation have the ability to call a special meeting on urgent issues. During this meeting, only the special issue can be voted on. No other issues may be raised.
Shareholders also have the right to inspect a corporation's voting list whenever they wish. Also, shareholders can appoint a proxy vote if they are unable to attend a shareholders meeting in person. States will generally have rules about how proxy appointments can occur and when they can be revoked.
The person appointed as a proxy must follow the directions of the shareholder, meaning they will need to vote according to the shareholder's wishes. Shareholders can also decide to conduct business without holding a meaning through a unanimous vote. Running a corporation without holding shareholders meetings is more common with closely held corporations.
In a public corporation, it would be extremely difficult to obtain unanimous consent, as there will be many more shareholders, all of whom will have their own interest. In states such as California, shareholders meetings do not need to take place in person and can take place via conference call as long as all shareholders on the call have the opportunity to speak and cast their vote. In general, a corporation has the ability to issue new stock shares whenever it wishes. When new shares are issued, existing stockholders' ownership will be diluted.
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