Shareholders Own the Corporation
Shareholders own the corporation because a share denotes a unit of ownership.4 min read
Shareholders own the corporation because a share denotes a unit of ownership. The number of shares a particular shareholder owns, with respect to the total number of shares issued by a corporation, denotes how much ownership he or she has in the corporation.
Shareholders or stockholders are the owners of shares in a corporation. A shareholder may own just one share or even thousands of shares. Earlier, stock certificates were issued to denote the number of shares owned by a shareholder. However, nowadays, most of the corporations only track the number of shares owned by different shareholders of the company. You may be the only shareholder of a corporation or one among thousands of shareholders.
Generally, there is no restriction on the type of entity that can become a shareholder of a corporation. Almost anyone, including an individual, partnership business, Limited Liability Company (LLC), and another corporation can become a shareholder of a corporation. Moreover, a shareholder may or may not be a U.S. citizen.
What Is Ownership Interest?
A share denotes your ownership interest or how much of the corporation you own. For example, if you own 100 shares of a corporation that has issued 1,000 shares, your ownership in the corporation is 10 percent. Similarly, if you hold all the 1,000 shares, you own 100 percent of the corporation. Sometimes, even if you own more than 1,000 shares in a large corporation, your ownership may still be less than one percent. It all depends upon the total number of shares issued by a corporation.
Shares make it easy to sell your ownership interest in a corporation. In case of publicly traded corporations, you can sell your shares through online trading or your broker. However, it takes more efforts to sell shares of a private company since you'll have to find the interested buyers on your own without any support of a trading platform. Moreover, a shareholder's agreement may put restrictions on when and whom you can sell.
Private corporations often use buy-sell agreements to outline the terms of ownership transfer. Additionally, they may also have arrangements to repurchase shares for a price based on a predetermined calculation. The procedure for calculating the repurchase price is set forth in the buy-sell agreement.
When you sell, assign, or transfer your shares, you transfer the ownership in the corporation. If you transfer all the shares of a corporation, you no more remain its shareholder.
Do Shareholders Own a Corporation?
In 1970, the famous American economist and the Nobel Prize winner, Milton Friedman, issued a classic statement that shareholders are the actual owners of a corporation and the executives are only their employees. His views can be summarized as follows:
- Corporate executives are the employees of the owners of the corporation.
- The executives have direct responsibility to their employers.
- The executives have the responsibility to operate the business according to the desire of their employers.
- The employers generally have a desire to make more money without violating the basic rules of the society.
Of late, an increasing number of legal scholars have been challenging the idea of shareholders being the owners of a corporation. According to Professor Lynn A. Stout of UCLA Law School, shareholders' role as owners is mostly limited only to the process of electing the board of directors. Stout is of the view that shareholders do not have a say in selecting the CEO of their corporation, nor can they demand dividend, which indicates that they are not the true owners of the corporation.
It appears that Milton Friedman may have been wrong in perpetuating the view that shareholders are the real owners of a corporation.
In 2005, the CEO of Whole Foods, John Mackey debated Milton Friedman's view that the executives are the servants of shareholders. According to him, it's not the shareholders but the entrepreneurs who have the authority and duty to define the purpose of a corporation because the entrepreneurs create the company and bring all the resources together.
The long-term goal of any corporation is to maximize its shareholders' wealth by pursuing the line of business the corporation is formed for.
Shareholders are one of many parties that have a contract with the corporation. Since they have a residual claim on the assets of a corporation, they have certain rights in the nature of ownership. However, the shareholders have only those rights that are specified in their contract with the corporation, as embodied in the state law and the corporation's documents.
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