The Rights of Shareholders

The rights of shareholders usually depend on what’s in a corporation’s by-laws. There are also various state statutes mandating certain default rights. Typically, the rights of shareholders will include:

  • Voting rights on issues that affect the corporation as a whole
  • Rights related to the assets of the corporation
  • Rights related to the transfer of stock
  • Rights to receive dividends as declared by the board of directors of the corporation
  • Rights to inspect the records and books of the corporation
  • Rights to bring suit against the corporation for wrongful acts by the directors and officers of the corporation
  • Rights to share in the proceeds recovered when the corporation liquidates its assets

A corporation can be financed through equity financing or debt financing. Equity financing is when stock is issued to purchasing investors, providing them a share in ownership. Debt financing involves an investor making a loan to the corporation in exchange for debt securities. Holders of debt securities usually do not have the same rights as shareholders – they’re often non-voting, for example.

Shareholders have meetings at fixed times – often annually, although not necessarily so (this is also set in the by-laws of the corporation).

The primary purpose of these meetings is for shareholders to elect the directors of the corporation, though shareholders may also vote on a number of additional issues. Persons with authority to do so may also call special meetings on matters that require immediate attention, though only those issues set forth in the notice of the special meeting may be the subject of the vote. A quorum must be present at the shareholder meeting for a decision to be binding. The typical quorum consists of more than half of the outstanding shares of the corporation.

By unanimous consent, shareholders can conduct business outside of an official shareholder meeting. This is more common in small, privately held companies, rather than big public ones, for reasons of practicality.

Some significant matters that may be voted on at shareholder meetings:

  • Approval or disapproval of changes in the articles of incorporation
  • Approval or disapproval of a merger with another corporation
  • Approval or disapproval of the sale of substantially all of the corporation’s assets that is not in the ordinary course of the corporation’s business
  • Approval or disapproval of the voluntary dissolution of the corporation
  • Approval or disapproval of corporate transactions where some directors have a conflict of interest
  • Approval or disapproval of amendments to bylaws or articles of incorporation
  • Make nonbinding recommendations about the governance and management of the corporation to the board of directors

Shareholders don’t usually have the right to vote on issues that occur for the corporation over the course of doing business — that’s what the board of directors is for.

There are several specific types of action a shareholder/group of shareholders can take against a corporation:

  • Shareholder direct litigation: Shareholders can protect their ownership rights in their shares by bringing a direct action against a corporation. Some cases are not appropriate for direct actions by a shareholder against a corporation, however. For example, a shareholder may not bring a direct action against a corporation by alleging that an officer has breached a fiduciary duty owed to the corporation. Such a case involves all shareholders and is more appropriate as a derivative action. By comparison, a shareholder may bring a direct action if he or she has been prevented from voting his or her shares in a vote.
  • Shareholder derivative litigation: Shareholders may bring suit as representatives of the corporation in a derivative action. Such an action is designed to prevent wrongdoing by the officers or directors of the corporation or to seek a remedy for such wrongdoing. These suits are generally brought when the corporation itself (through its officers and directors) refuses to bring suit itself. While these actions in many cases protect the rights of the corporation and shareholders of the corporation, these actions are often controversial.
  • Shareholder preemptive rights: Corporations retain the right to issue new shares of stock, which could dilute the ownership of existing stockholders. Existing shareholders often hold preemptive rights, which allow the shareholders to purchase these new shares of stock before they are made available to the public. If a shareholder owns 10 percent of a corporation, and the corporation issues new stock, the shareholder would own less than 10 percent if he or she did not purchase new stock. If the shareholder exercises preemptive rights, he or she may purchase as many new shares as necessary to retain that 10 percent interest.

via Encyclopedia of Everyday Law (enotes)

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  1. […] corporation has a board of directors, elected by shareholders. The board makes decisions for the company — hiring officers, setting […]

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