What Are Shareholder Rights?
If you just bought stock in Disney, as a part-owner of the company, does that mean you and the family can hit Disneyland for free this summer? Do Anheuser-Buschshareholders receive a case of beer each quarter?
These hypothetical perks are highly unlikely, but they do raise a question: What rights and privileges do shareholders have? While they may not be entitled to free rides and beer, many investors are unaware of their rights as stock owners. Here are several privileges that come with being a shareholder.
Key Takeaways
- If a company liquidates, creditors are the first to have their debts paid from the company's assets.
- Bondholders are the next in line to receive any proceeds from liquidation.
- Common shareholders are the last to have any debts paid from the liquidating company's assets.
- Common shareholders are granted six rights: voting power, ownership, the right to transfer ownership, dividends, the right to inspect corporate documents, and the right to sue for wrongful acts.
Levels of Ownership Rights
Every company has a hierarchical structure of rightsforthe three main classes of securities that companies issue: bonds, preferred stock, and common stock. In other words, there’s a pecking order of rights.
The priority of each class of security is best understood by looking at what happens when a company goes bankrupt. You may think that as a common shareholder with an ownership stake in the company,you would be first in line to receive a portion of the company’s assets if it went bankrupt. In reality, common shareholdersare at the bottom of the corporate food chain when a company liquidates.During insolvency proceedings, the creditors are the first to have their outstanding debts paid from the company’s assets.
The bondholders are the next priority followed by preferred shareholders and, finally, the common shareholders. This hierarchy is determined by what’s called“absolute priority,” the rules used in bankruptcies to decide which portion of the payment will be received by which participants.
In addition to the rules of absolute priority, other rights differ foreach class of security. For example, a company’s charter typically states that only the common stockholders have voting privileges, and preferred stockholders must receive dividends before common stockholders. The rights of bondholders are determined differently because a bond agreement, or indenture, represents a contract between the issuer and the bondholder. The payments and privileges the bondholder receives are governed by the indenture (tenets of the contract).
Risks and Rewards
Common shareholders are still part owners of the business, and if the business can turn a profit, common shareholders benefit. The liquidation preference we described above makes logical sense. Shareholders take on greater risk as they receive next to nothing if the firm goes bankrupt, but they also have a greater reward potential through exposure to share price appreciation when the company succeeds. In contrast, preferred stocks generally experience less price fluctuation.
Common Shareholders' Main Rights
- Voting power on major issues.Voting power includes electing directors and proposals for fundamental changes affecting the company such as mergers or liquidation. Voting takes place at the company’s annual meeting. If the shareholder cannot attend, they can do so by proxy and mail in their vote.
- Ownership in a portion of the company.Previously, we discussed a corporate liquidation where bondholders and preferred shareholders are paid first. However, when business thrives, common shareholders own a piece of something that has value. Common shareholders have a claim on a portion of the assets owned by the company. As these assets generate profits and as the profits are reinvested in additional assets, shareholders see a return as the value of their shares increases as stock prices rise.
- The right to transfer ownership.The right to transfer ownership means shareholders are allowed to trade their stock on an exchange. The right to transfer ownership might seem mundane, but the liquidity provided by stock exchanges is important. Liquidity—the degree to which anassetorsecuritycan be quickly bought or sold in the market without affecting the asset’s price—is one of the key factors that differentiates stocks from an investment such as real estate. If an investor owns the property, it can take months to convert that investment into cash. Because stocks are so liquid, investors can move their money into other places almost instantaneously.
- Entitlement to dividends.Along with a claim on assets, investors also receive a claim to any profits the company pays out in the form of a dividend. Management of a company essentially has two options with profits: they can be reinvested back into the firm (thus, one hopes, increasing the company’s overall value) or paid out in the form of a dividend. Investors do not have a say as to what percentage of profits should be paid out—the board of directors decides this. However, whenever dividends are declared, common shareholders are entitled to receive their share.
- Opportunity to inspect corporate books and records.Shareholders have the right to examine basic documents such as company bylaws and minutes of board meetings. In addition, the Securities and Exchange Act of 1934 requires public companies to periodically disclose financials. Most companies produce two versions of their annual report. The 10-K version must follow the filing requirements set by the Securities and Exchange Commission (SEC).
- The right to sue for wrongful acts. Suing a company typically takes the form of a shareholder class-action lawsuit. For example, WorldCom faced a firestorm of shareholder class-action suits in 2002 when it was discovered that the company had grossly overstated earnings giving shareholders and investors an erroneous view of its financial health.
$1.8 billion
The amount paid to settle 87 securities class action cases in 2021.
Shareholder rights vary from state to state and country to country, so it is important that investors check with local authorities and public watchdog groups. In North America, however, shareholders' rights tend to be standard for the purchase of any common stock. These rights are crucial for the protection of shareholders from poor management.
Corporate Governance
In addition to the six basic rights of common shareholders, investors should thoroughly research the corporate governance policies of the companies they invest in. These policies determine how a company treats and informs its shareholders.
Shareholder Rights Plan
Despite its name, this plan differs from the standard shareholder rights outlined by the government (the six rights mentioned above). Shareholder rights plans outline the rights of a shareholder in a specific corporation. (The information isusually accessible in the investor relations section of its corporate website or by contacting the company directly.)
In most cases, these plans are designed to give the company’s board of directors the power to protect shareholder interests in the event of an attempt by an outsider to acquire the company. A company will have a shareholder rights plan that can be exercised when another person or firm acquires a certain percentage of outstanding shares to prevent a hostile takeover.
The way a shareholder rights plan works can be demonstrated via an example: Say that Cory’s Tequila Company notices that its competitor, Joe’s Tequila Company, has purchased more than 20% of its common shares. A shareholder rights plan might then stipulate that existing common shareholders have the opportunity to buy shares at a discount to the current market price (usually a 10% to 20% discount).
This maneuver is sometimes referred to as a “flip-in poison pill.”By being able to purchase more shares at a lower price, investors receive instant profits and, more importantly, they dilute the shares held by the competitor whose takeover attempt is now more difficult and expensive. There are numerous techniques like this that companies can put into place to defend themselves against a hostile takeover.
Sometimes There Are Little Extras
Although free beer may be a little far-fetched, there are companies that offer shareholders little extras. Holders of at least 100 shares of Carnival (CCL) receive roomdiscounts when traveling on Carnival Cruises. So do shareholders of Royal Caribbean Cruises (RCL). Investors in Intercontinental Hotels Group (IHG) can further the savings by booking hotel stays for discounted prices. Meanwhile, owners of at least 100 shares of Ford (F) for six months can receive a discount on a new vehicle.
Before buying ownership in a company, investors should thoroughly research its corporate governance policies. These policies determine how a company treats and informs its shareholders.
The Bottom Line
Buying a stock, which represents an ownership claim in a company, provides certain rights. While common shareholders might be the last to be paid when it comes to liquidation, this is balanced by other opportunities such as share-price appreciation. Knowing your rights is an essential part of being an informed investor. Although the SEC and other regulatory bodies attempt to enforce a certain degree of shareholder rights, well-informed investors who fully understand their rights are less susceptible to risks.
FAQs
Shareholders make money in two main ways: Capital appreciation and dividend payments. Common shareholders are granted six rights: voting power, ownership, the right to transfer ownership, a claim to dividends, the right to inspect corporate documents, and the right to sue for wrongful acts.
What are the basic rights of shareholders? ›
The three basic shareholder rights are: the right to vote, the right to receive dividends, and the right to the corporation's remaining assets upon dissolution or winding-up. Where a corporation only has one class of shares, the three basic rights must attach to that class.
Where can I find shareholder information for a company? ›
Share and shareholder information is included in a company's incorporation documents. Any share changes after incorporation don't need to be reported until the company files its annual confirmation statement.
What are the rights of a 49% shareholder? ›
A minority shareholder is a shareholder who holds 49% of a company's voting shares or less. As a result, a minority owner does not have control over the company. In contrast, majority shareholders control 51% of the vote or more, giving them decision-making power over how the business is run.
What rights do common shareholders not have? ›
The common stockholders do not have the right to receive dividends before preferred stockholders. Notably, the common stockholders are positioned at...
What are 75% shareholder rights? ›
Special resolutions
A special resolution is one passed by at least 75% of the shareholders present in person or by proxy and entitled to vote at a general meeting. Notice of not less than 21 days' notice must be given to the members, specifying the intention to propose the resolution as a special resolution.
Can a shareholder sell his shares to anyone? ›
A very simple rule which is effective for many situations, is that no share can be transferred without the consent in writing of every shareholder.
Can you see all shareholders of a company? ›
Although investors sometimes ask the SEC for a list of a company's shareholders, the SEC does not maintain shareholder lists. Under SEC rules, a company must provide shareholders with a process for contacting other shareholders in two limited situations.
Can you check shareholders of a company? ›
You can find out the names of the shareholders of a public company through several resources. If you wish to find out the names of large shareholders of a public company that has filed with the SEC, you can find this information by searching EDGAR, the SEC's Electronic Data Gathering, Analysis, and Retrieval System.
What information do shareholders have access to? ›
Corporate Information That Shareholders Can Request
Lists of shareholders and the company's stock ledger. Operational documents such as meeting minutes and records of shares being transferred. The financial statements classified as books and records of account.
Special conditions are required for individuals who own (or are treated as owning) stock accounting for 10% or more of the total combined voting power of all classes of stock of the corporation employing the optionee.
What is the 2 shareholder rule? ›
(A 2-percent shareholder is someone who owns more than 2 percent of the outstanding stock of the corporation or stock possessing more than 2 percent of the total combined voting power of all stock of the corporation.)
What is the 500 shareholder rule? ›
The 500 shareholder threshold was a rule mandated by the SEC that required companies to publicly disclose financial statements and other information if they achieved 500 or more distinct shareholders.
How do shareholders get paid? ›
Many companies pay cash to shareholders in the form of a dividend. Shareholders receive a dividend per each share they own, usually paid once or twice a year. This money flows from profits made by the company.
What are the risks of being a shareholder? ›
Risks to shareholders
- Directors duties. ...
- Reliance on profitability and dividends. ...
- Control over management. ...
- Selling shares and exiting the company. ...
- Insolvency.
However, shareholders with at least 5% of the voting rights can force the company to call a general meeting of shareholders. The shareholders can then propose resolutions that address the decisions taken by the board and they can ask the board to reconsider or overturn an earlier decision.
What happens if someone owns 51% of a company? ›
In a closely held company this entire command structure may be collapsed into a single 51% owner. With 51% of the vote, this person may control the board of directors, the executive officers, the distribution of profits, and all day-to-day decisions of the company.
What does 51% ownership mean? ›
Someone with 51 percent ownership of company assets is considered a majority owner. Any other partner in the business is considered a minority owner because he owns less than half of the business.
What is the 20 percent shareholder rule? ›
The “20% rule,” as it is commonly known, requires Nasdaq and NYSE-listed companies in certain situations to receive shareholder approval before they can issue 20% or more of their outstanding common stock or voting power in a private offering, such as a PIPE (private investment in public equity).
Can you remove someone as a shareholder? ›
If you want to remove a shareholder, you first must decide if the shareholder is leaving the company voluntarily or involuntarily. For involuntary removals, the shareholder will usually need to have violated the shareholders agreement or company bylaws before they can be forced out of the company.
By Lucy Slatter. A shareholder cannot typically force another shareholder to sell their shares unless there is a contractual obligation entitling them to do so. For example, if there is a provision enabling such a sale in the company's Articles of Association, Shareholder Agreement or another valid contract.
Can a shareholder refuse to sell their share? ›
Absent breach of a contract or the law, a shareholder can't typically force another shareholder to sell. But a shareholder can seek to enforce the terms of a buy-sell agreement, a shareholder agreement, or another valid contract.
Do shareholders own 100% of a company? ›
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.
Do shareholders have a say in a company? ›
Key Takeaways. Buying a share of a company makes you a shareholder, but it does not give you a say in the day-to-day operations of a company. Shareholders own either voting or non-voting stock, and that determines whether they can weight in on big picture issues the company is considering.
Are the shareholder the real owner of the company? ›
Equity Shareholders are the real owners of the company.
Are the names of shareholders public information? ›
Since the shareholder register is a public document, third parties and other interested parties can access an updated list of a company's shareholders at any time.
Are shareholder reports public? ›
The U.S. Securities and Exchange Commission (SEC) requires that companies distribute annual reports to their shareholders. Annual Reports are also available freely to the public for most U.S. companies that offer stock.
How do I find out if I have shares in my name? ›
If you bought the security through a brokerage firm, contact the firm and ask if they have a record of your ownership. Brokerage firms are required to keep records for only six years. Copies of confirmations are only required to be kept for three years.
Are shareholders bound by confidentiality? ›
One of the many important components of a shareholders agreement lies in its capacity to oblige shareholders to keep certain matters confidential. Without it, your shareholders may not be bound to any terms that prevent them from sharing business information with competitors.
Do shareholders have a right to financial statements? ›
As a shareholder, you have the right to examine and copy corporate records, statements and directors' reports. You also have the right to receive the corporation's financial statements at least 21 days before the annual shareholders' meeting.
Shareholders' Rights
Different states may have slightly different rules, so check with an attorney regarding what your corporation is required to provide. In general, to inspect your accounting records, the shareholder must prove he has a good reason to believe an inspection is necessary and has proper intent.
How do I get rid of 50 50 shareholders? ›
50:50 shareholder problems
- Reasons to work with us to resolve a shareholder deadlock. ...
- Issuing a petition in court for the winding up of the company. ...
- Issuing a petition to force one shareholder to buy the other shareholder out. ...
- De-merger or spin off between the shareholders. ...
- Buy back and cancellation of shares.
Without an agreement or a violation of it, you'll need at least 75% majority to remove a shareholder, and said shareholder must have less than a 25% majority. The removal is accomplished through votes, and the shareholder is then compensated upon elimination, according to Masterson.
What is 30% share ownership? ›
30% Ownership means the ownership or holding, individually or jointly, directly or indirectly, through any Person, of 30% or more of the capital stock or its equivalent in an Entity or of any right which such Person or Persons grants the authority to vote or exercise similar rights on 30% or more of the capital stock ...
What is the 5 shareholder rule? ›
When a person or group acquires 5% or more of a company's voting shares, they must report it to the Securities and Exchange Commission.
Who is a 2% S Corp owner? ›
What is a 2% shareholder? According to the IRS, a 2% S corporation shareholder is someone who owns more than 2% of the company's stock at any time during the year. This also applies to individuals who own more than 2% of the company's voting power. S Corp shareholders include individuals, trusts, or estates.
What is the 5 stock ownership rule? ›
Beneficial ownership reports
If your company has registered a class of its equity securities under the Exchange Act, shareholders who acquire more than 5% of the outstanding shares of that class must file beneficial owner reports on Schedule 13D or 13G until their holdings drop below 5%.
What is the stock 7% rule? ›
To make money in stocks, you must protect the money you have. Live to invest another day by following this simple rule: Always sell a stock it if falls 7%-8% below what you paid for it. No questions asked. This basic principle helps you cap your potential downside.
What can a 15% shareholder do? ›
15% or more: can apply to court to object to a variation of share class rights; 10% or more: can demand a poll vote at a general meeting; 5% or more: a shareholder is able to require circulation of a written resolution and can require a general meeting to be held.
What is the golden rule for investors? ›
The greater the potential returns, the higher the level of risk. Make sure you understand the risks and are willing and able to accept them. Different investments have different levels of risk.
Capital growth and dividend payments are the two ways you can make money as a shareholder.
Do shareholders get paid monthly? ›
Typically, shareholders of U.S. based stocks can expect a dividend payment quarterly, though companies pay monthly or even semi-annually. There's no requirement for how often dividends are paid, so it's up to each company.
What are the benefits of being a shareholder? ›
Shareholders have the potential to profit from a rising share price and the potential to earn an income from dividend payments. Shareholders also have a range of other rights and benefits. Although, they differ slightly depending on whether you own ordinary shares or preference shares.
What is the most a shareholder can lose? ›
Once those shares have been paid for in full, no further money is typically payable by the shareholders for company debts. Simply put, the only money a shareholder risks losing if the business should fail is the money they have already invested in the business.
What is a shareholder entitled to? ›
Shareholders make money in two main ways: Capital appreciation and dividend payments. Common shareholders are granted six rights: voting power, ownership, the right to transfer ownership, a claim to dividends, the right to inspect corporate documents, and the right to sue for wrongful acts.
What happens if a shareholder wants to leave? ›
The exiting shareholder must notify the board of directors, and any other shareholders, about their departure. When doing this, they will also need to state why they are leaving. During this meeting, they will also need to say what they plan to do in the future.
Do shareholders have control over a company? ›
In large publicly traded corporations, shareholders own the corporation but have limited power to affect decisions. The board of directors and officers exercise much of the power. Shareholders exercise their power at meetings, typically through voting for directors.
What can shareholders do if they are not happy? ›
Shareholders can take legal action if they feel the directors are acting improperly. Minority shareholders can take legal action if they feel their rights are being unfairly prejudiced.
Do shareholders have more power than directors? ›
Shareholder's Power Depends on the Percentage of Ownership
Even though directors are prohibited from favouring some shareholders over others, in practice a majority shareholder's influence over the firm can be significant and decisions can be made by the directors.
What are the rights of 10 percent shareholder? ›
Right to demand a poll – in general, members holding 10% of voting shares (or five members who have the right to vote) can demand a poll in respect of a proposed resolution (s.
When an issue of shares or convertible securities is made by an issuer to its existing shareholders as on a particular date fixed by the issuer (i.e. record date), it is called a rights issue. The rights are offered in a particular ratio to the number of shares or convertible securities held as on the record date.
What are all of the following rights ordinary shareholders usually have? ›
Ordinary shares are the most common type of shares. They typically carry voting rights but do not give shareholders rights to receive or demand for dividends.
Why shareholder rights are important? ›
These rights ensure that shareholders are able to voice their opinions on board nominees and other proxy initiatives, as well as other corporate actions that may affect the value of their interests.
What are 25% share rights? ›
Shareholders holding 25% or more of the shares in the company have the power to block some key decisions the company may wish to make, as these decisions require a 75%+ majority (passed by way of a 'special resolution').
What decisions require shareholder approval? ›
The most common decisions requiring shareholder approval are:
- changes to your articles of association.
- grant of authority to issue new shares.
- disapplication of pre-emption rights before offering new shares to a new investor.
- changes your company name.
- removal a director.
A rights issue can signal financial distress or dilute the value of existing shares, which can negatively affect the share price and investor confidence. Therefore, the company needs to carefully assess the market sentiment, the demand for the new shares, and the potential impact on the existing shareholders.
What rights does the largest shareholder have? ›
Majority shareholders have the right to vote for and elect members of a company's board of directors, which means majority shareholders have a direct say in how the company is run.
Do ordinary shareholders have all of the rights except to? ›
Holders of our Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights.
What are common shareholders with preemptive rights entitled to? ›
A preemptive right is the right of existing shareholders to maintain their proportion of ownership of a company. They do so by acquiring their proportional share of any additional stock issuances by the firm. This right ensures that a shareholder's ownership interest is not diluted through the issuance of more shares.
What are the 3 types of shareholders? ›
Common stockholders enjoy voting powers regarding executive decisions of a company's operations. Preferred shareholders do not enjoy voting rights over matters of the company. Dividend distribution among common stockholders is done on the basis of how a company performs in a particular year.
Shareholders, or stockholders, are the owners of a company's outstanding shares, which represents a residual portion of the corporation's assets and earnings as well as a percentage of the company's voting power.
What are the responsibilities of a shareholder? ›
Shareholders must ensure that the affairs of the company are being conducted by the management, in the best interests of the shareholders.
