What does the term shareholder rights mean? What rights do shareholders have? Why shareholder rights matter? Let’s explore together in the article below!
What is a shareholder?
A shareholder is an individual, company, or organization that owns at least one share of a company. As shareholders are owners of the business, they benefit from the success of the company through the increase in the value of their shares. The role of shareholders in shaping and bringing profits to the company is extremely important. They are also often called stockholders, but should not be confused with stakeholders.
Shareholders are divided into two main types:
- Equity shareholders: These are the major shareholders of the company and usually have voting rights in corporate decisions. Dividend payments to them are not fixed but depend on the company’s profits.
- Preference shareholders: This group of shareholders receives a fixed dividend, which is usually higher than that of common shareholders, and is paid before common shareholders. However, they do not have voting rights due to the “preferential” nature of their rights.
The number of shareholders required in a company depends on the type of business:
- For One Person Company (OPC): at least 1 shareholder is required.
- For Private Limited Company (Pvt Ltd.): minimum 2 shareholders required.
- For a Public Limited Company (PLC): a minimum of 7 shareholders is required.
What are shareholder rights?
Shareholder rights refer to the legal and financial privileges granted to individuals or institutions that own shares of a company. These rights are designed to ensure that shareholders, as partial owners of the business, can influence important company decisions, share in its profits, and hold management accountable for their actions.
In essence, shareholder rights define the balance of power between a company’s management and its investors. They help prevent the misuse of corporate resources, encourage transparency, and promote long-term value creation.
>>See more:
- How Do Interest Rates Affect the Stock Market?
- Market Cap Stocks: What They Are and Why They Matter for Investors
- 1001 Stock Market Terms for Beginners Should Know
- What Are Stock Ticker Symbols? How To Read Stock Ticker Symbols
Understanding shareholder rights through an example
Imagine an individual investor owns shares in a public company. As a shareholder, they have the right to vote at the company’s annual general meeting (AGM), where they can vote on issues such as electing board members, approving executive compensation, or approving a merger. Shareholders also have the right to receive dividends if the company distributes profits to shareholders, and they can sell their shares on the market if they wish.
In another example, minority shareholders in a limited partnership may have the right to request information about the company’s financial records or challenge decisions made by the majority shareholders if they believe those decisions are detrimental to their interests or violate their shareholder rights.
Common types of shareholder rights
A shareholder with any amount of ‘ordinary’ shares (the most common type of share) will enjoy the following rights in a company:
Voting rights
Common shareholders have the right to vote at the company’s annual general meeting of shareholders. These shareholders have the right to vote in elections for board members, changes to the company’s organizational structure, and mergers and acquisitions. They can vote in person or authorize someone else to vote on their behalf if they are unable to attend.
Right to inspect books & records of company
Shareholders have the right to inspect the company’s books and records at any time. For example, they can see the minutes of board meetings, financial statements, the list of shareholders, and the company’s annual report. However, the inspection must be for a reasonable and legitimate reason.
Right to transfer ownership
Shareholders have the right to transfer their ownership through the purchase and sale of shares on the stock exchange. This gives shareholders high liquidity, meaning they can sell their shares at any time to convert them into cash for other purposes. This is a great investment advantage that other forms of investment such as real estate do not have.
Right to participate in profit
When a company makes a profit, the board of directors has two options: retain the profit to reinvest in business expansion or distribute the profit to shareholders in the form of dividends. Shareholders have the right to receive dividends from the company’s profits. The board of directors will decide the proportion of profits to be distributed as dividends.
Liability limited by shares
Shareholders’ liability is limited to the amount of money invested in the company. In the event of dissolution, bankruptcy or litigation of the company, shareholders are only liable for the amount of capital contributed when purchasing shares, and do not have to use personal assets to compensate for the company’s losses.
Right to claim during liquidation
When a company is dissolved or liquidated, shareholders are entitled to receive their capital contributions back after the company has fulfilled its obligations to pay creditors, preferred shareholders, and other investors. Common shareholders will be paid last in this order of priority.
Right issue
When a company issues additional common stock, existing shareholders have the right to purchase these shares at a discounted price, in order to maintain their ownership percentage in the company. After purchasing the shares at a preferential price, they can resell them on the market at the market price to make a profit.
Right to sue for wrongful acts
Shareholders have the right to sue when they discover wrongdoing in a company. Lawsuits can be brought by an individual shareholder, a group of shareholders, or a class of shareholders. These lawsuits typically target executives or board members for fraud, mismanagement, falsification of financial statements, or other wrongful acts, whether negligent or intentional.
The importance of shareholder rights
Shareholder rights are important because they protect the interests of investors and ensure that companies are accountable to their owners. These rights allow shareholders to influence important corporate decisions, such as mergers, acquisitions, executive compensation, or changes to corporate governance. Shareholders also have the right to speak up or take action if they believe the company is not acting in their best interests.
For businesses, respecting shareholder rights is key to maintaining investor confidence, promoting good governance and complying with legal and regulatory requirements. For shareholders, these rights help them protect their investments, ensure fair treatment and have a say in the management and direction of the company.
Conclusion
The article above is some information about what shareholder rights are, common types of shareholder rights that investors should know, and why they matter. Hopefully, the above sharing will help you understand more about shareholder rights so you can make accurate decisions in your investments and business operations.
See more: