Article

Do You Know Your Shareholders’ Rights?

07 Feb 2019

A shareholder or a stockholder is a person who holds/owns the shares of a company. Individuals who own common stock are known as the true owners of the company and have their own rights and privileges that are governed by the law and mentioned in the company’s articles of association. As shares represent a portion of the company, shareholders fundamentally own something that has value and the potential for appreciation.

Every company issues three kinds of securities such as bonds, preferential shares, and equity shares (common shares). Generally, there is a hierarchy when it comes to these three securities. In the case of liquidation or merger of the company, the priority of common shareholders is quite low compared to the other investors and are ranked in the following order:

  • Creditors
  • Bondholders
  • Preferential shareholders, and
  • Equity or common shareholders.

In the same way, when the company declares a dividend, it is first distributed to the preferred shareholders and then to the equity shareholders. Common shareholders take the most risk as they are liable to receive anything only after creditors, bondholders, and preferred shareholders have been paid. However, they also stand to profit the most when the company’s stock soars, whereas preferred shareholders do not witness frequent fluctuations in price.

Here are the primary rights of a common shareholder:

Profits

One of the most important rights of a shareholder is the right to the company’s profits. When it comes to profits, a shareholder has the right to receive the profit as long they own shares of the company. Profits are distributed to every shareholder based on the number of shares he/she holds. However, in the case of liquidation, shareholders are paid their dues only after the creditors and the preferential shareholders have been paid off.

Voting Power

Shareholders can participate in the decisions of the management through the annual general meetings. Shareholders can also vote for any fundamental changes in the company. If a shareholder is unable to attend the meeting, they can vote by proxy or mail. The shareholder also has the right to appoint auditors, although the board of directors will appoint the first auditor. The shareholders will appoint the subsequent auditors based on the recommendations of the audit committee and the director.

Transfer of Ownership

Shareholders have the right to transfer their shares to others. They can trade their shares in the stock exchange. The primary advantage of the equity is that it can be liquidated easily unlike other investments. As all transactions take place online now, it enables easy transferability of ownership.

Inspect Financial Records

Shareholders have access to the company’s financial records as the company is bound by law to present the same at the annual general meeting. Nowadays, all listed companies are required to make their financials public.

Right to Sue

A shareholder can sue the company if they feel that their rights have been violated. This is called a class-action lawsuit. For example, when a company overstates its earnings, thereby giving the shareholders an erroneous view on its prospects.

In addition to these, shareholders can also call for an extraordinary general meeting under special circumstances. Moreover, they should be well aware of the corporate governance policies of the corporation. These policies are vital and determine how a company treats its shareholders.

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Do You Know Your Shareholders’ Rights?

07 Feb 2019

A shareholder or a stockholder is a person who holds/owns the shares of a company. Individuals who own common stock are known as the true owners of the company and have their own rights and privileges that are governed by the law and mentioned in the company’s articles of association. As shares represent a portion of the company, shareholders fundamentally own something that has value and the potential for appreciation.

Every company issues three kinds of securities such as bonds, preferential shares, and equity shares (common shares). Generally, there is a hierarchy when it comes to these three securities. In the case of liquidation or merger of the company, the priority of common shareholders is quite low compared to the other investors and are ranked in the following order:

  • Creditors
  • Bondholders
  • Preferential shareholders, and
  • Equity or common shareholders.

In the same way, when the company declares a dividend, it is first distributed to the preferred shareholders and then to the equity shareholders. Common shareholders take the most risk as they are liable to receive anything only after creditors, bondholders, and preferred shareholders have been paid. However, they also stand to profit the most when the company’s stock soars, whereas preferred shareholders do not witness frequent fluctuations in price.

Here are the primary rights of a common shareholder:

Profits

One of the most important rights of a shareholder is the right to the company’s profits. When it comes to profits, a shareholder has the right to receive the profit as long they own shares of the company. Profits are distributed to every shareholder based on the number of shares he/she holds. However, in the case of liquidation, shareholders are paid their dues only after the creditors and the preferential shareholders have been paid off.

Voting Power

Shareholders can participate in the decisions of the management through the annual general meetings. Shareholders can also vote for any fundamental changes in the company. If a shareholder is unable to attend the meeting, they can vote by proxy or mail. The shareholder also has the right to appoint auditors, although the board of directors will appoint the first auditor. The shareholders will appoint the subsequent auditors based on the recommendations of the audit committee and the director.

Transfer of Ownership

Shareholders have the right to transfer their shares to others. They can trade their shares in the stock exchange. The primary advantage of the equity is that it can be liquidated easily unlike other investments. As all transactions take place online now, it enables easy transferability of ownership.

Inspect Financial Records

Shareholders have access to the company’s financial records as the company is bound by law to present the same at the annual general meeting. Nowadays, all listed companies are required to make their financials public.

Right to Sue

A shareholder can sue the company if they feel that their rights have been violated. This is called a class-action lawsuit. For example, when a company overstates its earnings, thereby giving the shareholders an erroneous view on its prospects.

In addition to these, shareholders can also call for an extraordinary general meeting under special circumstances. Moreover, they should be well aware of the corporate governance policies of the corporation. These policies are vital and determine how a company treats its shareholders.