Shareholder Rights
| Author | Jeffrey Wilson |
| Pages | 181-187 |
Page 181
Investors who purchase corporate stock enjoy a number of rights pertaining to their ownership. Unlike partnership law, where the owners of businesses are also the primary managers of the businesses, owners of a corporation generally do not run the company. Shareholders in a corporation are shielded from personal liability for the debts and obligations of the corporation. However, shareholders can lose their investments should the corporation fail.
Laws governing corporations in the United States are fairly standard from one state to the next. The commissioners on uniform state laws drafted the Uniform Business Corporations Act in 1928, though only three states adopted this act. The American Bar Association in 1950 drafted the Model Business Corporation Act, which subsequently has been modified numerous times. The last major redrafting occurred in 1984, but there were substantive revisions in 2002 and 2005. A large majority of states have adopted all or a significant portion of the Model Act. Other states have modified their own state corporation statutes to contain sections similar to the Model Act. Delaware's corporation statute is also significant, since most large, public corporations are incorporated in that state.
The rights of shareholders depend largely on provisions in a corporation's charter and by-laws. These are the first documents which a shareholder should consult when determining his or her rights in a corporation. Shareholders also generally enjoy the following types of rights:
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
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Rights to share in the proceeds recovered when the corporation liquidates its assets
The two broad types of financing available to a corporation include equity financing and debt financing. Equity financing involves the issuance of stock, which investors purchase and which represent a share in the ownership of the corporation. The two basic types of stock are common stock and preferred stock. Debt financing involves a loan of money from an investor to the corporation in exchange for debt securities, such as a bond. Holders of debt securities generally do not enjoy the same rights as shareholders in terms of voting rights, participating rights, or other rights related to the ownership of stock.
The lowest level of stock in a corporation is common stock. The rights related to common stock depend largely on the articles of incorporation and by-laws of the corporation. In general, owners of common stock have voting rights in a corporation as well as rights to receive distributions of money from the corporation (dividends). In a successful corporation, common stock ownership can be very lucrative. However, if a corporation is unsuccessful, common stock owners are usually the last in line to receive a distribution of the corporation's assets when the corporation's assets are liquidated.
State statutes often vary with respect to the default rights of common stock owners. The corporation may also issue multiple classes of common stock, such as nonvoting common stock or common stock with special dividend rights.
Unlike common stock, holders of preferred stock are entitled to fixed dividends and fixed rights to receive a percentage of a corporation's assets are liquidated. With respect to the dividend rights, an example of such stock would include a name such as "$20 preferred," which means the shareholder has a right to receive $20 in dividends per share before dividends are paid to common stock owners.
It is noteworthy that the board of directors in a corporation usually has the discretion to decide whether dividends are issued in a given year. If dividends are not distributed during one year, whether preferred stock owners receive dividends in a subsequent year depends on whether the preferred stock is cumulative or noncumulative. If the rights are cumulative, the corporation must be dividends during some subsequent year. If the rights are noncumulative, the rights to receive dividends are lost if the corporation does not issue dividends in a given year.
Preferred stock owners generally do not have the same rights to vote as common stock owners. However, a corporation may grant voting rights and additional rights in its articles of incorporation or other provisions. State statutes also provide some rights to preferred stock owners by default.
Corporations may seek to borrow money in addition to (or in lieu of) issuing stock. One method for borrowing money is to exchange the loan for a debt security that can be traded on a public market. Bonds are long-term debt securities that are secured by corporate assets. Debentures are unsecured debt securities. Owners of debt securities generally do not enjoy the same types of rights are owners of stock. However, a corporation may grant voting rights to the owners of debt securities. These owners may also have the right to redeem debt securities in exchange for stock.
Shareholders hold general meetings on an annual basis or at fixed times according to 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. This percentage may be increased or decreased in the by-laws of the corporation. Prior to each shareholder meeting, a list of shareholders eligible to vote must be prepared. Shareholders have the right to inspect the voting...
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