Everything You Should Know About Shareholders
In this blog post, we will look at what shareholders are and their responsibilities and rights. We’ll also discuss the difference between common and preferred shares.
Understanding Shareholders
What are shareholders? You’ve heard of them before, but what are they? Shareholders are individuals, companies, or institutions that own stock in a company. The term refers to individuals who have invested money in a business, mainly deciding on essential matters.
When a company grows, it gets more shareholders as the demand for its shares grows.
A shareholder is sometimes called a stockholder. It is because they hold voting rights over the company. Sometimes a shareholder can also have a seat on the board of directors.
Typically, the majority of shareholders are the founders or descendants of the founders. The majority shareholders hold over 50% of the shares and have over 50% of the voting rights. As a result, most companies avoid having a majority shareholder to prevent problems in decision-making.
The shareholders are not liable for the debts of the company in case of insolvency. Therefore, their investments and assets, which are not a part of the company, are safe from auctioning by creditors.
The rank that each shareholder has determines their decision-making power within the corporation. Shareholders vote on important matters, like electing directors and ratifying bylaws. However, they can’t do much else unless they are also on the board of directors. Therefore, it’s essential to understand who you are voting for when taking part in shareholder votes.
Founders’ Shares
Founders’ shares refer to common stock assigned to the founders by the company. The founders get these shares from the company during its formation at little or no cost. But they have the same rights as other shareholders in terms of business decisions.
Also, they have equal rights in voting unless otherwise specified by the articles of incorporation—this occurs more often than not.
Types of shareholders
There are many categories of shareholders, but they all fall under two major classes: common and preferred.
Common Shareholders
This type of shareholders includes owners of the company’s common stock, usually denoted as one common stock or 100 shares. These shareholders have a say in the day-to-day running and management of the company.
If the company’s management makes poor decisions that affect the company negatively, common shareholders have a right to file a class-action lawsuit against them.
These shareholders have fewer rights than preferred shareholders in the company selling off its assets.
Preferred Shareholders
There are very few companies that have preferred shareholders. These shareholders have no say in the company’s management. However, they guarantee to get their money back before the company pays any dividends to common stock owners.
The significant difference between the two types of shareholders is that preferred shareholders have priority over common ones if a company has to liquidate or sell off its assets.
Shareholder and Stakeholder
Although people confuse these two words to mean the same thing, they do not. A shareholder owns the company because he owns shares in the company.
A stakeholder has no ownership claim on the company but has a vested interest in the company’s welfare. The appeal may be in terms of money or other benefits that they receive from the company. For example, a team member and a supplier can be stakeholders, as they benefit directly from the company.
Responsibilities and Rights of Shareholders
Responsibilities
- Contribution to the company’s success (and not acting to damage their investment). Such actions include making significant decisions that are beyond the director’s role. These decisions include changing the constitution, deciding on the directors’ powers and authority, and appointing and firing directors.
- Holding board members accountable by resisting political pressures and asking tough questions
- Vote on important issues, for example, changes to the company’s charter, adding new board members, and significant transactions like mergers, acquisitions, and joint ventures.
- Come to shareholder meetings to get updates about company progress and listen to proposals from management.
- Verifying financial statements and approving them as necessary.
Rights of Shareholders
Corporation’s charter and bylaws guarantee shareholders the following rights.
- Take part in shareholder votes, which typically occur at annual meetings. They have a right to vote on significant issues that affect the company during the session. If they are not present, they can vote via proxy through mail-in ballots or online.
- Receive dividends when the corporation earns a profit.
- Receive proportionate distributions if they were to liquid the company or sell its property to pay off debts.
- Oppose transactions that benefit only some shareholders over others
- Receive notice from the corporation of any shareholder agreement made by management
- Inspect books and records at reasonable times to ensure that no wrongful conduct occurs on behalf of the board
- Bring a derivative action to enforce the rights of the corporation. Therefore, they can sue the company for activities that the directors or employers take if it affects its reputation.
Takeaway
Shareholders have an ownership claim in the business as they own the company’s stock. When a company liquidates, they pay the creditors first, then the bondholders. Preferred shareholders are next in line. The last people to receive payment are the common shareholders.
https://corporatefinanceinstitute.com/resources/knowledge/finance/shareholder/
https://www.investopedia.com/investing/know-your-shareholder-rights/
