What are Shareholder Rights?

Top 8 Rights of Shareholder

#1 – Voting Rights

Common shareholders have the voting rightVoting RightVoting Shares are the shares that authorize the shareholder to vote on Company issues like modifying its corporate policies or selecting Board of Directors etc. read more in the company’s annual general meeting. These shareholders have the right to vote in an election of the company’s director, changes in the company’s structure, and merger & acquisition. They can vote themselves or by proxy vote if the shareholder cannot attend personally.

#2 – Right to Inspect Books & Records of Company

Shareholders have the right to inspect the books and records of the company at any time. For example, they have the right to inspect the minutes of board meetings, the company’s financial statements, shareholder register, and annual reports of the companyAnnual Reports Of The CompanyAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company’s performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more. There should be a valid reason for examining the books.

#3 – Right to Transfer Ownership

Shareholders have a right to transfer their ownership by trading shares via a stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more. It provides liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more to the shareholders. They can sell their shares any time and get the cash in hand for another purpose. This investment is the primary benefit, which is not available in other investments like property.

#4 – Right to Participate in Profit

Whenever the company earns profit, management has two options: retain the profit and use it for business expansion. The second is to distribute amongst shareholders in the form of a dividendThe Form Of A DividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more. Shareholders have a right to receive dividends out of the company’s profit. The Board of DirectorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more will decide what profit percentage will be distributed as dividends.

#5 – Liability Limited by Shares

Shareholders’ liability is limited to the extent of the amount invested in the company. In the case of liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more, insolvencyInsolvencyInsolvency is when the company fails to fulfill its financial obligations like debt repayment or inability to pay off the current liabilities. Such financial distress usually occurs when the entity runs into a loss or cannot generate sufficient cash flow.read more, or any lawsuit, shareholders are liable for the amount they have invested in the company by purchasing shares. However, they are not liable to make the payment out of their assets.

#6 – Right to Claim During Liquidation

Shareholders have a right to take their money back in case of liquidation. A shareholder will get their capital after paying creditors, preference shareholders, and other investors will get the payment before common shareholders.

#7 – Right Issue

When a company wants to issue more shares of common shares, existing shareholders have a preemptive rightPreemptive RightPreemptive rights refer to a shareholder’s right to maintain his or her ownership stake by allowing them to purchase a proportional interest in any future issuance of common stock. These are rights provided to some equity shareholders that allow them to purchase additional shares of a company’s stock before it is made available to new investors.read more to buy these shares at a discounted price to maintain their ownership percentage. Then, after purchasing these shares at a discounted price, they can sell them into the market at market price and earn a profit.

#8 – Right to Sue for Wrongful Acts

The shareholder has a right to file suit for any wrongful act within the company. A lawsuit can be filed by the individual shareholder, a group of shareholders, or a class of shareholders. Shareholders are filing a lawsuit against the executive officer/director of the company for any fraud or mismanagement, misrepresentation of financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more or any other wrongful act done by the critical person either by ignorance or by willfulness.

Shareholder Rights Plan

The shareholder rights plan is a strategy adopted by the company to protect from hostile takeovers by the investors. For example, when an investor buys shares of a company in such a quantity that he will get some percentage of ownership in the company and management believes that this is not good for the company, then in such a case, management uses this strategy to protect the interest of the company and its stakeholder. In this strategy, the company allows its existing shareholders to buy its shares at a discounted price to dilute the ownership percentage of the organization planning a hostile takeoverHostile TakeoverA hostile takeover is a process where a company acquires another company against the will of its management.read more. This strategy is also known as poison pillsPoison PillsPoison pill is a psychologically based defensive strategy that protects minority shareholders from an unprecedented takeover or hostile management change by increasing the cost of acquisition to a very high level and creating disincentives if a takeover or management changes happen in order to alter the decision maker’s mind.read more.

  • Advantages: This benefits the existing shareholders/directors and protects the company from going power on the one hand.Disadvantages: The company’s valuation will decrease due to the issue of shares at a discounted price, and institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples.read more will not show their interest in buying the company’s claims and investing money because of the defensive nature of the management.

Shareholder Rights Statement

Shareholder rights and their obligation statement are defined in the shareholder agreement. It consists of how the company will operate, its objective, how it will protect the shareholder’s rights, how they can sell their shares, or other things related to the shareholder are mentioned in the shareholder agreement.

Conclusion

Shareholders are the owner of the company with limited liability. Their shares come with various rights, along with obligations. After being an owner of the company, shareholders cannot be part of the company’s day-to-day operation. Instead, they can choose the managing director who will be involved in the company’s daily process by exercising their voting rights. Shareholders have a right to profit from the company, but they cannot make this decision independently. Instead, this should be taken by the board of directors in the board meeting. It shows that shareholders are the owner, but at last, they cannot take any decision of their own will, and the board will approve each decision of directors. It brings transparency and a significant level of efficiency to the organizations.

It has been a guide to what shareholder rights are. Here we explain the top 8 Share Rights and their plans and statements. You may learn more about financing from the following articles –

  • Shareholder PrimacyShareholder StructureMajority ShareholderShareholders AgreementShareholders Equity