18.3: Shareholder Rights
- Page ID
- 49149
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)As owners of the corporation, shareholders have specific rights to help them assess their investment decisions. Shareholders are not entitled to manage the day-to-day operations of the business, but they enjoy the following rights.
Inspection
Shareholders have the right to inspect the certified financial records of a corporation. This right also extends to other information related to exercising their voting privilege and making investment decisions.
The right, however, is limited to good-faith inspections for proper purposes at an appropriate time and place. A proper purpose is one that seeks to protect the interests of both the corporation and the shareholder seeking the information. In other words, the inspection cannot be against the best interest of the corporation.
Courts have held that proper purposes include:
- Reasons for lack of dividend payments or low dividend amounts;
- Suspicion of mismanagement of assets or dividends; and
- Holding management accountable.
Corporations have a legitimate interest in keeping their financial and managerial documents private. Therefore, inspection of documents usually occurs at the corporation’s headquarters during regular business hours. Documents made available for inspection do not have to be allowed off premise if the corporation does not want them to be removed.
Shareholder Meetings
Shareholders have the right to notice and to attend shareholder meetings. Shareholder meetings must occur at least annually, and special meetings may be called to discuss important issues such as mergers, consolidations, change in bylaws, and sale of significant assets. Failure to give proper notice invalidates the action taken at the meeting.
A quorum of shareholders must be present at the meeting to conduct business. A quorum is the minimum number of shareholders (usually a majority) who must be present to take a vote. The corporation’s bylaws define what constitutes a quorum, if not set by state law.
If a shareholder is not able to be physically present during a meeting, he or she may vote by proxy. A proxy is a person authorized to vote on another’s stock shares.
Vote
Depending on the type of share owned, shareholders may have the right to vote. In general, shareholders of common stock are entitled to a vote for each share of stock owned. Owners of preferred stock often do not have a voting right in exchange for a higher dividend amount or preference in receiving dividends.
Common issues that shareholders vote on include:
- Election of directors;
- Mergers, consolidations, and dissolutions;
- Change of bylaws;
- Change in major corporate policies; and
- Sale of major assets.
Preemptive Rights
The Preemptive right is a shareholder’s privilege to buy newly issued stock in the corporation before the shares are offered to the public. Shareholders are allowed to buy shares in an amount proportionate to their current holdings to prevent dilution of the existing ownership interests.
Preemptive rights usually must be exercised within thirty to sixty days of being offered. This allows the corporation to complete the sale to shareholders before offering any remaining shares to the public.
Derivative Suit
A derivative suit is a lawsuit brought by a shareholder on the corporation’s behalf against a third party because of the corporation’s failure to take action on its own. Derivative actions are usually brought by shareholders against officers or directors for not acting in the best interest of the corporation.
To be eligible to bring a derivative action, a shareholder must own shares in the corporation at the time of the alleged injury. An individual or business cannot buy shares in a corporation to file a derivative suit for actions that occurred before becoming a shareholder.
Before bringing a derivative suit, shareholders must show that they attempted to get the officers and directors to act on behalf of the corporation first. Only after the officers and directors refuse to act may a derivative suit be filed.
Dissatisfaction with the corporation’s management is insufficient to justify a derivative suit. Derivative suits have been successful when misconduct or fraud of a director or officer is involved. If successful, any damages are awarded to the corporation, not the shareholders who brought the lawsuit.
Dividends
A dividend is a portion of a corporation’s profits distributed to its shareholders on a pro rata basis. Dividends are usually paid in the form of cash or additional shares in the corporation.
Although shareholders have a right to a dividend when declared, the board of directors has the discretion to decide whether to declare a dividend. The board may decide to reinvest profits into the corporation, pay for a capital expense, purchase additional assets, or to expand the business. As long as the board of directors acts reasonably and in good faith, its decision regarding whether to declare a dividend is usually upheld by the courts.