Rights and Role of Shareholders of the Corporation
All About Shareholders
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What is the role of shareholders of the corporation?
Shareholders are the owners of the corporation. They have ownership rights in the shares of corporate stock. The role of the shareholder in the corporation is limited, however, as they have neither the right nor the obligation to manage the day-to-day business of the enterprise. Shareholder rights vary pursuant to the type of stock owned and the applicable state law. State law is heavily influenced by authoritative sources, such as the Model Business Corporations Act (Model Act). Below is an explanation of common rights afforded corporate shareholders under state law.
Next Article: Characteristics of Corporate Ownership Interests (Stock) Back to: CORPORATE GOVERNANCE
What is a Shareholder's Right to Information?
Shareholders have the right to access and examine corporate records and information concerning the governance and financial performance of the entity. In public companies, much of the operational and financial information about a corporation must be reported to the public by filing with the Securities Exchange Commission. Companies must also disclose this information directly to shareholders on largely standardized reporting documents. Private companies, on the other hand, do not publicly report information. Further, there is no specific requirement to make periodic disclosures to shareholders. As such, shareholders in non-public entities must generally make requests for information. State law provides for the substantive and procedural rights of shareholders to access and review corporate records.
- Example: James is concerned that directors of ABC Corp are not exercising due care in the management of the company. She may seek access to company information to further understand managements actions. This may include minutes from director meetings. The company must generally afford her access to these records.
What is a Shareholder's Right to Vote
All corporations must have at least one class of stock representing an ownership interest in the company. In most corporations, the basic ownership share is known as common stock. These shares entail voting rights for the shareholder.
Election of Directors- At the annual meeting, shareholders have the right to elect directors. A corporate nominating committee of the board of directors produces a slate of directors and recommends election of a single director per available board seat. The names of nominated directors are listed on a proxy statement and sent to shareholders. The shareholders may either vote for the nominated director or abstain from voting. Under plurality voting, a director must receive a majority of votes cast to be elected to the board. This is a very low standard when there is only one nominated director on the proxy statement. This rule has been superseded in most large corporations in favor of a rule that requires a director receive at least a majority of outstanding votes.
- Note: Shareholders may also nominate their own candidates to the board. This generally requires the shareholders to justify their nomination and prepare and distribute their own proxy material. This is process is known as a proxy contest. Some state laws, as well as the NYSE and NASDAQ, both require that the members of the nominating committee be independent or not employees of the company.
- Example: ABC Corp is having an election of directors. ABC appoints Tom and Jerry, who are friends of the current directors but are not board members, to the nominating committee. Tom and Jerry recommend Sarah for director. The board agrees and places Sarahs name on the proxy solicitation. I am a shareholder and receive the proxy with Sarahs name. The board follows plurality voting, so Sarah must receive a majority of all votes cast, rather than a majority of votes outstanding. I can vote for Sarah, abstain from voting, or wage my own proxy contest to recommend a director of my choosing. I disagree with Sarah as director but know that sending proxy solicitations to all shareholders would be burdensome and expensive. Further, I know that it is unlikely that I will receive more votes for my nominee that Sarah will receive, so Sarah will win anyway. I decided to abstain from voting.
What is the Difference Between Straight Voting and Cumulative Voting?
Boards generally employ either straight voting or cumulative voting to elect directors.
Straight Voting- This method allows a common shareholder one vote per share of common stock for each available seat on the board of directors.
- Example: Gail owns 100 common shares of stock in ABC Corp. When two director seats come open, she may cast up to 100 votes to elect each director.
Cumulative Voting- This method allows a common shareholder a number of votes equal to her number of shares times the number of director seats available. She may cast these votes for any one or all of the available board seats.
- Note: Cumulative voting amplifies the voting power of a shareholder.
- Example: Tammy owns 100 common shares of stock in ABC Corp. When two director seats come open, she has 200 votes (100 shares x 2 director seats) to cast. She can cast all 200 votes for one director or split up her votes as she wishes.
What are the Rights to Vote for Fundamental Changes in Corporation?
Shareholders must approve any fundamental changes to the corporation. Fundamental changes include:
Mergers- This is the situation in which two companies combine to form one. The shareholders of the company being consumed must always approve this decision. The bylaws will determine whether the shareholders of the consuming corporation must approve the transaction. If the companies will merge to form a new corporation, generally the shareholders of both corporations must approve the transaction.
- Note: The corporate bylaws will lay out the number or percentage of shareholder votes required for approval. In the absence of specific rules in the bylaws, the default state-law rules will control.
- Sale of Assets - Shareholders must approve the sale of all or substantially all of the corporate assets. The idea is that this is effectively the equivalent of merger or shutting down the corporation.
Dissolution- Shareholders must approve the shutting down or dissolution of the corporation.
- Note: Shareholder approval is not required when a state takes action to involuntarily dissolve a corporation.
- Changes in Governing Documents - Shareholders have the right to vote for any changes or amendments to the governing corporate documents. This includes rights to vote on:
- Amendments to the Charter - Directors must initiate any changes to the articles of incorporation or charter. Once proposed, shareholders vote to approve or disapprove the directors proposal.
- Amendments to the Bylaws - The bylaws will direct the requirements and procedure for amendment. In the absence of provisions in the bylaws addressing this issue, state corporation law will supply the default rules. All shareholders are entitled to vote on matters presented at shareholder meetings.
What are the Shareholder Meeting Rights?
All state corporate statutes (as well as large public exchanges) require corporations to hold annual shareholder meetings. During these meetings, the corporation will conduct any required or desired corporate governance actions, such as electing directors. The requirement to hold meetings may be relieved for small corporations that handle these matters through unanimous written consent by the shareholders. Directors and large blocks of shareholders may call special meetings for any number of purposes. Notably, special meetings are appropriate when shareholders must vote upon a fundamental change to the corporation. Various state laws protect shareholder meeting rights.
- Note: Under many state laws (specifically those conforming to the Model Act), large shareholders may have the right to call special meetings to vote on matters of immediate concern.
- Note: Generally, shareholders holding 10% or more of a corporations shares are considered large shareholder and may call a special meeting.
- Example: Some states require 70 days notice of any intended meeting and specific requirements that a quorum of shareholder be present or represented during any meeting.
What is the Shareholder Right to Make Proposals?
Certain shareholders have the right to propose specific corporate actions to be taken at corporate meetings. This is normally done through adding these agenda items to corporate proxy statements. Under state law, a shareholder holding 1% of the outstanding shares or $2,000 worth of shares may request a proposal be placed in the corporate proxy material for shareholder vote. The primary limitation is that the shareholder proposal cannot usurp managements authority by making proposals related to ordinary business operations. If the shareholder proposal relates to the authority or rights reserved for shareholders, the result of the vote on the shareholder proposal is binding on the corporation. Proposals that are outside the ordinary authority of shareholders (i.e., it is a decision reserved to directors or officers), the proposal is not binding upon the board or officers.
- Note: The board may reject a shareholders proposal for material to be included in the proxy material. State law and the corporate governance documents will determine the ability of a shareholder to make proposals above director approval. The types of proposals that shareholders may wish to make commonly include resolutions regarding environmental practices, political spending, labor practices, etc.
- Example: I am a corporate shareholder of ABC Corp. I own 2% of the corporate stock. I want the corporation to vote on a resolution to mandate that corporate boards consist of 75% outsiders who have no relationship with current directors or officers. As a qualified shareholder, I can require that this proposal be included in the proxy material. The election of directors is a fundamental right of shareholders. It is possible that shareholder approval of such a resolution would be binding upon the board.
What is the Shareholder Right to Dissent?
In most states (and under the Model Act), corporate law allows for dissenter rights. Dissenter rights are a special group of rights designed to provide protections to shareholders in corporations that are not actively traded in the market. In a widely-held, public company, shareholders who do not agree with fundamental issues of corporate management or governance can sell their ownership interest. This is generally not an option for shareholders in closely-held and private corporations. Dissenter rights allow these shareholders to force the corporation to buy back their shares at fair value.
- Note: This right is not available for shareholders who disagree with non-fundamental aspects of corporate governance.
- Example: I am very upset that the corporation allows for plurality vote in the election of directors. The board is not very receptive to shareholder input regarding the nomination committee or the qualifications of directors. As such, I may exercise my dissenters rights and require the corporation to purchase my shares of ownership.
Discussion: How do you feel about the fundamental rights of shareholders? Should the rights be more or less extensive? Why or why not? Can you think of an example of any other rights or authority that could serve to further protect shareholder rights?
Practice Question: Mark suspects that the directors of the corporation have engaged in actions that are detrimental to the corporation and shareholder interests. What rights does Mark have to investigate the directors actions? If Mark is correct, what shareholder rights provide Mark with the ability to prevent this type of activity in the future?
- Shareholders have a number of rights conferred upon them by virtue of owning a percentage of the company. One such right is the right to inspect the corporate books and records. This right means that the shareholder can ask for financial reports by the directors. The shareholders also have a right to information pertaining the company dealing and financials. In case a shareholder through investigation discovers wrongful acts being conducted by the directors of the corporation, they have a right to sue so as to avoid a recurrence of the same in the future. Suing the corporations takes the form of a shareholder derivative lawsuit. If the evidence produced is sufficient, the courts may order the corporation to compensate the shareholders for any loss experienced.