August 9, 2024
Do you own shares in a corporation? By general definition in California, a corporation is a legal entity that separates the business from its owners; thus, limiting the owners from personal liability. In other words, the owner’s personal assets are shielded from the risk of being used to pay for the business’ debts, lawsuits, and other legal obligations with some exceptions. As an individual, organization, or company that owns shares in a corporation, you would be referred to as a shareholder or stockholder. A shareholder not only receives the monetary benefits of the corporation’s success but is also required to fulfill certain obligations.
What are the obligations of a shareholder?
The obligations of a shareholder vary depending on the type of shareholder. Typically, there are two types: a common shareholder and a preferred shareholder. A common shareholder generally receives stock in a private company as a founder or one of the more recently hired employees. The price of such stock is usually valued at the fair market value unlike preferred stock, which is usually sold at a higher price based on the company’s overall valuation. Preferred shareholders are paid dividends before common shareholders and in the case of bankruptcy or liquidation of the company, preferred shareholders are paid out first.
It is important to refer to key corporate documents such as the bylaws and the shareholders' agreement to thoroughly understand the obligations and rights of the shareholders.
Fiduciary Duties
Generally, the bulk of the corporate decision making is conducted by shareholders, directors, and the executive management. Specifically majority shareholders in addition to directors and management officers are bound to hold fiduciary duties to the corporation and minority shareholders, which include good faith and inherent fairness. Additionally, there is an expectation to act with honesty, loyalty, and good faith. Any power to control corporate activities for self-serving purposes or in a manner that will harm minority shareholders is likely considered improper conduct and not in the best interests of the company. As such, this conduct can be subject to lawsuits.
Decision Making
As a shareholder, most of their obligations entail making major decisions that affect the strategy and direction of the company. Shareholders periodically elect directors to represent them in major business and financial decision making while upholding their best interests and vision for the company. The board of directors appoint corporate officers such as the president or secretary to run the day-to-day operations. Should any director fail to uphold the best interests of the company or commit any act that does not align with the shareholders’ vision, the shareholders can remove that director from their position.
What are the rights of a shareholder?
The rights of shareholders may vary depending on the company’s bylaws, shareholders' agreement, and other policies and rules that the company has set in place. The following list contains some key rights that most shareholders possess.
Voting Rights
Regarding any voting rights, preferred shareholders do not usually have the same rights as common shareholders, or any voting rights at all. Preferred shareholders cannot elect a board of directors or have any influence on or say in any corporate policies. Conversely, common shareholders can elect board members who will ultimately make major decisions for the corporation. Thus, common shareholders have the ability to influence company decisions, structure, and policies including, without limitation, mergers and acquisitions and stock splits. Shareholders are not responsible for managing the day-to-day activities of the corporation as these responsibilities are for the appointed executives. Typically, the number of votes that a shareholder possesses will correspond to the number of shares in the corporation that they own. These rights are often exercised at the company’s shareholder meetings, which are held annually.
To fully understand the power and scope of the shareholders’ right to vote including any limitations, shareholders should refer to the corporation’s bylaws for guidance.
Right to Inspect Corporate Records
Under the California Corporations Code, shareholders generally possess the right to inspect bylaws, accounting books, records, meeting minutes, as well as financial statements of the corporation. Shareholders that own at least 5% of corporate shares have the right to access certain records. Such records can include a collective list of the shareholders’ information including the name, address, and shareholdings and quarterly financial information.
If a shareholder wants to review or inspect a company’s accounting records, they must establish a reasonable relationship between their interest as a shareholder and the purpose of their inspection. Or more simply, the shareholder is required to have a valid or proper reason to believe that such inspection is necessary. The request can be made in person or by an agent or attorney. Such shareholders’ rights also include the right to copy the records.
However, these privileges and rights can be limited. For example, shareholders are prohibited from reviewing corporate communications, including communications that are considered attorney-client privileged.
Right to Transfer Ownership of Shares
With the exceptions of any limitations that are expressly laid out in a shareholders' agreement, a shareholder can sell their stock at any time. Companies can manage and control ownership changes by including express provisions in their corporate documents such as processes of approval, rights of first refusal, or mandatory purchase provisions.
Right to Take Legal Action
With any corporate misconduct or illicit activities, shareholders have the right to bring legal action against the company, board of directors, any appointed executive officers, or other shareholders. For any losses suffered due to the violation of any securities laws, whether state or federal, or engaging in conflicts of interest or providing any misleading information, shareholders may file a lawsuit for damages. Additionally, if a shareholder is prohibited or refrained from their awarded rights such as the right to view corporate records, they can enforce such rights through a court order.
With any investment, it is important to fully understand your rights and obligations to avoid risks and potential disputes. If you feel that you have been denied any rights, an attorney at DY LAW can help you determine your options.
All information provided is strictly educational and does not constitute legal advice. Any past or previous results do not guarantee future outcomes as results may vary. For legal advice, please consult with a licensed attorney.
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