Understanding Shareholder Equity Owner Rights

Understanding Shareholder Equity Owner Rights

When you purchase or hold shares in the company, you own part of the company, which comes with certain rights. While every shareholder has some protections and legal rights, not every shareholder class is the same. Further, bondholders may have even more say or protection, even though you own part of the company. Nonetheless, state and federal law imposes obligations on the company, its management, and certain other shareholders.

You may have the right to take legal action if a party has violated your rights as a shareholder.

Depending on the type of action involved, you might seek the following in a lawsuit:

  • An injunction that either orders a certain type of conduct or prohibits it
  • Damages for yourself 
  • Damages on behalf of the company

Your Chicago shareholder litigation attorney will review your case and determine whether you suffered a violation of your shareholder rights and what, if any, recourse you have against the company.

The Right to Vote Their Shares

At times, shareholders can vote on key matters affecting the company. Shareholders usually exercise their right to vote at the annual meeting. They may also vote on special issues between meetings, such as key corporate transactions.

Some state courts have held that a shareholder has a right to receive material information they need when a company calls a vote. The company will usually prepare proxy statements that include information that the shareholders should consider when casting their vote. The company may face legal action if the proxy statements are misleading or fail to disclose certain material information.

Voting is not always routine. Upset shareholders can use their votes to exert their own power. If they disagree with how leaders are running the company or want to send a strong message, they can withhold their vote for the proposed board of directors. For example, if the board will not distribute dividends to the shareholders, shareholders can vote the current board out at the next election.

Shareholders have the right to vote in person, or they can make their election by proxy. Some classes of shareholders may have more voting power than others. For example, a controlling shareholder may have more say in voting because their vote counts far more. Closely held companies allow for less influence by other shareholders.

Other classes of stock do not have the same voting rights. Preferred shareholders do not have the same voting say that common shareholders have.

Shareholders can hold the company liable if it makes false statements concerning proxy contents in the materials it distributes.

The Right to Receive Dividends

Shareholders have the right (but not the obligation) to receive a portion of the company’s profits in the form of dividends. The company can declare dividends quarterly or at other intervals. These are usually cash payments that go into your account. The company can declare a stock dividend (which is similar to a stock split).

The company has no obligation to pay a dividend. Some profitable companies may put all the profits back into the business. Others may use the money to repurchase shares of stock, which can benefit management more. Stock buybacks generally increase the share price by reducing the number of shares outstanding.

Dividends may vary based on the class of stock. Preferred shareholders usually get dividends first, even if the common stock owners do not get anything. Preferred shareholders also get larger dividends. Their investment is more about income-producing than appreciation in share price.

The Right to File a Lawsuit Against the Company

One of the hallmark obligations that directors and officers owe to shareholders is a fiduciary duty

Here are the two basic elements of fiduciary duty:

  • Duty of care - Directors and officers must exercise reasonable care in making decisions. They must perform due diligence before they make any corporate decision.
  • Duty of loyalty - Directors and officers must place the company's interests ahead of their own. They should avoid conflicts of interest. The directors and officers should disclose conflicts of interest to shareholders and let them make their own decisions.

In addition, controlling shareholders also owe fiduciary duties to minority shareholders.

Shareholders can check the board and company management with a shareholder derivative lawsuit. If shareholders believe that the board violated its fiduciary duty or that the company is wasteful, they can file a lawsuit on behalf of the company.

In a shareholder derivative lawsuit, the proceeds of any lawsuit settlement do not go to the shareholders. Instead, the company itself is seeking to recover from those who have cost it money by failing to live up to their obligations. A shareholder derivative lawsuit is a powerful tool owners have when they cannot participate in company management or corporate decision-making. 

Shareholders are not personally liable for the debts of the company. Your risk in the company is limited to the size of your investment. You can lose everything you invest in an insolvent company. However, you cannot lose anything more than that. They cannot ask you to contribute more money to a company like a partner could.

The Right to Information

The shareholder may inspect the books and records of the company. This right exists under both common law and state business laws. The corporation’s obligation is relatively passive.

However, they must also actively maintain these records. They just need to make certain books and records available to shareholders. Then, you can perform your own investigation of the available information as a shareholder.

One of the most important pieces of information that you have the right to inspect is the list of shareholders. Shareholders must have the right to communicate with each other about corporate affairs. For example, you may need to communicate with other shareholders about your position on key corporate votes or lawsuits.

However, the corporation does not have to make disclosures to you. Their obligation is to just make the records available. However, you can hold the directors and officers liable if they disseminate false information in their reports.

The Right to Transfer Ownership

You can sell your shares anytime you want, so long as you own them. If the company has the right of first refusal, it can buy the shares directly from you, regardless of how you want to sell them.

How you sell your shares depends on the type of stock you own and whether the company is publicly listed. You may sell your shares in a private negotiation with another buyer.

Right Issue

The company may issue additional shares that dilute your ownership stake in the company. While the company needs to raise the money, they also owe you certain obligations. The company must give its shareholders the right to purchase the additional shares at a somewhat discounted price that allows you to maintain your ownership percentage in the corporation.

Shareholders Face Disadvantages

There are some drawbacks to owning shares.

First, you take your place behind bondholders and other creditors if the company goes bankrupt. You may deserve some payment for your investment, but a bankruptcy proceeding can often completely wipe out shareholders' investments.

Shareholders are practically the last class to get anything in a bankruptcy proceeding. If shareholders do receive anything in a bankruptcy liquidation, preferred shareholders take priority over common stockholders.

In addition, shareholders may have little say in company management beyond voting for the board. While the shareholders can vote for proxy measures and have the right to cast an up or down vote for individual board members, they do not have any other power to guide the company’s day-to-day operations.

Unless a shareholder holds a controlling or majority owner of the company, they must take a backseat to the management team that the board appoints to run the business. Management decisions that you do not influence can damage your investment.

You also have no control over whether a company pays dividends and the amount of profits it distributes to shareholders. Company management and the board of directors decide to declare the dividend. They have sole discretion.

Some classes of shareholders may even receive higher dividend payments than you. Common stockholders often receive the lowest dividends (behind restricted and preferred stockholders).

Depending on the market for your shares, you might not monetize your investment.

You can easily sell publicly traded shares. However, shares of closely held companies are not always easy to sell.

First, no liquid market may exist for your shares and no way to obtain any price discovery. Second, the company may restrict your right to sell. For example, your shares may come with a right of first refusal that requires you to offer your shares to the company first before you can find an outside buyer.

You need to know your rights as a shareholder. If you invest in a privately held company, you may negotiate a purchase agreement determining your shareholder rights. The company may even create a special class of stock that gives you additional rights.

In other circumstances, you may learn of your shareholder rights after you suspect that the company violated them. You may then need to take legal action against the company. The company might engage in misconduct that can harm the shareholder class as a whole, or it can affect you personally.

How a Shareholder Litigation Attorney Can Help You

Always hire a shareholder rights attorney to address any issues or concerns. They can provide experienced advice or file a lawsuit on your behalf against the company, if the situation comes to that.

A shareholder rights attorney can:

  • Review a minority shareholder agreement to make sure that it protects your rights.
  • Help value your shares of stock if the result of any dispute is a buyout of your share.
  • Communicate your position to the company if you are involved in any disputes.
  • Research the securities laws and precedents in your jurisdiction to help determine your course of action or whether you have a potential legal cause of action.
  • Draft a lawsuit complaint if you need to file a case against the company.
  • Advocate for you throughout the litigation process, gathering evidence to support your case throughout the discovery process.
  • Negotiate a possible settlement with the directors to compensate you (or the company, depending on the type of lawsuit you are filing).
  • Argue your case in court if you cannot resolve the dispute.

Hire a shareholder litigation attorney as soon as you believe you might have a dispute with the company. You need protection. Your attorney will immediately work to learn the specifics of your case and advise you on what action you might take.

Peter M. King, Shareholder Litigation Lawyer
Peter M. King, Shareholder Litigation Attorney in Chicago

The company has lawyers, and perhaps an in-house legal team, ready to avoid liability for the corporation in shareholder disputes. You cannot fight for what you deserve against such a formidable opponent without the right legal representation.

Hiring a shareholder litigation lawyer does not mean you will automatically go to court. It means you have a professional identifying and protecting your rights and investment. In many cases, shareholder disputes settle through informal negotiations. The company might give you what you deserve to avoid further legal issues. If you must go to court, you need a skilled litigator. Contact King & Jones's team for consultation and legal assistance.