What Rights Do Corporate Shareholders Have?
by Galia Schmidt, ABL Founding Partner
Many small businesses are run by the same people who own them. But what happens when an owner (for a corporation, called a “shareholder”) isn’t actually doing any decision-making and isn’t running the business themselves? What rights do they have?
No matter the size of the company, corporate shareholders have four basic rights no matter what:
- 1. The right to vote on the election of directors, and any other voting rights required or permitted by law.
The main right and obligation of shareholders is to vote on the corporation’s board of directors. In this way, shareholders shape the future of the company, because they’re electing the people who make the big decisions. The weight of the shareholder’s vote depends on how much of the corporation’s stock the shareholder owns — the higher percentage of total stock, the more the vote matters.
Shareholders may also have the right to vote on other major decisions, such as amending the bylaws or dissolving the company. These rights, however, differ business to business depending on that business’s corporate documents.
Shareholders who own more than 10% of the stock may also be able to call special meetings.
- 2. The right to receive economic benefit through the distribution of dividends.
Shareholders have a right to receive distributions from the company. These distributions can be dividends, partial liquidation, or complete liquidation if the company closes. Rights to distributions may be different for certain shareholders if there are multiple classes of stock; for example, shareholders with preferred stock may be entitled to dividends before those with common stock, or may receive a greater amount.
It is up to the corporation to decide whether dividends will be paid and what amount.
- 3. The right to inspect certain corporate records.
The corporation is required to provide an annual report to shareholders. It must contain a balance sheet, income statement, and statement of cash flows for the previous year. It also must include a report created by an independent account; or, if there’s been no accountant review, a certificate from an authorized representative of the corporation that states that the financial reports were prepared without an independent audit. If a corporation has fewer than 100 shareholders (which is most small businesses), the company can waive the annual report requirement in the bylaws. If you’re a shareholder in a small corporation, review the bylaws to see if the company requires to give you an annual report. A shareholder who owns at least 5% may request, at certain points of the year, an interim report including the income statements and balance sheets for the year so far.
Even if no annual report is required, shareholders are still entitled to receive certain information on request, if the purpose is reasonably related to the person’s interest as a shareholder. Shareholders have a right to inspect the corporation’s bylaws, accounting books, records of other shareholders, shareholder and board meeting minutes, and financial statements. “Financial statements” doesn’t mean shareholders can get full access to all books and financial information. It includes the reports that are commonly run for corporations, which may differ company to company, but generally will include things like balance statements and profit/loss statements.
- 4. The right to have the board and officers faithfully perform their duties on behalf of the shareholders.
The directors and officers of a company have what are called “fiduciary duties” to the company, and therefore to its shareholders. If they breach these duties, engage in bad faith, or engage in fraudulent or wrongful conduct, the shareholders may be able to sue.
A shareholder cannot sue simply because they’re unhappy with the decisions the company is making. Generally, the law gives the benefit of the doubt to the directors and officers; as long as they were acting with reasonable judgement based on the information they had at the time, a director or officer’s action is usually protected from lawsuits.
A shareholder can bring a lawsuit against an individual director or officer only if they have experienced some specific or personal harm that isn’t shared by the rest of the shareholders, for example, if they were denied their right to vote or were not paid a dividend that was promised to them. A shareholder can also bring a suit on behalf of the corporation itself, called a derivative suit. In order to bring a derivative suit, the shareholder’s complaint must be in the interest of the corporation itself (as opposed to their own personal interest). Before they bring the suit, the shareholder must make a written demand to the corporation with the complaint and a request to take suitable action, followed by a waiting period.
If you have questions about what information should be provided to a shareholder, or if you’re a shareholder and would like to enforce your rights, contact us for more information.