Business Law

A shareholder is the one who owns shares of a corporation. Each share gives the shareholder one vote. So, the more shares one has, the more votes he/she can use. The rights provided by different categories of shares are described in the Articles of Incorporation. One becomes a shareholder, when he/she buys shares. One can purchase them from other shareholders or from a corporation. A person is not considered to be a shareholder anymore, when all his/her shares are sold or when the corporation stops to exist. A shareholder does not take active part in managing a corporation. On the other hand, shareholders influence the way, in which a corporation is run, by passing resolutions at the meetings. However, shareholders are usually not in charge of the debts of a corporation (Industry Canada, 2011). Despite that, a shareholder can lose the money he/she has invested when a corporation dissolves. Most corporations in the United States do not exist for more than seven years (USLegal, 2010).

Laws that concern corporations in the United States are almost the same in all states, since almost all of them have adopted the Model Business Corporation Act. Rights of shareholders are mostly defined by by-laws and a corporation’s charter (USLegal, 2010).

Due to the traditional view, shareholders are seen as the owners of a company. This view is characterized by strong theoretical support of shareholders’ rights. Corporations should work so that shareholders get their profits, and directors should run them so that the sum of money shareholders get becomes bigger each time. So, theoretically, directors are subject to shareholders. They are the agents, who work on the shareholders’ behalf (Industry Canada, 2011).

Shareholders have the following rights:
  • to vote at the meetings (taking into consideration their class of shares);
  • to get part of profits of the corporation;
  • to get part of the corporation’s property after it stops to exist;
  • to be invited to shareholder’s meetings and take part in them;
  • to appoint and discharge directors;
  • to elect the auditor of the corporation;
  • to read and make copies of records, director’s reports, and financial statements of the corporation;
  • to get financial statements no later than 21 days before annual meetings;
  • to approve major changes (2010);
  • to bring a suit against the corporation in case of wrongful acts by those, who manage it (Industry Canada, 2011).

Two basic rights of a shareholder are the right to sell shares and the right to appoint directors. Nevertheless, the role of a director seems to be clearly defined whereas the role of a shareholder is not (Velasco, 2006, p. 413)

It is important to note that whereas directors and officers of a corporation are obliged to act in the best interests of shareholders, the shareholders do not have to act in the interests of each other (Companies Incorporated, 2015).

Rights of shareholders can be divided into the following categories: economic rights, control rights, information rights, and litigation rights. As it has already been mentioned, shareholders can get their profit by selling the shares they own and by receiving profits from the company’s income. The right to get income has its limits. Shareholders can only get the dividends declared by the board of directors of the company. Many companies usually pay dividends but some give only a small part of corporation’s income to shareholders (Velasco, 2006, p. 413).

As for control rights, the notions of ownership and control are separated in corporations. However, shareholders still have some rights in influencing the company’s destiny. They take important decisions concerning business and appoint directors who run the company. Different matters are to be solved by shareholders in different states, but they usually include charter amendments and mergers. Shareholders can only discuss the matters defined by directors (Velasco, 2006, p. 414).

Shareholders have the right to know certain information about the company’s affairs. However, this right is limited. They have access only to basic documents. The biggest part of the shareholders’ right to information is defined by the federal securities laws (Velasco, 2006, p. 420-421).

Shareholders can enforce their legal rights judicially in some cases. They are allowed to seek enforcement through derivative litigation. Derivative actions are brought from the entire corporation, so directors are the ones who decide to take the legal action or not. When there is a conflict between directors, shareholders take up their duties as for the legal action. The cases when shareholders can take part in derivative actions are few. Besides, directors are strongly protected against liability (Velasco, 2006, p. 421-423).

Nevertheless, when it comes to enforcing shareholders’ own rights, they are free to do whatever is needed to protect themselves. But again, such cases are also limited. For instance, they may start a legal action when they are not paid their part of the company’s profits. Shareholders are protected against fraud but not against unfairness (Velasco, 2006, p. 424).

According to the traditional view, however, the basic rights of shareholders should be respected. Shareholders should have strong economic and control rights. The restraint of shareholders from selling shares outside of the corporation is seen as protection of shareholders rather than limitations. The prohibition to sell shares imposed by directors is disrespect of the shareholders’ rights from the perspective of traditional view and there is no justification for it (Velasco, 2006, p. 437-438).

As for the right to manage business, the traditional view does not strongly require that shareholders take very active part in running a company. This is due to the fact that there are usually a big number of shareholders in a corporation. If everybody tried to manage it the way they want, the result would be a big mess. So, the appointment of director is regarded not as a means to deprive stockholders of their rights but rather as the way to help them. The freedom of a director is limited by shareholders’ wishes, since the director works to represent their interests first of all (Velasco, 2006, p. 438-439).

At the shareholders’ meetings, the shareholders do the following:
  • appoint directors;
  • elect an auditor;
  • discuss financial statements of a corporation;
  • discuss other business issues (Industry Canada, 2011).

Shareholders can also make agreements. A shareholder agreement is an agreement signed by some (usually all) shareholders of a corporation. The agreement must be in a written form. The agreements are different for different companies, but most of them deal with the same issues (Industry Canada, 2011).

There are restrictions on share transfer, which help shareholders determine who will become a shareholder in their corporation. Among such restrictions are prohibitions of share transfers for a certain period of time. For example, there is the rule, according to which a shareholder must first offer shares to shareholders of their corporation before selling them outside of the company. Shareholder agreements may also include the rules of shares transfer in case of certain events (bankruptcy, death, dismissal, retiring) (Industry Canada, 2011). However, shares ownership does not very much influence a company since everything is managed by directors (Velasco, 2006, p. 413).

There are two types of shareholders: corporate and non-corporate ones. A corporate shareholder is a shareholder that is the owner of shares in another corporation. A non-corporate shareholder is a partnership or one person who is the owner of shares in the corporation (Kelley, & Demand Media, 2015).

Corporations have more money than an individual person. That is why the former can buy a lot of shares. And thus, corporation can take more active part in taking decisions concerning the corporations, whose shares they own. Sometimes this can lead to better governance of a company, which becomes beneficial for non-corporate shareholders. Though, in other cases, actions of corporate shareholders are beneficial only for them (Kelley, & Demand Media, 2015).

Thus, the idea of the notion of shareholders is a useful one. It lets the people, who can invest big sums of money but do not have enough skills or time to work in a certain field, support those who want and can work in that field. At the same time, shareholders may become richer by getting part from the corporation’s profit. It is common to think that laws and statutes entitle shareholders with the rights, which are enough to protect them from cheating by directors, who are their trustees. It is also considered that since directors are the ones elected by shareholders, they should work for their benefit.

However, it is not always the case in practice. Sometimes directors find gaps in laws so that they can give less to shareholders and get more for themselves or companies. Besides, modern law tends to limit those who own shares and give more power to directors.

The model of relationships between shareholders and directors would work better if moral laws were also taken into consideration. It is fair enough when those who invest huge sums of money in a corporation, get the profit from it.

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