Who is a Shareholder?
A shareholder is a person, company, or institution that owns at least one share of a company's stock. They are commonly known as stockholders. The shareholders are the actual owners of the company and they enjoy the benefits of the company's success when there is an increase in stock valuation. The number of shareholders in a company is based upon the type of the company. The two types of shareholders in a company are:
What are Shareholder Rights?
Suppose, you buy the shares in Disney, does this mean you will have a free visit to Disneyland? This hypothetical example is highly unlikely but it may raise the question that what are the rights and privileges a shareholder has? Many shareholders are unaware of their rights which sometimes cause their exploitation by the organization. So, a shareholder needs to get complete knowledge about their rights to avoid any uncertainty.
The shareholders should also be aware of the fact that the rights are given in a hierarchical structure for three main classes of securities: bonds, preferred stock, and common stock.
Rights of a Shareholder
There are various rights of a shareholder in a company mentioned in the Companies Act 2013. Such rights are described below:
1. Appointment of Directors
The shareholders play a vital role in the appointment of a director. The shareholders pass an ordinary resolution for this purpose. Apart from this, the shareholders can appoint various types of directors which include:
Other than this, the shareholders can challenge any resolution also that is passed for appointing a director in the general body meeting.
2. Legal action Against Directors
Shareholders have the right to take any legal action against the directors of the company by the rules mentioned in the Companies Act 2013 in case of any fraud or insolvency. These rules are as follows:
3. Appointment of Company Auditors
The shareholders have the right to appoint the auditors of the company. As per the Companies Act 2013, the first auditor of the company is appointed by the BoD but further appointments are done by the shareholders with the recommendation of directors at the company's annual general meeting. Generally, the working period of an auditor is 5 years. However, it can be ratified by passing a resolution in the annual general meeting but in this case, the approval of the shareholders is required again.
4. Right to Vote
Voting is another right of the shareholders. They can vote at the annual general body meeting of the company. It is necessary for every company in India to conduct a general meeting once a year as per the Companies Act 2013. The company can call this meeting anywhere, i.e., at the head office or any other place of the company's choice. Many mandatory agendas are discussed in this meeting such as the adoption of financial statements, appointment or ratification of directors and auditors, etc. But any such resolution or decision can't be taken without involving the shareholders. The shareholders are free to give their vote in favor or against any decision.
A shareholder can also appoint a proxy of his/her to attend the meeting if he/she is unable to do so. However, the proxy does not have the right to take part in the quorum of the meeting in case of voting but it is permitted by following a procedure that is stated in the Companies Act 2013.
There are several types of voting as per the Companies Act 2013 which include the followings:
5. Right to Transfer Ownership
This right allows the shareholders to trade (buy and sell) their stock on an exchange without the permission of the company. This means a shareholder can sell his/her stake of shares into the share market whenever required. It makes the shares highly liquid. This key factor makes them different from an investment in real estate. For example, it can take a lot of time to convert a property into cash while in the case of shares it is very easy. This liquidity also allows the investors to move their money into other places instantaneously.
6. Entitlement to dividends
Shareholders have a right to claim to the company's profit that the company pays in the form of dividends along with the assets of the company. The company can either keep the profit in the form of retained earnings or can distribute it as a dividend. Whenever the dividends are distributed, the company can't eliminate any shareholder from receiving the dividend of his/her share. However, the shareholders have no right to interrupt the decision of the percentage in which the profit should be paid out (BoD is free to take this decision).
7. Right to Call for General Meeting
As per this right, the shareholders can call for a general meeting. They can pass orders to the director of the company to call for an extraordinary meeting. Other than this, the shareholders can also approach the Company Law Board for conduction of any such meeting if it is not done as per the statutory requirements.
8. Right to Inspect Registers and Books
Shareholders have the right to inspect the company's account books and registers whenever they want. Also, they can enquire about it if any fault or discrepancy is found.
9. Right to Ask for the Copies of Financial Statement
It is the right of the shareholders that they can ask for copies of the company's financial statements whenever they want. Also, it is the responsibility of the company to send a copy of the financial statements to the shareholders either quarterly or annually.
10. Winding up of the Company
If a company is going to wound up, then the shareholders have the right to get the prior information about it and also company can't exclude any shareholder from the distribution of assets (if remaining). But a point should be noted here that the assets are distributed as per the hierarchical structure in the case of winding up or bankruptcy of the company. As per this structure, the creditors are the first to have their outstanding debts paid, then the bondholders get their return which is followed by preference shareholders, and at last, the common shareholders get their share of assets.
Some Other Rights of a Shareholder
There are some additional rights of a shareholder which are as follows:
Other than the rights given above, it is also required for the shareholders to keep an eye on the companies' policies of the corporate governance in which they are investing. These policies determine the treatment of a company towards its shareholders and also the information that the company provides to its shareholders. Corporate governance policies may vary from company to company.
Shareholder Rights Plan
This plan describes the rights of the shareholders in a specific corporation. These plans help the BoD in protecting the interests of the shareholders in the event an outsider is attempting to acquire the company. The working of shareholder rights plan can be understood by an example. Suppose, A's Textile Company notices that its competitor, B's Textile Company has bought more than 25% of its shares. Then, the shareholder rights plans might stipulate that the existing shareholders can purchase shares at a discount.