What are Shareholder Rights?
Shareholder Rights refer to the rights that are attached to the shares and depends on the type of shares owned by the investor i.e. common share, preference share etc. Most common examples including voting rights, inspection of books, ownership transfer, participation in profit, limited liability, claim during liquidation, right to sue for wrongful acts and rights issue.
Top 8 Rights of Shareholder
#1 – Voting Rights
Common shareholders have the voting rightVoting RightVoting Shares are the shares that authorize the shareholder to vote on Company issues like modifying its corporate policies or selecting Board of Directors etc. in the annual general meeting of the company. These shareholders have the right to vote in an election of the director of the company, changing in the structure of the company, merger & acquisition. They can vote themselves or by a proxy vote if the shareholder is not able to attend personally.
#2 – Right to Inspect Books & Records of Company
Shareholders have the right to inspect the books and records of the company at any time. They have the right to inspect the minutes of board meetings, the financial statements of the company, shareholder register, annual reports of the companyAnnual Reports Of The CompanyAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements., and there should be a valid reason for inspecting the books.
#3 – Right to Transfer Ownership
Shareholders have a right to transfer their ownership by the trading of shares via a stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.. It provides liquidityLiquidityLiquidity shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses. to the shareholders. They can sell their shares at any time and get the cash in hand for another purpose. This is the major benefit of this investment, which is not available in other investments like property.
#4 – Right to Participate in Profit
Shareholders have a right to receive dividends out of the profit of the company. Whenever the company earns profit, management has two options first is to retain the profit and use it for expansion of business, and second is to distribute amongst shareholders in the form of a dividendThe Form Of A DividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.. The Board of Directors will decide what percentage of profit will be distributed as dividends.
#5 – Liability Limited by Shares
Shareholders’ liability is limited to the extent of the amount invested in the company. In the case of liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order. or insolvencyInsolvencyInsolvency is when the company fails to fulfill its financial obligations like debt repayment or inability to pay off the current liabilities. Such financial distress usually occurs when the entity runs into a loss or cannot generate sufficient cash flow. or any lawsuit, the shareholder is liable to the amount they have invested in the company by way of purchase of shares. They are not liable to make the payment out of their personal assets.
#6 – Right to Claim During Liquidation
Shareholders have a right to take their money back in case of liquidation. A shareholder will get their capital after making payment to creditors, preference shareholders, and other investors who will get the payment before common shareholders.
#7 – Right Issue
When a company wants to issue more shares of common shares, then existing shareholders have a preemptive rightPreemptive RightPreemptive rights refer to a shareholder's right to maintain his or her ownership stake by allowing them to purchase a proportional interest in any future issuance of common stock. These are rights provided to some equity shareholders that allow them to purchase additional shares of a company's stock before it is made available to new investors. to buy these shares at a discounted price to maintain its ownership percentage in the company. After buying these shares at a discounted price, they can sell these shares into the market at market price and earn a profit.
#8 – Right to Sue for Wrongful Acts
The shareholder has a right to file suit for any wrongful act that happened within the company. A lawsuit can be file by the individual shareholder or by a group of shareholders or by the class of shareholders. Shareholders are filing a lawsuit against the executive officer/director of the company for any fraud or mismanagement or misrepresentation of financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. or any other wrongful act done by the key person either by ignorance or by wilful.
Shareholder Rights Plan
The shareholder rights plan is a strategy that is adopted by the company to protect from hostile takeovers by the investors. When an investor buys shares of a company in such a quantity that he will get some percentage of ownership in the company and management of the company believes that this is not good for the company then in such case management uses this strategy to protect the interest of the company and its stakeholder. In this strategy company allows its existing shareholders to buy the shares of the company at a discounted price to dilute the ownership percentage of the organization who is planning to a hostile takeover. This strategy is also known as poison pillsPoison PillsPoison pill is a psychologically based defensive strategy that protects minority shareholders from an unprecedented takeover or hostile management change by increasing the cost of acquisition to a very high level and creating disincentives if a takeover or management changes happen in order to alter the decision maker’s mind..
- Advantages: This provides benefits to the existing shareholders/directors and protect the company from going power in one hand.
- Disadvantages: Valuation of the company will decrease due to the issue of shares at a discounted price, and institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples. will not show their interest in buying the shares of the company and investing money because of the defensive nature of the management.
Shareholder Rights Statement
Shareholder rights and their obligation statement are defined in the shareholder agreement. It consists of how the company will be operated, what is the objective of the company, how the shareholder’s rights will be protected, how they can sell their shares, or other things that are related to the shareholder are mentioned in the shareholder agreement.
Shareholders are the owner of the company with limited liability. They have various rights, along with obligations. After being an owner of the company, shareholders cannot be part of the day to day operation of the company. Rather, they can choose the managing director who will involve in the day to day operation of the company by exercising their voting rights. Shareholders have a right to take profit from the company, but they cannot make this decision on their own. Rather, this should be taken by the board of directors in the board meeting. This shows that shareholders are the owner, but at last, they are not in a position to take any decision at his own will and each and every decision will be approved by the board of director this bring the transparency and great level of efficiency in the organizations.
This has been a guide to what are Shareholder Rights. Here we discuss the top 8 rights of shareholders along with their plans and statements. You may learn more about financing from the following articles –