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Shareholder Rights

Updated on June 24, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

What are Shareholder Rights?

Shareholder Rights refer to the rights attached to the shares and depend on the type of shares owned by the investor, i.e., common share, preference share, etc. Most common examples include voting rights, an inspection of books, ownership transfer, participation in profit, limited liability, claim during liquidation, right to sue for wrongful acts and rights issue.

Key Takeaways

  • Shareholder rights encompass various rights associated with holding shares of a company, which vary depending on the type of share the investor purchases. 
  • Examples of such rights include the right to vote on company matters, the ability to inspect the company’s books and records, the right to transfer ownership of shares, the opportunity to participate in the company’s profits, the benefit of limited liability protection, the ability to make claims in the event of liquidation, and the right to sue for wrongful acts. 
  • The top 8 rights of the shareholder are voting rights, the right to inspect books and records of the company, the right to transfer ownership, the right to claim liquidation, liability limited by shares, the right to participate in profit, the right issue, and right to sue for wrongful acts.
  • The shareholder rights plan is the plan that the company practices to safeguard from hostile investors’ takeover.

Top 8 Rights of Shareholder

Shareholder-Rights

#1 – Voting Rights

Common shareholders have the voting right in the company’s annual general meeting. These shareholders have the right to vote in an election of the company’s director, changes in the company’s structure, and merger & acquisition. They can vote themselves or by proxy vote if the shareholder cannot attend personally.

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#2 – Right to Inspect Books & Records of Company

Shareholders have the right to inspect the books and records of the company at any time. For example, they have the right to inspect the minutes of board meetings, the company’s financial statements, shareholder register, and annual reports of the company. There should be a valid reason for examining the books.

#3 – Right to Transfer Ownership

Shareholders have a right to transfer their ownership by trading shares via a stock exchange. It provides liquidity to the shareholders. They can sell their shares any time and get the cash in hand for another purpose. This investment is the primary benefit, which is not available in other investments like property.

#4 – Right to Participate in Profit

Whenever the company earns profit, management has two options: retain the profit and use it for business expansion. The second is to distribute amongst shareholders in the form of a dividend. Shareholders have a right to receive dividends out of the company’s profit. The Board of Directors will decide what profit percentage 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 liquidationinsolvency, or any lawsuit, shareholders are liable for the amount they have invested in the company by purchasing shares. However, they are not liable to make the payment out of their 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 paying creditors, preference shareholders, and other investors will get the payment before common shareholders.

#7 – Right Issue

When a company wants to issue more shares of common shares, existing shareholders have a preemptive right to buy these shares at a discounted price to maintain their ownership percentage. Then, after purchasing these shares at a discounted price, they can sell them 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 within the company. A lawsuit can be filed by the individual shareholder, a group of shareholders, or a class of shareholders. Shareholders are filing a lawsuit against the executive officer/director of the company for any fraud or mismanagement, misrepresentation of financial statements or any other wrongful act done by the critical person either by ignorance or by willfulness.

Shareholder Rights Plan

The shareholder rights plan is a strategy adopted by the company to protect from hostile takeovers by the investors. For example, 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 believes that this is not good for the company, then in such a case, management uses this strategy to protect the interest of the company and its stakeholder. In this strategy, the company allows its existing shareholders to buy its shares at a discounted price to dilute the ownership percentage of the organization planning a hostile takeover. This strategy is also known as poison pills.

  • Advantages: This benefits the existing shareholders/directors and protects the company from going power on the one hand.
  • Disadvantages: The company’s valuation will decrease due to the issue of shares at a discounted price, and institutional investors will not show their interest in buying the company’s claims 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 operate, its objective, how it will protect the shareholder’s rights, how they can sell their shares, or other things related to the shareholder are mentioned in the shareholder agreement.

Conclusion

Shareholders are the owner of the company with limited liability. Their shares come with various rights, along with obligations. After being an owner of the company, shareholders cannot be part of the company’s day-to-day operation. Instead, they can choose the managing director who will be involved in the company’s daily process by exercising their voting rights. Shareholders have a right to profit from the company, but they cannot make this decision independently. Instead, this should be taken by the board of directors in the board meeting. It shows that shareholders are the owner, but at last, they cannot take any decision of their own will, and the board will approve each decision of directors. It brings transparency and a significant level of efficiency to the organizations.

Frequently Asked Questions (FAQs)

What is a poison pill shareholder rights plan?

Poison pills or shareholder rights plans are a company’s means to protect against a hostile takeover. Moreover, it always does not mean that a poison pill refers to companies that do not want to be taken over. Instead, sometimes they use it to force the acquirer to negotiate takeover terms that benefit the target company.

Why are shareholder rights important?

A shareholder rights system is a corporate governance system critical part. It assures that shareholders can express their opinions on board nominees, other proxy initiatives, and various other corporate actions that may influence the value of the interests.

What is Shareholder Rights Directive II?

The Shareholder Rights Directive II (SRD II) is a European Union (EU) directive created to build up the shareholders’ position and to diminish short-termism and extreme risk-taking in the companies traded on EU-regulated markets.

What is shareholder rights directive?

The Directive amends the Shareholder Rights Directive. It sets up the needs concerning exercising specific shareholder rights connected to EU-listed companies. It also sets particular requisites to boost shareholder engagement, specifically in the long term.

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