A shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and therefore, are legal owners of the company and the percentage of their ownership depends on the number of shares they hold against the total number of shares made available by the company.
The law defines the shareholder only after their name or the entity’s name (in case of institution) is mentioned in the company’s register. Shareholders of a company or the corporation are legally separate from the corporation itself and thus are not liable for the corporation’s liability. Until and unless they’ve offered a guarantee, they have limited liability to the unpaid share price underlying.
They can acquire shares either from the primary markets (during the IPO of the company) and thus provide the capital for the corporation or from the secondary market. They are considered to be the subset of stakeholders of the company which has a direct or indirect interest in the business entity like customers, suppliers, employees and the community.
Roles of Shareholder
- Discuss, decide and vote for the directors of the company.
- Decide on the directors’ salary. This has to be appropriate in order to compensate for the expenses and cost of living in the city where the director lives without being able to compensate for the company’s offers.
- Taking decisions in areas where directors have no power including making changes at the company constitution level.
- Checking and making approvals of the financial statements of the company as and when they are reporting as per company Act norms.
- Deciding on the dividend pay-out percentage and make sure the dividends are paid out.
- Brainstorm, vote and decide on any organizational decision (strategy, merger, acquisition, liquidation and etc..)
Types of Shareholders
There are two types of shareholder.
#1 – Common
A person or an institution that owns common shares or ordinary shares of a company is known as a common shareholder.
#2 – Preferred
A person or an institution that owns a preferred share of a company is known as a preferred shareholder. In terms of liability from a company’s perspective, the preferred shares are seniors to common shares and juniors to debt and bonds.
Both common and preferred get paid the agreed dividends from the company on the decided date. The preferred shareholders get paid before the common and after the company has paid all of its debt holders and vendors.
Rights of Shareholder
They are granted six rights by their nature and are listed below.
- Voting Power: It has the right to vote for the corporate decisions concerned and limited to the company.
- Partial Ownership of Firm: They owns part of the company proportional to the number of shares in the name of the holder.
- Right to Transfer Ownership: It has the right to transfer his shares to any person or institution under certain conditions.
- Right to Receive Dividends: He/she has the right and entitled to receive the decided amount in the company’s AGM (Annual General body Meeting) as a dividend for the shares held by them.
- Right to Inspect Corporate Documents: Under the company’s activities, a firm is liable to report and file its financials. All are entitled to inspect any of these corporate documents on any occasion without any particular reason.
- Right to Sue Concerned for Wrongful Acts: They can file a lawsuit if he/she comes across any wrongful action by the company in terms of ethics, discrimination, fraud and etc.
Importance of Shareholder
- They have the right to vote and elect the director of the firm. These directors, in turn, appoint and supervise senior executives and officers including CFOs, COO and CEO. Thus they influence the firm’s operations director. It can trade the shares they hold in share markets for money, pledge to raise money. The supply and demand of any particular company’s shares in the market define, fluctuate and decide it’s the share price, Thus, they indirectly influence the share price of a stock in a market.
- They invest the money as capital in the company and expect returns when the company makes profits, so they are one of the important stakeholders of the company or corporation. If a company liquidates, creditors are first in line to receive their debts. Next comes the bondholders who hold bonds of the company. Common shareholders are next and last in line to receive to have their debts paid in case of the company’s liquidation. As they are the most important stakeholder and participate in the management of the company.
Difference between Shareholder and Stakeholder
- All Shareholder is no doubt the stakeholder’s, in fact, vital stakeholders of that particular company but the reverse is not true (vendors, customers, and employees are not shareholders)
- Stakeholders are not owners of the company but shareholders are the owners of the company. The number of shares decides their percentage of ownership.
- Stakeholders do not have voting rights.
- Stakeholders do not get paid dividends whereas shareholders get paid for dividends as decided in the general body meetings.
- Shareholders are last in line to receive liability when company files for bankruptcy where stakeholders receive their debt as per their rank in order (Employees, vendors, creditors and bonds holders)
- Volatility: The price of stock traded in markets can be fluctuating and shareholders bear the risk of volatility.
- Dividends: There is no fixed dividend percentage or compulsion for the companies to pay the dividends.
- Financial Performance: Shareholder’s returns are solely decided by profitability and its financial performance.
- Bankruptcy: They are last in line to receive their debt in case if a company goes bankrupt and files for liquidation.
This has been a guide to what is Shareholder and its definition. Here we discuss types and rights of shareholders along with roles and importance. You may learn more about financing from the following articles –