Owning Stock and Being a Shareholder in a Corporation
What is a Shareholder?
A shareholder is an individual or entity that holds shares representing an equity ownership interest in a corporation, often termed either common or preferred stock. A shareholder can also be referred to interchangeably as a stockholder.
As an equity holder, a shareholder is a part-owner of a corporation and participates in the increase or decrease in the company’s value.
The bylaws may provide different classes of stock with different economic (and other) rights, and holders of preferred stock receive priority and preferred distributions over holders of common stock.
One of the key features of share ownership is limited liability. A corporate shareholder is not liable for the debts and obligations of the corporation. Under certain circumstances, a court can look through a corporation and hold its shareholders responsible for certain debts and liabilities, most commonly in cases of fraud or other misconduct. Such an action, referred to as “piercing the corporate veil,” is not common, as it undermines the general principle of limited shareholder liability, a fundamental feature of the corporate form.
What Is Stock? What Does It Mean to Own Stock?
Stock represents an equity ownership in an entity, and normally, with certain exceptions, is given in exchange for a paid-in capital contribution to a business.
Ownership of stock does not entitle the holder to specific property or assets of the company, but rather, provides the holder with a share of the entity’s profits and gains, normally through the receipt of dividends.
The Supreme Court identified those characteristics usually associated with stock as “(i) the right to receive dividends contingent upon an apportionment of profits; (ii) negotiability; (iii) the ability to be pledged or hypothecated; (iv) the conferring of voting rights in proportion to the number of shares owned; and (v) the capacity to appreciate in value” (United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 851, 1975).
Here are some general features of stock, which can vary depending upon a company’s Articles of Incorporation and the terms governing specific classes or stock:
- Dividends
Although stockholders are generally compensated through dividends, a company can issue classes of stock that do not pay dividends, or it can issue different classes of stock with different rights and priorities with respect to dividends. For example, a company could issue a class of preferred stock that is entitled to the first payment of proceeds available for distribution as dividends relative to another class or classes.
- Negotiability
Negotiability refers to the ability to buy and sell stock. A shareholder's ability to buy stock or sell stock it owns will depend upon a variety of factors, including the size and depth of the market for the company’s shares, if any exists, as well as the restrictions of the federal securities laws.
The stock of IBM or Apple, for example, is highly liquid and can be purchased or sold with ease on an established exchange. There may not be a market for the stock of smaller or less established corporations, however, and many closely-held corporations' Articles of Incorporation do not permit sales to outside parties without prior consent.
- Pledge
Like the other features identified by the Supreme Court, this is a common feature of stock but may not be present in all cases. Many small or closely-held corporations restrict the ability of shareholders to pledge or hypothecate their stock holdings.
- Proportional Voting Rights
Stock may be issued as one or more series of common shares, all of which have the same rights and privileges with respect to voting, or it may represent preferred shares, which have some voting preference or additional rights relative to the entity’s common shares.
Similarly, a company can issue classes of non-voting stock. Notably, although the voting rights may vary with respect to classes of stock, stock within a class will all have the same proportional voting right, if any, as other shares of the same class.
- Capacity to Appreciate in Value
As an equity interest, the value of stock will rise and fall with the success or failure of the company.
This feature is in contrast to debt issued by a company, which pays a fixed rate of interest regardless of the company’s changing fortunes (although the company’s success or failure may affect the price of a debt instrument on a secondary market, if any exists).
Should your company require stock certificates, we offer high-quality stock certificates preprinted with your company's name, number of shares and the par value.
What is a Shareholder Equity?
The total shareholder equity can be roughly understood as a value estimation of the company. It helps to approximate the value of a company by considering the total value of its assets compared to the total value of its liabilities.
Shareholder Rights
Many terms related to shareholders’ rights can be set forth in a corporation’s Certificate of Incorporation or bylaws.
Corporate shareholders’ rights often vary, depending on the size of the corporation. For example, shareholders’ rights in a private corporation with only a few key holders will differ greatly from rights afforded to a shareholder in a large, publicly-traded company.
In close corporations, shareholder rights will be set forth with specificity in a shareholder’s agreement among the holders. In larger corporations with a larger number of shareholders, the Certificate of Incorporation and the bylaws are the primary governing documents.
Delaware law sets forth default rules and rights that will govern in the event that a corporation’s governing documents are silent on an issue and, importantly, spells out certain limited rights that cannot be waived in such documents.
One of the primary rights of common shareholders of a Delaware corporation is the right to their pro-rata share of any dividend issued by the Board of Directors to the common shareholders.
Another basic right of all owners of shares of common stock in Delaware corporations is that they may vote one vote per share on all matters that common shareholders are allowed to vote on.
Under Delaware law, a shareholder has a right to vote on any amendment to the corporation’s governing documents, whether such class of shares is entitled to vote or not under the governing documents, for actions that would (i) increase or decrease the number of authorized shares of such class; (ii) increase or decrease the par value of shares of such class; or (iii) adversely alter or change the powers, preferences, or special rights of the shares of such class.
Another key, unassailable right is a shareholder’s right to inspect the books and records of a corporation. This often-litigated right permits a shareholder to inspect corporate books and records for any “proper purpose,” which has been interpreted to mean a purpose reasonably related to a person’s interest as a shareholder. For example, investigating suspected mismanagement would generally qualify as a proper purpose. A shareholder is permitted to review records that are “essential and sufficient” in order to achieve a proper purpose.
Privacy of Delaware Corporation Shareholders
The number of authorized shares of each class of stock in a Delaware corporation is on file with the Delaware Division of Corporations; however, the names and addresses of the shareholders are not listed or recorded with the State government.
In fact, there is no public registry that lists shareholders of private Delaware corporations, and private Delaware corporations are not typically obligated to publically disclose their stock ownership records.
Corporations must hold a shareholder meeting at least once every thirteen months and must send a notice to all shareholders of the time and place of the meeting, inviting them to attend. Shareholders who have the time should make an effort to attend a corporation’s shareholder meetings so they can stay abreast of the corporation’s activities, challenges and growth. They may also attend by conference telephone and may vote by proxy without attending if they desire.
If you'd like to learn more about shareholders' rights, shareholder equity, or anything related to owning stocks, you can read more online or contact our office, and we'll be happy to answer any questions.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.
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There are 2 comments left for Owning Stock and Being a Shareholder in a Corporation
joseph jordan said: Monday, December 14, 2020shareholders are allowed to inspect the books and records of the corporation. if the Delaware corporation is a subsidiary of a foreign or us holding company are the parent company shareholders permitted to inspect the books and records of the Delaware subsidiary ?
HBS Staff replied: Tuesday, December 15, 2020The right of the parent company shareholders to inspect the books and records of the subsidiary is governed by the law applicable to the parent company. The fact that the parent company shareholders are indirectly invested in the subsidiary does not give them the rights of a shareholder of the subsidiary for matters such as inspection of records. If the law governing the corporate aspects of the parent company permit inspection of the parent company’s books and records, the parent’s shareholders may get access to the subsidiary’s records through the parent’s available materials.
yasemin Karayel said: Thursday, April 9, 2020Thanks for the blog. Very helpful. I am trying to find UBO of a Delaware Inc previously incorporated with your firm. We need to do the onboarding. But none of the documents bylaws and certificate of incorporation shows the names of sharholders. Which document should I ask, maybe latest shareholder`s meeting? I appreciate your help.
HBS Staff replied: Friday, April 10, 2020Shareholders of Delaware corporations are generally not filed with the state or part of a public database. If this is a company you are working with, you may want to try reaching out to your contact them and requesting the needed information from them.