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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 principal of limited shareholder liability, a fundamental feature of the corporate form.
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, and can vary depending upon a company’s Articles of Incorporation and the terms governing specific classes or stock:
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.
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 a shareholder in a large, publicly-traded company.
In close corporations, shareholders’ 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 to 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.
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 which 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.
*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.