Owning Stock and Being a Shareholder in a Corporation

By Brett Melson Monday, December 12, 2016

what does it mean to be a shareholder in a corporationA 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.

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, and 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 a 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 Google, 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.

piercing the corporate veil

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 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.

Privacy of Delaware Corporation Shareholders

what does a shareholder do

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

THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.

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