Corporations and Law

Shareholder Rights

Shareholders typically do not have rights in management. Instead, they have the right to vote to elect the board of directors every year. Shareholders also have inspection rights and voting rights for matters that fundamentally change the corporation.

A shareholder (also called a stockholder) is a person or institution that owns one or more shares of stock in a corporation. Shareholders have limited rights in the company they partly own. For example, they do not have the right to directly control the operation of the business, are not agents of the corporation, and cannot act on the corporation's behalf. However, shareholders have the right to information about the company and the right to vote on matters related to the company. All corporations must have at least one class of stock with voting rights. One of the reasons a company founder that incorporates his business might buy 5,001 shares in his corporation, which is over 50 percent of the stock, is that this gives him the majority of the votes.

Generally, shareholders who act in good faith have the right to inspect and copy the corporation's minute book, accounting documents, and shareholder lists. In the business world, a minute book is a written record of what was discussed and decided at company meetings. A shareholder acts in good faith when they seek the corporation's information for a proper purpose and as an owner—not as a competitor. The Securities and Exchange Commission (SEC) requires corporations whose shares are traded publicly in the U.S. stock exchanges to provide quarterly and annual reporting to their shareholders on a variety of business and financial data.

Shareholders must approve any fundamental changes to the company. These include mergers, the sale of substantial assets, dissolution, or amendments to the articles of incorporation. Publicly held corporations must hold annual shareholder meetings or seek approval from shareholders by written consent if the company cannot hold an annual shareholder meeting.

Shareholders also have the right to use a proxy to vote for them at a meeting. A proxy is a person appointed by a shareholder to vote for the shareholder at a meeting. It is also the name of the document the shareholder signs for this appointment. Most shareholders vote by proxy.

At the annual meeting, shareholders elect directors. First, the nominating committee of the board of directors selects candidates. In large corporations, the nominating committee must be made of independent directors who are not employees of the corporation. In many corporations, if shareholders want to nominate their own candidates, they have to distribute a proxy statement to other shareholders and demonstrate why their candidate is superior. This method usually is not favored because it is costly, complex, and disruptive. Second, the slate of candidates is placed in the proxy statement and sent to shareholders. The shareholders then must vote in favor of the nominee or withhold their vote.

The traditional corporate voting method is plurality voting, which elects the nominee who receives more votes than their opponents even if no candidate receives a majority vote. If there are no opponents, then the candidate need only receive one vote to be elected.

In cumulative voting, also called proportional voting, a person is entitled to cast one vote for each share of stock they own. Therefore, someone with 50 shares would have 50 votes to cast. That person could either cast all those votes for one person or back a variety of candidates.