Last Updated on May 24, 2022 by Aradhana Gotur
Companies looking for additional funds can issue shares to raise funds from investors. When investors invest in a company’s share, they become shareholders. They become part-owners of the company and have various rights and play a role in its overall management. In this article, we dive deep into who are shareholders and their rights.
Table of Contents
Who is a shareholder?
In technical terms, a shareholder is a part-owner of a company. The shares issued by a company provide ownership rights to investors. As such, when any individual or entity invests in one or more shares, they buy proportional ownership of the company depending on the number of shares purchased.
For example, if a company issues 1 lakh shares and you buy 10,000 units, you become a 10% owner of the company. Now, part-ownership here does not mean you become a promoter or behave like an owner. It simply means you get a share of the profits generated by the company given out as dividends, and also have a say in the management of the company through your voting rights.
Rights of shareholders
Shareholders are entitled to the following rights:
Right to earn returns
Shareholders have the right to earn returns on their investments. Such returns can be earned in two ways:
- By selling their stock for a price higher than its cost price
- By earning dividends. When a company earns a profit, it might distribute a part of the profit amongst its shareholders to reward them for their investment. This distributed profit is called a dividend and you can earn this dividend if you remain the shareholder of the company on the dividend record date.
Rights on the company’s assets
When the company is being liquidated, the assets left over after paying back the creditors, are distributed among the shareholders. The shareholders, thus, have the right to claim the company’s residual assets to liquidate their holding.
Right to vote at board meetings
Shareholders have the right to constitute the Board of Directors of the company and also vote at annual board meetings on various matters. This power is bestowed on shareholders because they are considered as owners of the company.
Right to have a say in managerial decisions
Shareholders have the right to express their opinions and decisions in the managerial decisions of the company.
Right to full disclosure of the company’s finances
As per the legal norms, companies are required to provide a complete and transparent picture of their finances to their shareholders. This allows shareholders to assess the company’s performance. It also allows them to make the right decision about staying invested in the company or not.
Right to sue the company
Shareholders have the right to file lawsuits against the company for any wrongdoings or unfair practices.
Types of shareholders
Shareholders of a company can be categorized into different types. Here’s how:
Types of shareholders based on ownership
- Majority shareholder: An investor who owns 50% or more of the company’s outstanding shares is called a majority shareholder. This type of shareholder has a considerable say in the management and operation of the company. Usually, the founders of the company become majority shareholders. Alternatively, if another company acquires 50% or more shares of the company, it would also become a majority shareholder.
- Minority shareholder: Any investor not owning a minimum of 50% of the company’s outstanding shares is called a minority shareholder. Most investors fall under this category.
Types of shareholders based on the type of shares owned
A company might issue preference and equity shares. Thus, depending on which type of share that you own, you are categorised as a preference or an equity shareholder.
- Preference shareholder: Investors of preference shares are called preference shareholders.
- Equity shareholder: Investors who invest in the equity shares of the company are called equity shareholders.
Equity vs preference shareholders
Besides the type of shares owned, equity and preference shareholders have quite a few differences. Have a look:
|Equity shareholders||Preference shareholders|
|They get the last claim on the company’s assets in the case of liquidation. The assets are first used to pay off the creditors and the preferred shareholders. Then, the residual assets are used to pay equity shareholders||They get the first claim on the company’s assets after the creditors are paid off at the time of liquidation|
|Dividend payment depends on the company’s choice. Equity shareholders, thus, might or might not get dividends. Moreover, the dividend rate is not fixed and depends on the company’s performance||Dividend payment is guaranteed and is done every year at a fixed rate|
|They have the right to vote at board meetings||They have no right to vote at board meetings|
|They can trade their shares at stock exchanges||Preferred stock is usually not listed on the stock exchange. As such, preferred shareholders cannot trade their stockholding easily|
Roles of shareholders
Shareholders are bestowed with various roles to play in the company’s operation and management. These roles include the following:
- Electing the Board of Director for the company and also its Chairman
- Appointment of company’s directors, their remuneration and defining their roles
- Changing the constitution of the company
- Passing resolutions at board meetings
- Checking and approving the financial statements of the company
- Making key managerial and executive decisions
Shareholders are an important source of funds for an organisation. Their participation and subsequent approval help companies make the right managerial decisions for growth and profitability. As a shareholder, you can also benefit from dividends and capital gains when you invest in a company’s stock. So, understand the meaning and types of shareholders. Know their roles and rights too so that you can make the most of being a shareholder.