Common Shareholders' Six Main Rights
1.Voting Power on Major Issues
This includes electing directors and proposals for fundamental changes affecting the company such as mergers or liquidation. Voting takes place at the company's annual meeting. If you can't attend, you can do so by proxy and mail in your vote. (see The Purpose and Importance of Proxy Voting)
2.Ownership in a Portion of the Company
Previously we discussed the event of a corporate liquidation where bondholders and preferred shareholders are paid first. However, when business thrives, common shareholders own a piece of something that has value. Said another way, they have a claim on a portion of the assets owned by the company. As these assets generate profits, and as the profits are reinvested in additional assets, shareholders see a return in the form of increased share value as stock prices rise.
•The Right to Transfer Ownership
Right to transfer ownership means shareholders are allowed to trade their stock on an exchange. The right to transfer ownership might seem mundane, but the liquidity provided by stock exchanges is extremely important. Liquidity is one of the key factors that differentiates stocks from an investment like real estate. If you own property, it can take months to convert your investment into cash. Because stocks are so liquid, you can move your money into other places almost instantaneously.
•An Entitlement to Dividends
Along with a claim on assets, you also receive a claim on any profits a company pays out in the form of a dividend. Management of a company essentially has two options with profits: they can be reinvested back into the firm (hopefully increasing the company's overall value) or paid out in the form of a dividend. You don't have a say in what percentage of profits should be paid out - this is decided by the board of directors. However, whenever dividends are declared, common shareholders are entitled to receive their share. (To continue reading, see How and Why Do Companies Pay Dividends?)
•Opportunity to Inspect Corporate Books and Records
This opportunity is provided through a company's public filings, including its annual report. Nowadays, this isn't such a big deal as public companies are required to make their financials public. It can be more important for private companies.
•The Right to Sue for Wrongful Acts
Suing a company usually takes the form of a shareholder class-action lawsuit. A good example of this type of suit occurred in the wake of the accounting scandal that rocked WorldCom in 2002, after it was discovered that the company had grossly overstated earnings, giving shareholders and investors an erroneous view of its financial health. The telecom giant faced a firestorm of shareholder class-action suits as a result. (Want to read more about frauds? See The Biggest Stock Scams of All Time.)
Shareholder rights vary from state to state, and country to country, so it is important to check with your local authorities and public watchdog groups. In North America, however, shareholders rights tend to be more developed than other nations and are standard for the purchase of any common stock. These rights are crucial for the protection of shareholders against poor management.
Corporate Governance
In addition to the six basic rights of common shareholders, it is vital that you thoroughly research the corporate governance policies of a company. These policies are often crucial in determining how a company treats and informs its shareholders. (For a detailed look at the importance of corporate governance to shareholders and prospective investors as well as where to find a company's record or policy, see Governance Pays.)
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