Articles

Shareholders

The term "shareholder" refers to one who holds or owns shares of stock in a corporation. Shareholders are the owners of a corporation. As owners they are entitled to certain rights. However, shareholders do not have the same ownership rights as the owners of sole proprietorships or partnerships. For example, shareholders are generally not entitled to control the corporation’s business affairs and they do not own the corporation’s property.

Shareholders also do not have the same liabilities as the owners of sole proprietorships or partnerships. Shareholders are not liable for the corporation’s acts or debts. Unless the corporation’s Articles of Incorporation provide for greater liability, a shareholder’s only obligation is to pay for his or her shares.

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Right to Vote

One of the fundamental rights of a shareholder is the right to vote. However, shareholders do not get to vote on most corporate matters. Instead, their right to vote is limited to voting for the corporation’s directors and to voting for changes in the corporation’s structure.

The right to vote in an election of directors is one of the shareholders’ most important rights. Most shareholders have little control over the way a corporation’s affairs are managed. However, shareholders can vote for the directors who do manage the corporation’s affairs and who appoint the officers who run the day-to-day operations. Shareholders can also vote to remove directors. The ability to elect and remove directors gives shareholders indirect control over the way the corporation is run.

Shareholders are also entitled to vote for any change that would materially affect their ownership. This usually means that shareholders have the right to vote on proposals to amend the Articles of Incorporation, to merge, to consolidate, to exchange the corporation’s shares, to convert, to sell all or substantially all of the corporation’s assets not in the ordinary course of business, and to dissolve the corporation.

The exact voting rights of each class or series of a corporation’s shares are set forth in its Articles of Incorporation. By law, a corporation must have at least one class of shares with unlimited voting rights. However, it may limit the voting rights of other classes by so providing in its articles.

Dividends and Distributions

Shareholders have the right to receive transfers of money and other property from the corporation in respect of their shares. These transfers are called distributions. When the corporation distributes its prof-its to its shareholders, this is known as a dividend.

Dividends may be received in cash, property or shares. The board of directors decides, in its discretion, if and when a dividend will be declared. However, by law, the board may not declare a dividend if such a declaration would leave the corporation insolvent. Some states further restrict dividends by providing that they can only be paid out of certain corporate accounts.

A corporation may grant particular classes or series of shares a priority in receiving dividends by so providing in its Articles of Incorporation.

Shareholders also have the right to receive distributions of the corporation’s assets after the corporation dissolves or liquidates. However, the shareholders can only receive the assets remaining after the corporation has paid off its creditors. All shareholders will share the net assets in proportion to their share ownership unless the Articles of Incorporation provide that certain classes or series of shares are entitled to a preference over the other shares.

Preemptive Rights

Preemptive rights are a special right that may be granted to shareholders.

Shareholders with preemptive rights have an opportunity to buy their proportionate share of a new issue of stock before it can be sold to anyone else. For example, a shareholder who owns 10% of a corporation’s shares would be entitled to purchase 100 shares if the corporation issued 1,000 new shares. This right is generally used to protect the dividend and voting rights of minority shareholders in small, privately-owned corporations. Shareholders in large, publicly-traded corporations are usually denied this right.

In some states, preemptive rights are granted to shareholders by the corporation statute. However, these states allow corporations to deny preemptive rights by so providing in their Articles of Incorporation. In the rest of the states, shareholders do not have a statutory preemptive right. However, these states allow corporations to grant their shareholders this right by so providing in their Articles.

Cumulative Voting

Cumulative voting is another special right that may be granted to shareholders. It is a special way in which shareholders may vote for directors. Shareholders who have the right to cumulate their votes are entitled to as many votes as equal their number of shares multiplied by the number of directors. They may then cast all of their votes for a single director or distribute the votes as they see fit. For example, if a corporation is to elect 7 directors, a shareholder with 100 voting shares would be entitled to 700 votes. The shareholder could cast all 700 votes for one director, or divide his or her votes among the various candidates.

Cumulative voting increases the voting power of minority shareholders, thereby giving them a better chance of being represented on the board of directors. Like preemptive rights, the right to cumulative voting is granted by statute in some states and denied by statute in others. The corporation can also deny or grant the right to cumulative voting in its Articles of Incorporation.

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Inspection of Corporate Books and Records

All corporation laws give shareholders the right to inspect and copy various corporate books and records. The corporation cannot deny shareholders this right in its Articles or bylaws.

Several states have prerequisites that shareholders must meet before being entitled to demand an inspection. For example, the shareholders may have had to own their shares for at least 6 months or have held at least 5% of the corporation’s outstanding shares. Inspections may also be allowed only if the shareholder’s demand to inspect was made in good faith, for a proper purpose, and if the records re-quested were directly connected with that purpose. A proper purpose is defined as a purpose related to the shareholder’s interest as a shareholder. For example, a desire to communicate with other shareholders on corporate issues is a proper purpose for demanding to inspect the list of shareholders. A desire to value one’s shares is considered a proper purpose for demanding an inspection of financial records. An improper purpose is one that will harm the corporation, or that is intended to further the shareholder’s personal interests. Thus, for example, buying shares of a competitor and demanding an inspection to obtain business plans would not be a proper purpose.

The shareholder must give the corporation written notice that he or she is demanding an inspection. The demand must describe the records requested and the purpose for requesting them.

The inspection may be made by the shareholder or any authorized agent such as an accountant or attorney. The inspection must take place during regular business hours, at a reasonable location. The right to inspect includes the right to make copies of the books and records.

If the corporation refuses to grant the right of inspection, the shareholder may go to court and ask it to order the corporation to allow the inspection.

Dissenter's Rights

The right to dissent allows shareholders who voted against certain corporate transactions to have their shares appraised and purchased by the corporation if the transaction is approved and they no longer wish to remain shareholders.

Shareholders generally have the right to dissent in cases of merger, consolidation, share exchange, and the sale of substantially all corporate assets not in the ordinary course of business. They may also dissent to amendments to the Articles of Incorporation  that materially affect their rights—such as restricting their voting rights or abolishing preemptive or other preferential rights.

Each state has procedures that must be followed in order for the shareholder to effect dissenter’s rights. These procedures are quite detailed. Typically, it is provided that the corporation must notify the shareholders that a meeting will be held at which they may vote on a transaction that creates dissenter’s rights. The shareholders must notify the corporation, before the vote is taken, that they intend to demand payment for their shares if the transaction is effectuated. When the vote is taken, the shareholders must not vote in favor of the transaction.

If the transaction is approved, the corporation must send a notice to the dissenting shareholders telling them how to go about obtaining payment. The notice must contain a form which the dissenter may use to demand payment. The form must specify the date by which the demand must be received. A shareholder who does not demand payment by the set date will not be entitled to payment for his or her shares. As soon as the proposed transaction is taken, or upon receipt of a payment demand, the corporation must pay the dissenting shareholder its estimate of the shares’ value. If the shareholder is not satisfied with the corporation’s estimate, he or she may demand payment of his or her own estimate. If the shareholder and the corporation cannot agree on the shares’ value, they must go to court and have a judge appraise the shares.

Shareholder Derivative Suits

A shareholder can go to court to protect a corporation from wrongs committed against it by its management or by others. A lawsuit brought by a shareholder on behalf of a corporation is called a shareholder derivative suit. Although the shareholder brings the suit, the action belongs to the corporation. As a result, if the shareholder wins the suit, the damages awarded by the court will go to the corporation—not the shareholder.

A shareholder must satisfy several requirements before being allowed to bring a derivative suit. For example, the shareholder must have held stock in the corporation at the time the alleged wrong was committed. The shareholder may also be required to maintain ownership of the stock throughout the litigation. The shareholder must be able to fairly and adequately represent the interests of the corporation and the other shareholders.

Another prerequisite to bringing a derivative suit is the demand requirement. This requires the shareholder to notify the corporation’s board of directors that the alleged harm is being committed and demand that the board take some action to protect the corporation. The demand requirement allows the board to decide if the corporation should pursue a cause of action or take some other remedial action. The shareholder may bring a derivative suit only if the board refuses or ignores the demand. If the board decides that the corporation should sue on its own behalf, the shareholder cannot sue derivatively.

In some states, the demand requirement may be excused if the shareholder can show that making a demand would have been a futile gesture. This generally occurs when the directors were involved in the alleged harmful conduct. In that case it may be futile to make a demand because the directors are unlikely to take action against themselves. Other states, however, require a demand to be made in all cases.

Often, when a demand is made, the board of directors will appoint a special litigation committee to investigate the complaint and decide what the corporation should do. Once a derivative suit has been filed, most states provide that the suit cannot be settled or discontinued without judicial approval.

Direct Shareholder Actions

A shareholder may also bring an action against a corporation directly, rather than derivatively. In a direct action, the shareholder alleges that a wrong has been inflicted directly upon him or her. In a derivative suit, the shareholder alleges that a wrong has been inflicted upon the corporation. A shareholder bringing a direct action does not have to comply with the special procedural requirements—such as making a demand—that a shareholder bringing a derivative suit must comply with. Any damages awarded in a direct action go to the shareholder.

Direct actions may be brought when the corporation breached some contractual or statutory duty it owed the shareholder. For example, an action claiming that the shareholder was denied his or her right to inspect corporate records could be brought directly. Actions claiming that the corporation interfered with the shareholder’s right to vote or alleging that a dividend was wrongfully withheld could also be brought directly.

On the other hand, if the shareholder alleges, for example, that management wasted corporate assets or deprived the shareholders of the right to receive a takeover offer, these claims would have to be brought derivatively, because the injury is actually to the corporation.

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Shareholder's Meetings

A corporation must hold a shareholders’ meeting every year. The time and location of the annual shareholders’ meeting are generally fixed in the bylaws. Meetings may be held by means of remote communication such as the Internet rather than having a physical location. If the corporation fails to call an annual meeting, the shareholders may be able to go to court and ask the court to order the meeting held.

In addition to the annual meeting, special shareholders’ meetings may be held. These meetings may be called by the board of directors, by the holder of a stated percentage of the corporation’s shares, or by any other person named in the Articles of Incorporation or bylaws.

In order for a shareholders’ meeting to be valid it must be duly called and noticed and a quorum must be present. A quorum is the minimum number of shares that must be represented at the meeting before business may be transacted. The corporation’s bylaws will usually fix the percentage of shares that constitutes a quorum. In the absence of a bylaw provision, statutes state that a majority of the shares will constitute a quorum.

Notice of Meetings

Shareholders must be given notice of all shareholders’ meetings. It must state the place, day and hour of the meeting. Notice of a special meeting must also state the meeting’s purposes. The shareholders may only act upon those matters described in the notice of the special meeting. Generally, notice of an annual meeting does not have to state the purposes. However, if fundamental corporate changes are to be voted on—such as a merger or dissolution—the notice must state this.

The notice must be in writing, or, in many states, given by electronic transmission, if consented to by the shareholder. Notice must be delivered within a certain time period before the meeting is held. This time period varies depending upon the state. Generally, only shareholders who are entitled to vote at a meeting are entitled to notice. However, where certain types of fundamental corporate changes are to be considered at the meeting, notice may have to be given to all shareholders.

Shareholders may waive notice of a meeting by signing a waiver. The waiver must be delivered to the corporation. It may be signed before, during, or after the meeting.

Setting Record Dates

The corporation must determine which shareholders are entitled to notice of and to vote at a shareholders’ meeting. Many statutes provide that this may be done by setting a record date. A record date is a date fixed in the bylaws or set by the board of directors which is a certain number of days before the meeting. All persons who own shares as of the record date will be entitled to notice and to vote. Some corporation laws allow separate record dates for notice and voting purposes. State corporation laws provide that the record date may not be set at more than a certain number of days before the meeting.

Some statutes provide that instead of setting a record date, the board or the bylaws may set a date at which the corporation’s stock transfer books will be closed. All persons listed on the books before they are closed are entitled to notice and to vote.

Actions Without a Meeting

Shareholders may take actions without a meeting, notice, or vote if written consents setting forth the actions taken are obtained from all of the shareholders. Some states permit actions to be taken without a meeting if consents are received from the number of shareholders necessary to take the action at a meeting. In the case of less than unanimous consent, prompt notice must be given to all shareholders of whatever action was approved. In many states electronically transmitted consents constitute written consents.

Proxies

A shareholder may appear at a meeting and vote his or her shares in person. Or a shareholder may appear and vote by proxy. A proxy is an authorization, signed by the shareholder, directing the proxy holder to represent the shareholder at the meeting and vote his or her shares. The proxy holder is the shareholder’s agent and must vote the shares as the shareholder directs. Proxies may be appointed in writing or by telephonic or electronic transmission.

A proxy becomes effective when it is received by the secretary or other officer or agent authorized by the corporation to receive and tabulate votes. Proxies last for a limited period of time. Most statutes provide that a proxy is valid for 11 months. However, the proxy may specify a longer period.

Proxies are generally revocable at any time. A shareholder may revoke a proxy by notifying the proxy holder, by executing a new proxy that is inconsistent with the earlier one, or by the shareholder attending the meeting and personally voting the shares.

In large, publicly-traded corporations, shareholder business is conducted mainly through proxies. Contests for control of these corporations are often conducted by the soliciting of proxies. Proxies solicited from the shareholders of such publicly-traded corporations must meet the requirements of the federal securities laws.

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