A person or legal organization that is registered by a company as the legal owner of shares of the share capital of a public or private corporation.

Author: David Bickerton
David Bickerton
David Bickerton
Asset Management | Financial Analysis

Previously a Portfolio Manager for MDH Investment Management, David has been with the firm for nearly a decade, serving as President since 2015. He has extensive experience in wealth management, investments and portfolio management.

David holds a BS from Miami University in Finance.

Reviewed By: Osman Ahmed
Osman Ahmed
Osman Ahmed
Investment Banking | Private Equity

Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He's currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

Osman holds a Bachelor of Science in Computer Science from the University of Southern California and a Master of Business Administration with concentrations in Finance, Entrepreneurship, and Economics from the University of Chicago Booth School of Business.

Last Updated:December 31, 2023

What Is A Shareholder?

A person or legal organization that a company registers as the legal owner of shares of the share capital of a public or private corporation is referred to as a shareholder, or stockholder, in many cases. 

Examples include another company, a political body, a foundation, or a partnership. A corporation's members may be referred to as stock owners. 

A person or legal entity joins a company as a stockholder when their name and other information are put in the corporation's register of stockholders or members. 

Shares are fractional ownership in a corporation. For certain businesses, shares are a type of financial instrument that allows for the equitable distribution of any declared residual earnings in the form of dividends. 

A stock with no dividend payments does not distribute its income to its stockholders. Instead, they look forward to further increasing the stock price by reinvesting the profits in the business as the earnings rise.

Unless mandated by law, the corporation is not compelled or allowed to inquire as to who really owns the shares in question. 

Typically, a business cannot possess its own stock.

By subscribing to the IPOs, stockholders may have purchased their shares on the primary market, giving the firm capital. 

However, the majority of owners purchase their shares on the secondary market and do not contribute any money to the company directly. 

Depending on the share class, share owners may receive specific benefits. Generally speaking, a company is governed for the benefit of its stock owners by its board of directors.

Stockholders are a subset of stakeholders, which might encompass anybody with a direct or indirect interest in the company. 

For instance, stakeholders like the community, customers, suppliers, and workers are often seen as such since they have an effect on the business or add value to it.

Key Takeaways
  • Shareholders own shares, representing ownership in a corporation, and register in the stockholder register.
  • Shareholders acquire shares through IPOs or on the secondary market, impacting stock prices and providing capital.
  • Shareholders influence company operations, funding, and management, playing a vital role in decision-making.
  • Shareholders impact board nominations, file lawsuits against executives, and exercise voting rights in general meetings.
  • Shareholders generally have limited liability, but personal guarantees or specific actions may make them accountable for corporate debts.

A Brief Understanding of Who can become a Shareholder

Owners of a company have the option of issuing preferred shares or ordinary stock to investors. In exchange for funds required to expand and run the business, companies offer equity shares to investors.

Unlike debt capital, which is acquired through a loan or bond issuance, equity has no legal obligation to be repaid to investors, and shares do not pay interest even if they may distribute earnings in the form of dividends. 

From small-scale firms or Limited liability companies to large international organizations, almost all businesses issue shares of some type.

The founders or partners of privately held businesses or partnerships hold the stock. Shares of small businesses are sold to outside investors on the primary market as they expand. Friends and relatives may be among them, followed by venture capital investors. 

If the business keeps expanding, it could try to obtain more equity money by selling shares to the general public through an Initial public offering (IPO). 

A company's shares are referred to as being publicly traded once they are listed on a stock exchange following an IPO.

The majority of businesses issue common shares. These give owners a continuing stake in the business and its earnings, offering the possibility of investment development through both capital gains and dividends.

Additionally, common shares have voting privileges, providing stockholders greater power over the company. 

These privileges give stock owners the ability to decide whether or not to authorize the issuance of additional securities or the payment of dividends, as well as vote on other corporate decisions. 

Additionally, some common stock has preemptive rights, allowing stockholders to purchase additional shares and maintain their ownership stake when the company issues additional stock.

Electronic records of stock shares have taken the role of actual paper stock certificates. The Securities and Exchange Commission (SEC) regulates the issuance and distribution of shares in public and private markets, as well as the trading of shares on the secondary market.

Importance of Shareholders

These stockholders not only make a profit from their investment by owning a company's shares, but they also have a significant impact on how a corporation is run, financed, governed, and controlled.

The importance of stockholders is as follows:

1. Operations of the Corporation

By choosing the top management, these stock owners have direct control over the company's activities. 

Some investors select stocks that will enable them to generate the predicted earnings, maintaining constant pressure on businesses to achieve their projected sales and profits.

2. Funding the Company

Instead of ownership rights, stockholders provide funding to companies. Startups and privately held companies can also raise money by selling shares to a small group of investors or through private placements.

3. Managing the Company

Public companies' boards of directors are obligated to maintain open communication with the list of stockholders on the company's financial situation and activities. 

In actuality, senior executives of such organizations spend time talking with market analysts, stockholders, and other entities about issues related to the governance of the company.

4. Authority over the company

Shareowners can use their ability to select employees to direct a company's activities. For instance, if stockholders cannot agree on a suitable price, they can successfully thwart takeover efforts.

Therefore, stock owners have a big influence on a company's overall success and profitability since they have authority over most parts of its operations.

The Role and Rights of a Shareholder

Following are the roles and rights of a stockholder:

1. Selecting the Board of Directors & SLT

Through the adoption of an ordinary resolution, stockholders have a direct say in the nomination of directors.

Additionally, stock owners have the power to appoint several kinds of directors:

An additional director who will serve until the next general body meeting, for instance, or an alternate director who will serve in that capacity for three months. 

A nominee director; is a director nominated to fill a casual vacancy in any director's office who was appointed at a general meeting of a public business. 

In addition to this, a stockholder may object to any resolution adopted at the general body meeting for the nomination of a director.

2. Lawsuit against executives

Shareowners have the option of suing the director in the following situations:

  • Any action was taken by a director in any way that is detrimental to the company's affairs.
  • Any action taken that is against the law or the constitution.
  • Fraud occurs when a company's assets are transferred for less than they are worth.
  • When the company's money is misappropriated.
  • Any act committed with malice intended.

3. Voting Right

The annual general body meeting is open to stockholders, who may also participate and cast votes there.

Every corporation must conduct at least one-year general meeting. The adoption of financial accounts, the nomination or confirmation of directors and auditors, and other obligatory agenda items are discussed during the meeting.

When a stockholder is unable to attend the meeting, they may choose a proxy to act on their behalf. Nevertheless, in the event of a vote, the proxy is not permitted to count toward the meeting's quorum.

4. Calling of General Meetings

A general meeting may be called by stock owners. If general body meetings are not conducted in accordance with the law, they may also turn to the Company Law Board for assistance. 

5. Right to administer the company's books of accounts

Since stock owners are a company's primary stakeholders, they have the right to see the company's books and accounts and, if they so want, to inquire about them.

6. Passing Ordinary Resolutions

If a simple majority of stockholders present at the meeting vote in favor of the motion, the ordinary resolution is approved by the shareowners. Therefore, a majority of the votes cast (more than 50%) generally represented by a show of hands must be in favor.

7. Passing Special Resolutions

The Companies Act may occasionally call for a special resolution in specific circumstances, such as when changing the articles of association or other significant or delicate issues. The Articles may also call for a unique resolution. 

A special resolution must get a majority vote of 75% in favor of passing. It is assumed that an ordinary resolution will be put to the vote if the kind of resolution necessary is not specifically stated.

Liability of a Shareholder

The owners of the company might restrict their liability in one of two ways. It might be constrained by shares or by a guarantee.

Profits from a corporation limited by guarantee are not usually distributed to the firm's stockholders; instead, they are frequently retained for charitable or community projects.

A company limited by shares requires its stockholders to reimburse the business for the shares they have purchased. The stockholders normally do not have to pay any more money to the corporation for debts after those shares have been fully paid for.

Simply put, a shareowner only stands to lose the money they have already invested in the company if it should fail.

Although the safety that limited liability offers, there are several situations in which a stockholder of a limited company might be held personally accountable for corporate obligations.

The signing of a stockholder's personal guarantee for a business loan is one example. 

The creditor will then have the option of taking legal action against the stock owner who signed the guarantee if the company is unable to pay the debt.

The directors and the stockholders of the firm are frequently ones and the same in limited companies.

There are various different circumstances in which a stockholder who serves as a director or executive of the corporation may be held personally responsible for corporate debts, such as ;  

  • Discarding of company assets for gratis or for less than its valuation during or prior to bankruptcy
  • Constructing an overdrawn director's loan account by withdrawing money from the company in the form of a director's loan as opposed to dividends or salary
  • Taking unlawful income, which are dividends that are not paid out of profits

An administrator will be appointed in the event of an insolvent liquidation to liquidate the company's assets, allocate the cash to the lenders, and shut down the operation. 

The actions of the company's shareowners and directors in the two to three years preceding the insolvency will also be looked at.

If they discover instances of any of the aforementioned, they may take legal action to hold the stockholders personally accountable for the debts of the business.

Types of Shareholders

There are various types of stockholders. The detailed discription of each types is as follows: 

1. Ordinary stockholders

Ordinary shares are fractional ownership interests in the company issuing them. The stockholder has a voice in important corporate decisions that are made at stockholder meetings since they are an owner.

A dividend may or may not be paid to the stockholder. The board of directors of the corporation determines if and how much of a dividend will be paid. 

The dividend is the stockholder's portion of the corporation's profits for the most recent six months or twelve months.

They have the option to collect dividends, if any, that remain after the firm pays preferred share distributions, in other words.

Essentially, this has no significance. The firm's board may choose to invest all of the extra money back into the company, in which case any remaining earnings would not be eligible for dividends.

If the corporation fails, ordinary stockholders will also be entitled to a portion of the remaining economic value. 

However, after bondholders and preferred stockholders, they come last in bankruptcy court. Common stockholders, therefore, have the same rights as debt holders.

The risk and cost that ordinary stockholders of a company assume are more than that of preferred stockholders, but there is also the potential for bigger profits. 

In the event of a significant profit, ordinary share owners are free to distribute the surplus among themselves, whereas preferred stockholders and creditors are limited to receiving the fixed sums to which they are legally entitled.

The same thing happens when startup businesses are bought by bigger enterprises. Typically, common stockholders reap the greatest rewards.

Stock owners also have the right to receive and approve the company's yearly financial accounts, as well as the opportunity to vote for the company's board of directors and residual profits.

Ordinary shares have a declared "par value" or face value in many countries; however, this is a technicality and is frequently fixed at a few cents per share. 

The market price that investors pay for common shares is determined by market forces, the worth of the underlying company, and investor mood.

2. Preference Stockholders

The term "preference shares" refers to a company's stock that has dividends that are paid to stockholders ahead of payments on the regular stock. 

Preferred investors are entitled to receive payment from corporate assets before regular stockholders in the event that the firm declares bankruptcy.

While common stocks often do not, the majority of preference shares carry a set dividend. In contrast to common stockholders, preferred stockholders normally do not have voting rights.

There are four types of preference shares: 

a. Cumulative Preferred Stocks

In accordance with the terms of the cumulative preferred stock, the company shall pay to the holders of Cumulative Preferred Stock all dividends, including those previously withheld. 

Although these dividend payments are promised, they aren't usually made on time. 

Dividends that are past due are referred to as dividends in arrears and are required by law to be paid to the stock's purchaser at the time of payment. The holder of this kind of preferred share occasionally earns extra compensation.

b. Non-cumulative preferred stock

No unpaid or missed dividends are issued by non-cumulative preferred stock. 

The non-cumulative preferred stockholders have no right or authority to make a future claim for forgone dividends if the corporation decides not to pay them in any particular year.

c. Participating Preferred Stock

The right to receive dividends equal to the generally stated rate of preferred dividends plus an extra payout depending on a predetermined condition is granted to stockholders of participating preferred shares

Typically, only if the total amount of dividends received by common stockholders exceeds a set per-share amount would this additional payment be paid out. 

Participating preferred stockholders can also be entitled to receive a pro-rata portion of the residual proceeds received by common stockholders in the event of a corporate liquidation, as well as the stock's purchase price.

  • Convertible Preferred Shares

With convertible preferred stock, owners have the opportunity to exchange their preferred shares for a predetermined number of common shares at any time after a defined date. 

Normally, at the stockholder's request, convertible preferred shares are swapped in this manner. 

However, a business may have a clause on such shares that enables the issuer or the shareholders to compel the issuance. 

The performance of the common stock is ultimately what determines how valuable convertible common stocks are.

What is Articles of Association?

When it comes to business management, a company's articles of association (AoA), also known as articles of incorporation in some jurisdictions and memorandum of association (if one exists) are the two legal documents that together make up the company's constitution. 

They outline the duties of the directors, the type of business that will be conducted, and the procedures by which the stockholder can exercise control over the board of directors.

The articles of organization, which may govern both internal and exterior matters, are essential legal papers for a corporation.

A corporation's existence in the United States and Canada is established by its articles of incorporation, which are sometimes known as the certificate of incorporation or the corporate charter. 

They are often filled with another company registrar or the secretary of state in the U.S. state where the business is incorporated. Articles of organization are a word used to describe limited liability organizations (LLCs) in the U.S.

General Contents of AoA:

  • The issuance of shares and the types of shares, such as ordinary stock and preferred stock.

  • The transferability of shares and the dividend policy.

  • Valuing intellectual property

  • How the company's daily activities are carried out.

  • The appointment of directors, which demonstrates whether a shareholder dominates or shares equal power with all contributions; 

  • The special voting powers of the Chairperson and the method of electing them;

  • The quorum requirements and voting thresholds for directors' meetings.

  • Confidentiality and the founders' acceptance of consequences for disclosure.

  • The first option is to acquire rights and make counter offers by a founder.

Researched and authored by Aviral Mathur | LinkedIn

Reviewed and edited by Sakshi Uradi | LinkedIn

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