What Is A Shareholder? (With Rights And Responsibilities)

Updated 21 July 2022

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A shareholder is an individual or organisation who owns a part of a business. If you are considering a position with a publicly traded company, it is important to understand the roles and rights of shareholders and how the shareholding process works. This can help you learn about investment options and research companies. In this article, we explain "What is a shareholder?", the types of shareholders, their rights, roles and importance in a business and a few frequently asked questions.

What is a shareholder?

If you possess an interest in the investment sector, you may wonder, "What is a shareholder?". Shareholders, alternatively referred to as stockholders, are legal entities that own at least one share of a company's stock. Ownership of stock often gives certain rights to shareholder equity in the company and they can vote at shareholder meetings. Shareholders make a capital gain on the share as a result of the stock price appreciation or as cash dividends. The benefits of being a shareholder vary depending on the amount and type of stock they own.

While shareholders benefit from a company's success, they also share its failure. In challenging times, shareholders lose money when the value of their stock drops. Shareholders may lose their entire investment if the company fails.

Types of shareholders

The majority of businesses have two distinct types of shareholders and stocks, equity and preferred. What kind of stock a person owns determines their shareholding type. Each type has different rights and privileges and shareholders' agreement specifies their rights.

Equity shareholders

Here are some general facts about equity shareholders:

Generally, they are the most prevalent by a big margin because the equity stock is less expensive and has greater supply than preferred.
They have voting rights, usually one vote per share, while preferred stockholders do not. These rights give equity stockholders a voice in certain decisions.
Equity shareholders only receive dividends when the board of directors votes to pay them. The board also specifies the amount of any dividends paid to them.
If the company goes bankrupt, equity shareholders are the last to receive anything from the proceeds after getting all the assets sold and the creditors paid. They may not receive anything after preferred shareholders receive their share.

Preferred shareholders

Here are some privileges that preferred stockholders have:

Preferred stockholders or preference shareholders get priority in the payment of dividends and usually receive a larger share than equity stockholders.
Preferred shareholders receive dividends according to a fixed percentage and get paid at regular intervals, while equity shareholders have no set share and schedule.
If a company liquidates, preferred shareholders get their share of the proceeds before equity shareholders.

Majority shareholder

While equity and preferred are the most familiar shareholder classifications, another classification is according to an entity's stock ownership. If one shareholder holds more than 50% of the company's outstanding shares, that entity is a majority shareholder.

In contrast, a minority shareholder is one who owns less than 50% of the company's outstanding shares. The majority shareholders are usually the founders of the company or the founders' heirs. Since they own so much of the company, majority shareholders have more influence over operations, the board of directors and top executives. Because of this power and control, many investors prefer to avoid companies with majority shareholders.

Rights of a shareholder

The rights of shareholders may differ depending on if an individual or entity holds common or preferred stock and how much stock they hold. Here are some of the rights that a shareholder may have when they own stock in a company:

Voting

Typically, equity shareholders have voting rights. They usually get one vote for each share they own at the annual meetings. If shareholders cannot attend the meeting, they can vote via proxy. The voting topics may emerge during the annual meeting and as interest matters, including board appointments, company policies or acquisitions. Although preferred shareholders can also join annual meetings, they do not have voting rights, unlike equity shareholders.

Dividends

Both equity and preferred shareholders hold the right to receive dividend payments. Owners of preferred stocks can get a fixed dividend or dividend calculated at a fixed rate before dividends are paid out on equity shares. Preferred shareholders also get priority over the equity shareholders in payment of surplus. But in the case of liquidation, claims of preferred shareholders are less important than the claims of the company's creditors and bondholders.

Legal actions

A shareholder may have the right to bring a lawsuit against the company for wrongdoing. This right protects shareholders if the company's leadership violates its fiduciary responsibility. It is only in the case of violations that shareholders can take legal action against the company. For instance, if the board of directors made any decision in the best interests that had a negative effect on the company, a lawsuit is not an option. There might be cause for legal action if the board worked in self-interest at the cost of the corporation and its stockholders.

Information

A shareholder may hold the right to request and review the financial and organisational records of the company. They may have entitlement to financial statements, annual memos and governing documents, among other things. Having access to this information enables them to comprehend and evaluate its performance, allowing them to make more sensible decisions. Public companies require to make such information available to the public under Securities and Exchange Board of India (SEBI) regulations.

In contrast, private companies are exempt from disclosing this information to the public or shareholders. If the private companies' shareholders want to view their financial records, they may make a direct request.

What is the importance of shareholders in a company?

Along with making a profit by investing in a company's stocks, these shareholders also play a significant role in various aspects of a business, including:

Operating a company: Shareholders significantly influence company operations by nominating senior management personnel. For example, investors choose stocks that can meet their earnings expectations, putting companies under pressure to meet their sales and profit projections.
Financing a company: Generally, shareholders fund companies in lieu of ownership rights. Start-ups and private companies can also raise capital through private placements or share issues to select investors.
Regulating a company: It is important for board members of public companies to be transparent with the company's shareholders regarding their financial and operational conditions. Even senior executives of such companies discuss regulatory issues with market analysts, shareholders and other stakeholders.
Control over a company: A company with many minority shareholders is vulnerable to vicious takeover attempts. Shareholders can object to such moves if they want the current management or think the offering price is too low.

Roles and responsibilities of shareholders

As per SEBI, here are some of the roles and responsibilities of shareholders that come along with their rights:

Getting all the pertinent information about corporate developments and company-specific information to make meaningful investment decisions.
Being aware of applicable statutory provisions and ensuring effective implementation.
Trading only with SEBI registered intermediaries when dealing in the securities.
Not engaging in fraudulent and unethical securities trading or acting on unpublished price-sensitive information.
Participating proactively in the proceedings of shareholders' meetings or annual general meetings.
Responding to communications whenever a company seeks approval through a postal ballot.
Responding to SEBI, depository, brokers, other intermediaries or company communications seeking investor inputs or feedback.
Avoid spreading false information about the company on any social media platform, which can hinder the company's growth.

FAQs about shareholders

Here are answers to some frequently asked questions related to shareholders:

Can a shareholder serve on a company's board of directors?

Yes, a shareholder can also be a member of the board. Although the two roles are different, it is the shareholders' responsibility to be aware in which capacity they are serving at all times. The potential for conflicts of interest exists when parties serve two different roles.

What are the differences between shareholders and stakeholders?

People use these two terms often interchangeably in conversation, but they serve different roles in regular business practice. In brief, shareholders own the company, while stakeholders do not. Stakeholders are individuals or organisations that have an interest in the business's performance, whether that interest is financial. Employees, for example, are stakeholders because their livelihoods rely on the company's survival. Another type of stakeholder is the local government in the location of the business. It is a stakeholder because it benefits from the company's property taxes.

Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed.