A shareholder of a company enjoys a number of rights and powers in a company in exchange for its investment in the company. This article will look at the role a shareholder plays in the running of a company, as well as a shareholder’s rights and liabilities.
What is a shareholder and what role does it play in a company?
A shareholder is a part owner of a company. A shareholder must be a legal entity (that is, can own property, sue or be sued) and may be a natural person or a corporation. All companies must have at least one shareholder, with a proprietary company only being able to have fifty shareholders who are not also employees.
As a company is a separate legal entity, the company, not the shareholder, owns the assets of the company. As the shareholder is a part owner, the shareholder can have a say in the running of the company by, for example, voting on key issues. Majority shareholders, and smaller shareholders voting in blocs, can therefore play a significant role in influencing the direction of the company.
What are the rights of a shareholder?
The usual situation is that in return for investing in a company a shareholder receives a bundle of rights in the company. These shareholder rights differ from company to company and within companies depending on the class of shares held. Most companies only have one class of share (ordinary shares) but Australian law allows for the creation of different classes of shares. The rights which attach to the different classes of shares is a matter for the company to determine and are usually set out in the company’s constitution.
As a general rule, shareholders enjoy the following rights:
- voting on key issues (for example, election and dismissal of directors) and attendance at shareholder meetings;
- right to transfer ownership (often in restricted circumstances);
- receive company reports and announcements;
- entitlement to dividends and other distributions;
- entitlement to a final distribution on winding up;
- participation in corporate actions such as further issues of shares, share buybacks, mergers and de-mergers; and
- right to sue to make the company act lawfully.
Further rights and powers of a shareholder can be found in company legislation, the company’s constitution (or the replaceable rules, to the extent applicable) and any shareholders’ agreement.
What shareholder rights could be found in a shareholders’ agreement?
A shareholders’ agreement often fills in the gaps in areas not covered by company legislation or a company’s constitution and can be a useful tool to define the commercial arrangements between shareholders and assign personal rights to those shareholders. Such additional rights may include:
- the right to be employed by the company;
- the right to ensure other shareholders do not compete with the company;
- the right to confidentiality in respect of information provided by a shareholder;
- detailed rights and obligations protecting the interests of minorities
- ‘drag along’ and ‘tag along’ rights in the event of a proposed sale; and
- termination, forced sale and other exit provisions.
What are the liabilities of a shareholder?
Due to the separate legal existence of a company, shareholders are not responsible for the company’s obligations merely by reason of being a shareholder.
The liability of a shareholder is usually limited to:
- any unpaid amounts on the shares held by that shareholder;
- any liability or obligations expressly provided for in the company’s constitution or shareholders’ agreement; and
- liability for breach of directors’ duties if shareholders are considered to be directors (for example, if shareholders are provided with powers that would ordinarily be exercised by directors).
In return for an investment in the company, shareholders enjoy certain rights and powers. These rights and powers usually relate to having a voice in the running of the company, entitlements to receive reports and enjoyment in the profits of the company. However, the rights arising to shareholders differ from company to company and even within companies where there are different classes of shares. Many companies choose to document the commercial arrangements and personal rights accruing to shareholders in a shareholders’ agreement. Liability of shareholders is often limited to the amount unpaid on their shares but further liability can arise depending on the terms of company’s constitution and shareholders’ agreements.
We are able to give you specific advice, tailored to your circumstances, on shareholder rights, classes of shares and shareholders’ agreements.