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Purchasing shares in a company primarily provides you with an ownership stake in the company. In some cases, becoming a shareholder entitles you to take part in certain decision-making processes of the company. As a part owner, you can attend shareholder meetings. You can also stay up to date with the company’s business and influence material decisions by voting. This article explores the rights of a shareholder and sets out some of the key liabilities that shareholders of any company should be aware of.
Becoming a Shareholder
You can become a shareholder, also known as a member, in two ways.
Firstly, the company may issue shares to you. This can happen either upon registration with ASIC or when the directors (and potentially shareholders) resolve to issue new shares. Secondly, an existing shareholder may transfer their shares to you. If you receive shares this way, the company must update their share register to reflect the change in share ownership.
In either case, the company’s constitution and shareholders agreement will most likely set out a specific process and certain approvals that are needed in order to formally recognise and approve an issue or transfer of shares to you. Common approvals needed are board approval, shareholder approval and/or a requirement the company complies with a pre-emptive rights process in favour of existing shareholders.
Under the Corporations Act 2001 (Corporations Act), an entity may only become a shareholder of a company where they are either:
- a shareholder upon incorporation; or
- agree to become a shareholder after incorporation and their name is entered on the register of shareholders.
The Rights of a Shareholder
As a shareholder, you own part of the company and have certain rights in return for your investment.
Shareholders will generally receive ‘‘ordinary’ shares. Where you hold ordinary class shares, you will have the right to:
- attend shareholder meetings;
- vote on key issues, such as changing the company’s name, adopting or amending the company’s constitution, amongst many others;
- receive dividends and other distributions; and
- participate in surplus assets upon the winding up of the company.
The Corporations Act allows for a company to determine the rights and restrictions attached to a certain class of shares. For example, the company may want to issue shares to an investor where both parties have agreed that the shareholder will invest and take a back seat in the company’s operations in exchange for preferential rights to receive dividends. In this case, the company would need to create a class of shares where that particular class of shares does not have a right to participate in matters requiring shareholders to vote on that matter.
In addition to these general rights afforded to company shareholders, a number of other factors can affect your rights as a shareholder.
1. Private or Public Company
Public companies have far more onerous reporting and regulatory obligations than those of private companies. This includes the requirement that a company must prepare directors and financial reports in accordance with the Corporations Act. The company must then send a copy of these reports to all members by at the latest, four months after the end of the financial year. Alternatively, the company could send a copy of these reports at least 21 days before the next annual general meeting.
2. Ordinary or Preference Shares
Ordinary shares confer the rights as listed earlier in this article. On the other hand, another common class of shares, called preference shares, gives you preferred treatment over ordinary shareholders. This includes the right to priority when the company declares a dividend. Often, companies pay dividends to preference shareholders as a fixed percentage or in priority to other shareholders until the preference shareholder has been repaid a set amount. If a company is insolvent, as a preference shareholder, you have priority over ordinary shareholders to recover the amount you invested.
3. Company’s Constitution
The company’s constitution is typically where share class rights are found. The constitution will usually list the different classes of shares the company has on issue or can issue.
Your rights can be increased or decreased, depending on the contents of your constitution and any changes made to the share class rights found in the constitution. However, there are strict process requirements for the company to adhere to in order to vary the rights attached to a particular class of share if it has been issued. For example, if you hold ordinary shares and the company intends to vary your share class rights to remove your right to vote, the company must first obtain shareholder approval of the shareholders in that particular class.
The company must also give written notice of the variation of rights attached to the shareholder’s shares within 7 days after the variation is made.
4. Replaceable Rules
Additionally, if the company constitution does not exclude the operation of the replaceable rules, the replaceable rules will apply.
The replaceable rules are set out in the Corporations Act and outline certain processes that require shareholder approval, including but not limited to:
- appointing directors;
- remuneration of directors; and
- removal of directors.
5. Shareholders’ Agreement
Finally, a shareholders’ agreement will complement the constitution or replaceable rules. Common concepts in a shareholders agreement that affect your rights as shareholder include:
- the dividend policy or the power for the board to create and amend one;
- where you hold a minority stake and shareholders holding a predetermined majority stake in the company choose to sell that stake, you have the opportunity to participate in the sale of a substantial part of the company;
- where you and the other shareholders who hold a predetermined majority stake (e.g. 75%) and you choose to sell that stake; you have the ability to force minority shareholders to sell their stake in the company;
- the circumstances under which you can sell shares;
- the process and approvals required for the company to issue new shares (as this may dilute your shareholding);
- ensure that other shareholders do not compete with the company;
- confidentiality in respect of information provided to the shareholder; and
- if you plan to sell your shares, whether the shares must be offered first to the company or other existing shareholders (called pre-emptive rights).
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What Liabilities Do Shareholders Have?
There are very few risks to becoming a shareholder in a company. The underlying reason for this is that a company is a separate legal entity. This means the company can:
- enter into agreements in its own capacity;
- assume obligations;
- pay taxes or debts; and
- sue or be sued in its own name.
The separate legal status of the company means that even if the company has debts, you are not responsible for those debts as a shareholder. This is the case regardless of whether the company incurs the debts before or during your membership of the company.
Under the Corporations Act, a shareholder of a private company limited by shares need not contribute more than the amount unpaid on the shares in respect of which the shareholder is liable. So, if you obtain 100 shares in a company at a price of $10 per share, you will not need to pay more than $1,000 unless you agree to invest a further amount of capital into the company in exchange for more shares.
It is also important to note that if you are a company director, you incur a wider range of liabilities than a normal shareholder. This may occur if you have powers that are ordinarily reserved for directors. Directors are responsible for the management of the company and its day-to-day affairs. Under the law, directors’ duties place a heavier burden on directors than on shareholders and a breach of those directors duties may result in that director being personally liable for the company’s debt incurred as a result of that breach.
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As a shareholder, you have certain rights and responsibilities over the company. Given you own part of the company, your rights will include the right to attend shareholder meetings, vote on key issues and the right to sell your shares. Additionally, you will receive dividends and other distributions should the company make them. Overall, your liability as a shareholder is limited to the amount you have agreed to pay on your shares.
If you need help understanding what are your rights and liabilities as a shareholder of a company, contact our experienced commercial lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
There are two different ways for you to become a shareholder. Firstly, the company may issue shares to you upon registration with ASIC or when the company creates new shares. Secondly, an existing shareholder may transfer their shares to you.
The company structure, Corporations Act, constitution and shareholders agreement will all affect your rights as a shareholder. However, most shareholders have the right to attend shareholder meetings, vote on key issues, sell their shares and share in the company’s profits.
However, the Corporations Act allows for a company to determine the rights and restrictions attached to a certain class of shares. For example, a company may issue shares to an investor where both parties have agreed that the shareholder will invest and take a back seat in the company’s operations in exchange for preferential rights to receive dividends. In this case, the company will have or will create a class of shares where that particular class of shares does not have a right to participate in matters requiring shareholders to vote on that matter.
As a shareholder, you generally take on limited liability because a company is a separate legal entity. Generally, your liability as a shareholder is limited to the amount you have agreed to pay on your shares. This means that even if the company incurs losses and debts, you generally will not be responsible for those debts. For example, if you agree to subscribe for 100 shares in a company at a price of $10 per share, you will not need to pay more than $1,000 unless you agree to invest a further amount of capital into the company in exchange for more shares.
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