A shareholder of a company enjoys a number of rights and powers in exchange for their investment in the company.
This article will look at the role a shareholder plays in running a company, as well as a shareholder’s rights and liabilities.
The Role of a Shareholder
A shareholder is a part owner of a company. They must be a legal entity (i.e. can own property, sue or be sued) and may be a natural person or a corporation. All companies must have at least one shareholder.
As a company is a separate legal entity, the company (and not the shareholder) owns the assets of the company. However, the shareholder can have a say in the running of the company. For example, majority shareholders or smaller shareholder blocs can vote on key issues and therefore play a significant role in influencing the direction of the company.
Shareholder Rights Generally
In return for investing in a company, a shareholder receives a bundle of rights in the company. These shareholder rights differ between and within companies depending on the class of shares held. Australian law allows for the creation of different classes of shares, but most companies only have one class of share (i.e. ordinary shares).
The company will decide what rights will attach to the different classes of shares. As a general rule, shareholders enjoy the following rights:
- attending shareholder meetings and voting on key issues (e.g. election and dismissal of directors);
- transferring ownership (often in restricted circumstances);
- receiving company reports and announcements;
- receiving dividends and other distributions; and
- participating in corporate actions (e.g. further issues of shares, share buybacks, mergers and de-mergers).
These rights are usually set out in:
- the company’s constitution (or the replaceable rules, to the extent applicable);
- the company legislation; and/or
- any shareholders agreement.
Rights in a Shareholders Agreement
A shareholders agreement often fills in the gaps in areas not covered by company legislation or a company’s constitution. It can be a useful tool to define the commercial arrangements between shareholders and assign personal rights to those shareholders.
Additional rights detailed in a shareholders agreement may include the right to:
- be employed by the company;
- ensure other shareholders do not compete with the company;
- ‘drag along’ and ‘tag along’ in the event of a proposed sale; and
- confidentiality in respect of information provided by a shareholder.
Due to the separate legal existence of a company, shareholders are not responsible for the company’s obligations simply because they are 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 (e.g. 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. Liability of shareholders is often limited to the amount unpaid on their shares, but further liability can arise depending on the terms of the company’s constitution and shareholders agreements.
If you want advice on shareholder rights and agreements, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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