Purchasing shares in a company entitles you to take part in the running of the company. As a part owner, you can: 

  • attend meetings; 
  • stay up to date with the company’s business; and 
  • influence the direction of the company’s affairs by voting.

This article explores these rights 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, either upon registration with ASIC or when the directors and shareholders agree to create new shares. 

Secondly, an existing shareholder may transfer their shares to you, which the company must register on the share register. 

The Rights of a Shareholder

As a shareholder, you own part of the company and have certain rights in return for your investment. A number of different factors can affect your rights, as set out in the table below.

Factor

Rights and Responsibilities

Private or Public Company

Public companies have tougher reporting obligations, including the requirement that a copy of the financial accounts must be sent to all members at least 21 days before the annual general meeting.

Ordinary or Preference Shares

Ordinary shares give you the right to vote on matters put before all the shareholders of the company. You also have the right to share the company’s profits when the company issues dividends. 

Preference shares, on the other hand, give you preferred treatment over ordinary shareholders. This includes the right to fixed dividend payments and the priority right to be repaid if the company becomes insolvent.

The Company’s Constitution

The company constitution can affect your shareholding in a number of ways, including:

  • detailing what constitutes a quorum (i.e. the minimum number of members required to be present at a meeting);
  • setting out the agreed method of paying a dividend; and
  • detailing the voting rights of each class of shares.

The Replaceable Rules

If there is no company constitution which excludes the operation of the replaceable rules, these rules will apply.

The replaceable rules are set out in the Corporations Act and outline rules about:

  • appointing directors;
  • remuneration of directors; and 
  • removal of directors.

The Shareholders Agreement

A shareholders agreement will complement the constitution or replaceable rules. The relevant provisions for shareholders include: 

  • the dividend distribution policy;
  • protection of minority shareholder interests;
  • the circumstances under which shares may be sold; and
  • whether the shares must be offered first to the company.

Additional rights may also be created by shareholders agreements, such as the right to:

  • be employed by the company;
  • ensure that other shareholders do not compete with the company; and 
  • confidentiality in respect of information provided by the shareholder.

In most cases, however, shareholders will have the right to:

  • attend shareholder meetings;
  • vote on key issues, such as appointing a new director or dismissing an existing director;
  • sell their shares (although this right is restricted in most cases);
  • receive company reports and announcements;
  • participate in corporate actions (such as the issue of more shares, share buybacks or mergers); and
  • receive dividends and other distributions.

What Liabilities Does a Shareholder Have?

There are very few risks with becoming a shareholder in a company. The underlying reason for this is that a company is a separate legal entity. This means that separate from the liabilities of the individual members of the company, a company can:

  • enter into agreements;
  • assume obligations;
  • pay taxes or debts; and
  • sue or be sued in its own right.

The separate legal status of the company means that even if the company you hold shares in has debts, you are generally not responsible for those debts. This is the case regardless of whether the the company incurs the debts before or during your membership of the company. 

Your liability as a shareholder is generally limited to the unpaid amount on your shares. This is usually a relatively small amount in comparison to the potential debts a company may incur in its own right.

You may also take on liability as a shareholder where it is expressly provided for in the company’s constitution or shareholders agreement. This kind of liability is best evaluated on a case-by-case basis, with reference to the company’s key documents.

It is also worth noting that you may take on a much wider range of liabilities than a normal shareholder if you are also a director of the company. 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, director’s duties place a heavier burden on directors than on shareholders.

Key Takeaways

As a shareholder, you have certain rights and responsibilities over the company. Generally, your liability is limited to the amount outstanding on the shares you have bought. The debts of the company are separate from your own. The documents which will outline your responsibilities include:

  • company’s constitution;
  • shareholder’s agreement if applicable; and
  • company’s constitution, if it has one.

If you need assistance with a shareholder’s agreement, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

How Do I Become a Shareholder?

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 shared. Secondly, an existing shareholder may transfer their shares to you.

What Rights Do I Have as a Shareholder?

Your shareholder rights will be affected by the company structure, constitution and shareholder agreement. However, most shareholders have the right to attend shareholder meetings, vote on key issues, sell their shares, receive company reports, participate in corporate actions and share in the company’s profits.

What Liabilities Do I Have as a Shareholder?

Shareholders generally take on very little liability because a company is a separate legal entity. This means that even if the company incurs losses and debts, you generally will not be responsible for those debts.

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