What Rights Do All Common Shareholders Have?

Common Stock

When you buy shares of a company through a broker, you almost surely will be buying common stock. Common stock is one type of equity capital that firms can raise. As the name implies, it is the most common form of equity, and it gives shareholders certain rights and privileges. Common stock may be contrasted with preferred shares, which often pay out higher dividends but do not confer voting rights. Common stock, however, is often last in line for repayment if a company goes bankrupt. This means that common shares carry greater overall risk compared to preferred shares or corporate bonds.

Individuals that own common shares of company stock, however, are viewed as partial owners of that company. This ownership stake grants certain rights. The most important rights that all common shareholders possess include:

• The right to share in the company’s profitability, income, and assets (e.g., in the form of dividends)
• A degree of control and influence over company management selection and members of the board of directors
• Preemptive rights to newly issued shares
• General meeting voting rights

Right to Share in Profitability

As partial owners of the company, common shareholders have the right to participate in a company’s profitability for as long as they own the shares. The division of profits is based on the number of shares owned by a shareholder, and gains can be substantial to shareholders over time.

In addition to a share in profits generated by the company, shareholders also have rights to income distributions through dividend payments. If a company’s board of directors declares a dividend in a certain period, common shareholders are in line to receive it.

Dividends are not guaranteed, however. If the company is liquidated, common shareholders have the right to assets and income of the company after bondholders and preferred shareholders are paid.

Right to Influence Management

Common shareholders also have the right to influence company management through the election of a company’s board of directors. In smaller companies, the president or chairperson of the board is typically the individual who owns the largest share of common stock. Larger companies may have greater diversity in the common shareholder investor pool.

In either case, individuals in the management of the company do not own enough of a stake in the company to influence who sits on the board of directors. Shareholders have the right to influence who holds management positions through control over the election of board members.

Right to Buy New Shares

Common shareholders also have preemptive rights. If the company issues new shares to the public, current shareholders have the right to buy a specific number of shares before the stock is offered to new potential shareholders. This means that if a company decides to go through with a tender offer or secondary offering, existing common shareholders have first dibs.

Preemptive rights can be valuable to common shareholders, as they are often provided at a subscribed price on a per-share basis.

Right to Vote

Arguably, the greatest right for common shareholders is the ability to cast votes in a company’s annual or general meeting. Major shifts within a publicly-traded company must be voted on before changes can take place, and common shareholders hold the right to vote either in person or via proxy.

Proxy voting is important, since most shareholders typically cannot travel out to a company’s annual meeting. Instead, shareholders receive proxy materials (in the mail or online), allowing them to cast their votes on certain items of corporate governance. These may include electing new board members, voting on a potential merger or acquisition, or approving a stock split or dividend increase. Votes are then aggregated and represented at the meeting by a designated proxy.

Right to Sue for Wrongful Acts

Common shareholders who feel their rights have been violated also have the right to sue the issuing company. A court has the power to enforce common shareholder rights when corporations are found to have violated their rights, either through a single shareholder complaint or as a class-action lawsuit.

Additional Rights

In addition to the major shareholder rights indicated above, holders of common stock also have the right to transfer their shares to another party. This can include selling shares in the open market or gifting them to a family member or other third party. Shareholders also have the right to view and examine a company’s financial statements in which they own stock. In addition to access to filings with the SEC such as quarterly or annual reports (which are also available to the public), a shareholder may request copies of company bylaws and meeting minutes.

Some companies also provide shareholders with certain perks over and above these basic rights. Some cruise lines and hotel chains, for example, will offer discounted fare and room rates to individuals that own more than a certain minimum number of shares.

The Bottom Line

If you are an investor, you probably own common shares in several companies. This means that you have certain rights in each of these corporations. Although most ordinary investors only use these rights to a limited degree, they are important to know about and understand.