10 Shareholder Rights You May Not Know You Have

Spring is when a young (or old) investor’s fancy turns to love—and proxy voting. If you own shares in individual stocks, you’ll probably start receiving proxy solicitations soon. These voting forms are the most concrete reminder of shareholders’ rights and responsibilities with regard to the companies they invest in.

In this article, I’ll explain the legal privileges you have as a shareholder and how to exercise them.

The Basics

In some ways, owners of common stock are at the bottom of the ladder. Bondholders are first in line to receive interest and principal payments from a company’s assets. Preferred stockholders rank second and receive dividend payments before common stockholders. Common stock shareholders are last to be paid in the event of a bankruptcy. Instead, they have a residual interest in the company’s equity, which is the amount left over after subtracting total liabilities from total assets.

Technically, shareholders don’t legally own the corporation. Instead, they own securities that give them a claim on the company’s equity and dividends paid to common shareholders. It’s also important to note that shareholders aren’t responsible for managing the company. That role is explicitly given to the board of directors, which then appoints executive officers to run the company’s day-to-day business operations.

The 10 Most Important Shareholder Rights

1. The right to receive dividends, if any. Companies have broad discretion in how they allocate capital, and the board of directors typically weighs in on whether to reinvest profits, pay down debt, make acquisitions, repurchase shares, or pay a dividend. If the board decides to pay a dividend, every shareholder of record is entitled to receive the per-share dividend amount multiplied by the number of shares owned.
2. The right to information. Under most state laws, shareholders have the right to view a company’s books and records, as well as its charter, bylaws, minutes from board meetings, and list of shareholders of record. Under federal securities laws, companies must provide shareholders with a comprehensive set of quarterly and annual financial reports, as well as many other required disclosures.
3. The right to elect directors. Members of the board of directors play a critical role, which is to guide the company, make sure it’s in compliance with legal requirements, and manage the business on behalf of shareholders. They also have fiduciary duties to protect the company’s interests and to act in the best interest of shareholders. As part of the proxy process, shareholders can either cast a vote for a proposed director or withhold their votes (but typically can’t vote against a candidate). Under most state laws, directors are elected by a plurality vote, meaning that candidates can still be elected even if they didn’t receive a majority of the votes cast.
4. The right to nominate directors. The SEC adopted new “proxy access” rules in 2010, which allow shareholders to nominate candidates for the board of directors. Nominating shareholders are required to hold shares representing at least 3% of the voting power of the company’s securities, with the shares being held for at least three years. Shareholders may nominate no more than one nominee or a slate of nominees representing up to 25% of the company’s board of directors, whichever is greater.
5. The right to vote on major issues affecting the company. Shareholders are allowed to vote on any fundamental changes to the company that affect its structure, such as changes to its charter or bylaws, an acquisition by another company, a merger of two companies that become a new company, a material sale of corporate assets, or the disbanding of the company (unless initiated by the government).
6. The right to provide an advisory opinion on executive pay. As part of the Dodd-Frank overhauls enacted in 2010, publicly traded companies are required to provide shareholders with an advisory vote on executive compensation (also known as Say on Pay) at least once every three years. Shareholders are asked to vote on the pay of company’s chief executive officer, chief financial officer, and at least three other most highly compensated executive officers. However, Say-on-Pay votes are nonbinding; the company or board doesn’t need to take any specific action based on these votes.
7. The right to submit a proposal for a proxy vote. Shareholders who own a minimum amount of the company’s stock ($2,000 for at least three years, $15,000 for at least two years, or $25,000 for at least one year) may submit a proposal to be included on the company’s proxy statement. There are various limitations on what type of proposals may be submitted, and any proposals that end up on the proxy are typically subject to a nonbinding advisory vote.
8. The right to participate in the annual meeting of shareholders. Under state law, issuers are generally required to hold annual meetings. The annual meeting of shareholders is often the one time per year that shareholders can meet directly with corporate executives. In more practical terms, the annual meeting is the culmination of the proxy-voting process. Shareholders who didn’t already submit proxy votes may cast votes in person or express their concerns about matters presented for shareholder approval.
9. The right to sue. As owners of a stock, shareholders can bring legal action against the company, board members, executive officers, or other shareholders. It’s important to note that losing money on a stock isn’t a sufficient reason for making a lawsuit; the shareholder must be able to prove that a wrongful act took place. Wrongful acts are generally defined as a breach of duty, neglect, error, misstatement or misleading statement, or error of omission.
10. The right to sell shares. In legal terms, common stocks are considered a form of personal property and can therefore be sold freely (with some minor exceptions such as lockup periods after an IPO). For publicly traded stocks, this means shareholders can decide if and when to sell their shares through the open market. At the end of the day, shareholders can “vote with their feet” if they’re unhappy with a company’s board or management. That may be the most valuable shareholder right of all.