Voting rights of a Shareholder – Basic Guide

A person or company holding even one share of a corporation is known as a shareholder. In startups, shareholders are mostly the founders. But as the company expands, more investors are brought in and the company stock becomes a currency to be used appropriately as resources for the business. If the business performs well, shareholders are rewarded from the gain in the share price.

Shareholder rights

A shareholder is any entity that owns a claim to company profits. It is, in fact, the shareholders who appoint the board of directors to oversee company operations on their behalf. Since shareholders have invested in the company, to protect their interests, there are certain guidelines in place. For example, shareholder voting rights.

What are shareholder rights?

Shareholder rights vary based on the state and country of incorporation. Investors must check with local authorities about the prevalent business policies before deciding on their investments. It is these policies that determine how a company treats its shareholders. Though there are 3 classes of shareholders, their extent of engagement and shareholder voting rights with the company differ. The pecking order of rights is determined by ‘absolute priority’.

Absolute priority determines the order of shareholder preference when a company goes bankrupt. In case of insolvency, a company has to first settle all debts and outstanding payments of creditors. Next in line are the bond-holders and preferred shareholders. Common shareholders are last in this order. Though this is a liquidation scenario, the situation is very different in case of shareholder voting rights. Later sections of this article deal with this aspect in detail.

Since shareholders own the company and reserve special voting rights in strategic decisions of the company as well, a shareholder may misuse their position of power. To avoid being targeted by such shareholders, in 1982 shareholder rights plans were introduced in the United States. A corporate board may adopt this strategy to diffuse attempts of a hostile takeover by a shareholder. These plans are triggered whenever one individual or entity obtains a substantial percentage of total share ownership. In such situations, this plan allows existing shareholders to buy additional shares at a discounted rate, thus diluting the ownership interests of the hostile party.

So far we have discussed shareholder rights in general. But as mentioned before, rights in the company’s decision making varies with the type of investment. Shareholders owning bonds and preferred stocks have more or less similar rights, but the ones owning common stocks enjoy a different set of rights that include shareholder voting rights. Let us now move on to know more about the basic rights of common shareholders.

Common shareholder rights

Common shareholders are those who own common stocks. Common stocks are the ones traded largely in a stock exchange, and as the business grows, share prices of common stocks increase. Unlike notes, as the interest of common shareholders are entwined with the company’s performance, they are granted the following rights:

• Voting power – This is one of the most fundamental rights vested on common shareholders. They are legally required to vote on proposals that may affect the company in elemental ways (eg. mergers, liquidation). Shareholder voting rights are exercised during the company’s Annual General Meetings (to be discussed in detail in later sections). If the shareholder is unable to be present in person, voting by proxy or via email is also considered valid.
• Appointment of Directors and company auditors – The board of directors are appointed by the shareholders. Since the BOD is vested with sufficient power to run the company operations, they may turn against the shareholders in case they start acting out of personal interest. So to protect the interests of shareholders, actions of the BOD are set up in a way that they are legally binding. It is the same for the appointment and liabilities of company auditors as well.
• Ownership in a portion of the company – One way of seeing common shareholders is as an entity that embodies the company. Hence in case of liquidation, they are equally liable along with the company to first pay off outstanding debts before claiming their profits. But when the company is doing well, they reap from company profits. The decision to pay dividends or invest profits back into the business and raise the overall stock price is however the decision of the board of directors, but electing the board of directors is part of shareholder voting rights.
• The right to transfer ownership – Common shareholders can buy or sell stock in the market as this is how they exercise their right of transferring ownership. As simple as this may sound, having this right is crucial especially in times of liquidation. Unlike fixed assets, common shareholders can quickly move their money invested in company stocks.
• Opportunity to inspect Corporate books and records – Common shareholders have the right to examine basic company documents such as company bylaws and board meeting minutes. This is a process of providing them access to the overall operations of the company.

Shareholder voting rights give common shareholders the right to vote on matters concerning foundational documents such as the memorandum as well. Let us now move on to the next section to discuss the voting rights of shareholders in detail.

Shareholder voting rights

Shareholders are vested with rights to vote on corporate policies such as appointing directors, initiating corporate actions, making changes to any part of corporate operations, and so on. Provisions in corporation’s bylaws govern the voting rights of shareholders. Let us see how it works.

What is the voting right of a shareholder?

In democratic voting procedures, one person is entitled to only one vote. But in the case of shareholders, one share is equivalent to one vote. Thus one shareholder owning 10 shares is entitled to 10 votes. This is how shareholder voting rights differ from regular voting eligibility. Voting on important policy matters happens during shareholder meetings.

Shareholder meetings and their voting rights

Shareholder meetings are a regulatory requirement for both public and private and companies as shareholder voting rights are exercised during these meetings. Rules governing these meetings are set out in the bylaws of the particular state in which the company is incorporated. Bylaws of every company mention shareholder meeting dates. Unless there are any massive hiccups, annual shareholder meetings are held on the same date every year. However, an official intimation has to be sent well in advance reminding all shareholders about the meeting. A typical shareholder meeting invite looks like this:

The Securities and Exchange Commission requires companies to provide a document to shareholders containing certain information that helps them make informed decisions about matters that will be discussed in the Annual Meetings. This document is called the Proxy Statement. It generally includes proposals for new inclusions to the Board of Directors, information on director salaries, bonus & options plan for directors or any other decision made by the company.

A corporation keeps a note of all shareholders on a record date before the meeting. Only shareholders on the record are eligible to vote and can exercise their shareholder voting rights. Following are the basic voting rights of shareholders:

• Quorums – A quorum is the benchmark for shareholder attendance in annual meetings. Decisions made in annual meetings are binding only if a quorum is present, with a typical quorum consisting of more than half of the outstanding shares of a corporation. However, based on the company bylaws, this percentage may increase or decrease.
• Proxy votes – Shareholder voting rights allow shareholders to appoint a proxy on their behalf who is entrusted to be present at the Annual Meeting. This appointment has to be done in writing and may not necessarily be a fellow shareholder. The relationship between a shareholder and a proxy is that of a principal and an agent, thus making the role of a proxy binding to the instructions given by the shareholder. The state specifies rules for proxy appointment and it is a common practice during annual meetings of publicly held corporations.
• Common voting matters – In a small business with a couple of shareholders, it is easy to arrive at a unanimous consensus. But in a large publicly-traded company, with multiple shareholders, a unanimous consensus is almost impossible because the decisions taken in shareholder meetings will have a long-standing impact on the affairs of various individuals and businesses. Here are some common voting matters (apart from director appointments) that invite shareholder voting rights:
  • Amendments to bylaws or Articles of Incorporation
  • Merger with another corporation
  • Sale of a large portion of corporation assets not per regular norms or practice
  • Transactions or corporate decisions where directors have a conflict of interest
  • Voluntary dissolution of the corporation
• Minority shareholder rights – Minority shareholders are those who hold less than 50% of the company shares. By default, majority shareholders have higher voting powers, but minority shareholders have some legal rights as well. To prevent being run over by large stake owners, minority shareholders have the right to file a case in court against problematic company leadership. Here are some minority shareholder voting rights:
  • Access to corporate records – Minority shareholders of all C-corporations have the right to access records and financial statements of the company. However, the request to access these has to be made in writing and mostly all expenses to replicate these have to be borne by the requisitioner.
  • Expectations of management compliance – Minority shareholders have the right to demand corporate officers to take actions that are in the company’s best interest and as per standards set forth by the shareholder agreement. For example, they can prevent a director from getting involved in any action which might be perceived as a conflict of interest. If not complied with, minority shareholders can sue the director claiming suppression of their rights.
  • Benefit from holdings – Minority shareholders have limited rights to benefit from receiving dividends or to sell company stocks for profits. The extent of their rights in these matters is decided by the company officers.
  • Exercise control – Minority shareholders have the right to elect directors or suggest proposals for shareholder considerations. If many minority shareholders manage to come together to form a majority, they can even prevent or delay acquisitions of other companies.

By now we have a fair idea about shareholder voting rights and how they play out in corporations. In the next section, we will go into detail of annual general meetings where shareholders are expected to participate and exercise their voting rights over important corporate policies.

Annual General Meeting (AGM)

As large corporations have an extensive list of shareholders, and most often shareholders are people or firms who run businesses themselves, it is not practical to call on them at random. The organized process of shareholder gatherings conducted once a year is the Annual General Meeting (AGM). The main purpose of an AGM is to ensure that there is full compliance with all independent statutory requirements of a company.

What is an Annual General Meeting?

In simple terms, an AGM is an annual gathering of company shareholders. The directors are responsible to present an Annual Report detailing the company’s financial performance and strategies. Shareholders voting rights are exercised on current issues discussed in earlier sections such as the appointment of directors and auditors, dividend payouts, etc. In large companies, an AGM is possibly the only time when shareholders and company executives interact.

How does it work?

An AGM is a mandatory requirement as per laws of incorporation, but the exact rules may vary based on jurisdiction, being more stringent with publicly traded companies. Annual proxy statements, otherwise known as Form DEF 14 A must be filed with the Securities & Exchange commission by public companies. The date, time, and location of the AGM along with executive compensation and any other matters concerning shareholder voting is included in this document.

AGMs are the avenue where shareholder voting rights play out. However, the time between two consecutive AGMs must not be beyond 15 months. AGM notice must be sent to all shareholders in writing, at least 21 days ahead of the AGM. This meeting notice must mention the exact AGM date along with all other proposals, information, and reference to be discussed in the meeting. In case, a company is faced with a situation where they have to resolve matters involving shareholder voting between two AGMs, they may call for an Extraordinary General Meeting.

Voting as a shareholder in an AGM

An AGM is typically the platform company directors and executives use to share their vision with the shareholders. Financials of the company are disclosed during these meetings and shareholders also get an opportunity to ratify or approve decisions made by the board of directors during the previous year. Thus shareholder voting rights are crucial to any equity holder’s point of view.

Conclusion

By now you may have a better understanding of shareholder voting rights and how this can be exercised during a company’s AGM. However, this shareholding voting process can be cumbersome when many shareholders from diverse backgrounds are involved.

Eqvista’s shareholder voting app allows you to easily share board resolution consents with your company shareholders. You can easily find all voting results in your company profile, thus making the entire voting process swift and paperless. To know more contact us today!