Shareholder

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) defines the term “Shareholders”.

Introduction

A shareholder, also known as a stockholder, is a person, company, institution, or any other legal entity that holds stock in a company and is registered as the legal owner of shares of a public or private company’s share capital. To be a partial owner of a company’s stock or mutual fund, a shareholder must hold at least one share. A person or legal entity becomes a shareholder in a company once its name and other details are registered in the company’s register of shareholders or members.

The ownership percentage held determines a shareholder’s influence on the company. A company’s shareholders are legally distinct from the company itself. They are normally not accountable for the company’s obligations, and their liability for business debts is restricted to the paid share price unless a shareholder has been offered guarantees. Since shareholders are technically the owner of the company, they benefit from the success, growth and profitability of a company. These benefits take the shape of higher stock prices and/or dividends. When a company loses money, the share price lowers, which can result in shareholders losing money or seeing their portfolios suffer losses.

Shareholders may have purchased their shares in the primary market by subscribing to initial public offerings (IPOs), and thereby given money to the company. Most shareholders, on the other hand, buy shares in the secondary market and do not contribute to the capital of the company directly. Depending on the share class, shareholders may be offered unique privileges.

Shareholders purchase stock in a firm with the goal of profiting from dividend payments or an increase in the market price of the stock. They may also purchase stock in order to take control of a company.

Shareholders have specific rights, including the ability to vote on certain company affairs, vote for the Board of Directors or be elected to a seat on the Board of Directors, receive dividends from the company, and receive its annual financial statements. A company’s board of directors supervises a company in general for the interest of its stockholders (fiduciary duty).

If the company is dissolved and its assets are sold, the shareholder may be entitled to a percentage of the proceeds (in proportion to the shares held by him or her), assuming all creditors have been paid. When this situation arises, a shareholder does have the obligation to bear the company’s debts and financial commitments, which means creditors cannot force stockholders to pay them.

A majority shareholder is a single shareholder who owns and controls more than 50% of a company’s outstanding shares. Minority shareholders, on the other hand, are individuals who own less than 50% of a corporation’s equity.

Typically, majority shareholders are the founders of companies, while majority shareholders in older companies are frequently descendants of company’s founders. In any scenario, majority shareholders hold more than 50% of the voting rights and as a result, wield enormous authority over important operational decisions, including the replacement of board members and the appopointments of C-level executives such as the chief executive officers (CEO) and other senior employees. Consequently, companies frequently strive to not have any majority shareholder amongst their ranks.

Types Of Shareholders

There are different types of share holders. They can be categorized on the basis of the kind of shares owned, the % of shared owned and ownership’s representation.

On The Basis Of The Kind Of Shares Owned

Common Shareholder

Those who own a company’s common shares (or regular shares) are called common shareholders. This is the most typical shareholding structure. They are the most common form of stockholder, and they have the ability to vote on company’s affairs. They have the right to participate in general meetings of the corporation, in the election of directors, and they can initiate class action lawsuits, when necessary, because they have authority over the governance of the company.

Preferred Shareholder

Preferred shareholders possess a share of the company’s preferred shares/stocks rather than regular shares. They have no voting rights or influence over how the company is operated. They are instead entitled to a predetermined yearly dividend, which will precede the payout before dividends are distributed among the common shareholders.

Therefore, while both common stock and preferred stock appreciate in value as the firm performs well, it is the former that enjoys greater capital gains or losses.

On The Basis Of The Percentage Of Shares Owned

Majority Shareholder

A majority shareholder is someone who actually owns more than 50 percent of a company’s stock. Company’s founders or their successors are typically this type of shareholder.

Minority Shareholder

Minority shareholders own less than 50% of a company’s shares, often as little as one share.

On The Basis Of Ownership’s Representation

Beneficial Shareholder

A person or legal entity that receives financial and economic benefit of ownership of the shares are called Beneficial Shareholders.

Nominee Shareholder

A nominee shareholder is a person or legal entity mentioned as the owner on the company’s register of members, but who, whether disclosed or not, operates for the benefit or at the direction of the beneficial shareholders.

The Rights Of Shareholders

Shareholders may have the following rights, subject to relevant legislation, corporate rules, and any shareholders’ agreement:

The right to see and inspect the books and records of the company
To file a lawsuit against the company for breach of fiduciary responsibility
To nominate directors (though minority safeguards make this difficult in practice) and suggest shareholder resolutions
To vote on the board of directors’ nominees for directors
To vote on mergers and corporate charter alterations
To receive dividends (in the case that they are announced)
To participate in yearly meetings in person or via teleconferences
To vote on important matters by proxy (if they are unable to attend voting meetings in person) either through mail-in ballots or digital voting platforms
To liquidate or sell the shares owned by them
To acquire the company’s newly issued shares
To vote on shareholder resolutions and to file them
To vote on proposed management styles

The rights described above can be divided into two categories: (1) cash-flow rights and (2) voting rights. While the cash-flow rights that come with shares, determine their value, voting rights may be significant as well.

Calculation Of The Value Of Cash-Flow Rights

Discounting future free cash flows can be used to calculate the value of shareholders’ cash-flow rights.

Calculation Of The Value Of Voting Rights

There are four ways to calculate the worth of a shareholder’s voting rights:

The distinction between voting and non-voting stock (dual-class approach)
The difference between the price paid in a block-trade transaction and the price paid in a subsequent exchange transaction (block-trade approach)
The implied voting value obtained from option prices
The excess lending fee over voting events

Role Of A Shareholder

Being a shareholder entails more than simply getting profits; it also entails certain duties. They are as follows:

Deciding about and determining what powers they will be provided to the company’s directors, such as electing and dismissing them from the position.
Setting a compensation for the directors. Shareholders must ensure that the sum given will cover the director’s cost of living in the city where he or she lives without jeopardizing the company’s finances.
Making decisions on matters over which the board of directors has no authority, such as modifications to the company’s constitution.
Examining the company’s financial accounts and approving them.

Shareholder VS Stakeholder

Many individuals mistakenly believe that shareholder and stakeholder are the same term. The terms, however, do not have the same meaning. A shareholder is a company’s owner based on the number of shares they possess. A stakeholder, unlike a shareholder, does not own a share of the company and yet is invested in its performance which may or may not be monetary in nature.

For example, a hotel chain in the United States has multiple stakeholders, including its employees, who rely on the company for their livelihood. Because of the taxes the company must pay each year, its stakeholders also include local and national governments.

Shareholder VS Subscriber

A company begins as a private limited company that is governed, founded, and structured by a group of people known as “subscribers” until becoming public. The subscribers are the company’s founding members, as their names appear in the memorandum of association. Their names are written in the public register after the firm goes public, and they remain there even if they leave the company.

Useful Resources

Freeman E., H. Elms, 2018, The Social Responsibility of Business Is to Create Value for Stakeholders, MIT Sloan Management Review, 17/12/2020.

Jack Welch (2009) Welch condemns share price focus Financial Times.

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).