What is a Shareholder?
A shareholder is an individual, company, or entity that holds a share of stock in a company. As a result of ownership, some shareholders are entitled to vote on how the company operates.
🤔 Understanding shareholders
A shareholder owns at least one share of stock in a company. Each share represents a claim to that company's income or assets, and so that means each shareholder is effectively one of multiple company owners. In some cases, certain types of shareholders may benefit from a broad range of rights and responsibilities, including the power to vote on appointing or removing company directors, approving financial statements, and voting on any significant changes the company decides to make. Shareholders are also sometimes entitled to a proportional share of a company's income via a dividend, should the company choose to distribute dividends.
All publicly traded companies are broken down by shares of stock, and each company must issue at least one share before it starts trading.
Since its initial public offering (IPO) in 1980, tech giant Apple has been split up into 4,375,480,000 shares of stock – but that doesn't mean Tim Cook has to answer to four billion different shareholders. Apple's most significant shareholders are other companies and mutual funds, including Warren Buffet's famous holding company Berkshire Hathaway.
As of the first quarter of 2020, Berkshire Hathaway owns more than 250 million shares in Apple. Because every shareholder gets a proportional vote on important company matters, that means Warren Buffet’s company enjoys a significant say on how Apple is managed and run.
Shareholders are like the recipients of slices of pie...
Each slice represents a share of ownership in that company. That means every shareholder who's bought or been given a slice of the pie generally gets to have their say on what goes into it, how it gets cooked, and what the group ultimately decides to do with the pie.
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- What is a shareholder?
- What is the role of a shareholder?
- Do shareholders own the company?
- What are the types of shareholders?
- What are shareholder rights?
- What is the difference between a shareholder and a stockholder?
- What is the importance of shareholders?
What is a shareholder?
A shareholder can be any individual, company, or entity that owns one or more shares of stock in a company, a trust, or a non-profit organization. Stock shares represent an ownership claim over a portion of any given company, its earnings, and its assets — which means that shareholders are the company's owners.
Stock ownership may entitle shareholders to a broad set of responsibilities and rights and enables certain types of shareholders to vote on important company decisions.
As company owners, some shareholders may receive financial rewards based on the commercial successes of that company in the form of dividends or increased stock valuations. That being said, it’s important to note that not all companies can (or choose to) issue dividends.
Any single shareholder that gains over 50% of a company's shares becomes the majority shareholder for that entity. That ownership enables a company's majority shareholder to have a more significant say in the running of that company. Everyone holding less than 50% of a company's stock is referred to as a minority shareholder.
It's important to note that although shareholders are effectively a company's owners, most shareholders are not involved in the day-to-day running of the company business. These tasks typically get delegated to company boards, directors, and their appointed teams.
What is the role of a shareholder?
Shareholders can have multiple responsibilities, but the scope of those responsibilities depends on shareholder type.
Common shareholders are the most prevalent type of shareholder in many jurisdictions, and they have a wider set of responsibilities than other shareholder types.
Different companies may require their common shareholders to carry out various roles based on the governing rules that the company decided upon at the point of its incorporation. But, generally speaking, companies will often require their common shareholders to carry out the following responsibilities:
Shareholders typically approve the salaries of company directors. Likewise, they may also get to choose to issue rules or guidance on the salaries company directors are subsequently able to pass on to other employees.
Approving financial statements
When it comes to company financial statements, in many cases the buck stops with shareholders. A lot of companies may require shareholder approval for all financial statements before they get finalized.
Shareholders typically decide who they'd like to appoint or remove as company directors, and they also may get to pick and choose which powers and duties are granted to those directors.
A majority vote often decides these measures at an annual general meeting (AGM), which is why the role of a majority shareholder is so critical.
Voting on big changes
Major strategic changes that fundamentally alter a company's direction must typically be decided by a vote of shareholders.
Significant votes are often reserved for a company's AGM or at a special emergency shareholder meeting if a rapid decision is needed.
Although common shareholders are typically asked to take on many of these responsibilities, it’s worth pointing out the amount of time they’re required to devote to their role will vary. In some cases, many or all shareholder responsibilities could boil down to a single annual vote at a company’s AGM — and even then, a common shareholder can often submit a proxy vote and fulfil their duties without attending the meeting.
Do shareholders own the company?
Yes, shareholders are the owners of a company. When a company decides to issue stock, that means the company is broken into shares that represent a claim to that company's income and assets.
The founders or existing owners of that company will typically decide how many shares they'd like to break the company up into — and in gaining one or more shares of that stock, each new shareholder effectively becomes one of multiple company owners.
It's worth pointing out there are also slightly different types of ownership based on how a company has been incorporated.
A lot of small businesses are formed as closely held corporations. These are sometimes referred to as "close corporations" in the United States or "private limited companies" overseas.
Close corporations are privately run and typically have a small number of shareholders. According to the IRS, in order to qualify as a close company for tax purposes, more than 50% of the shares in a given company must belong to five or fewer shareholders.
A company may also choose to become a publicly held corporation.
A public company can have any number of shareholders and sell company stock as part of one or more public offerings to any individual, company, or institution. Because public companies can have thousands upon thousands of shareholders, voting power is often diminished, and each shareholder may have less of a say in how the company is run.
What are the types of shareholders?
No two companies are alike, so corporate structure and shareholder types do vary from company to company. That being said, there are only two main types of shareholders that you're going to run across in the vast majority of companies: common shareholders and preferred shareholders.
Common shareholders are any individual, company, or entity that owns at least one common stock share in a company. In other parts of the world, common shareholders are called "ordinary" shareholders — and these are the individuals or entities that would typically come to mind when you think of the word "shareholder."
Common shareholders typically fulfill many roles and responsibilities, including the right to vote on significant company decisions, make appointments, and approve a company’s financial statements. They may also reserve the right to file a shareholder complaint, or even a class-action lawsuit, if they feel the company is being mismanaged or their rights as a common shareholder have been in any way infringed upon.
Unlike common shareholders, preferred shareholders typically retain no voting rights. That means although a preferred shareholder does effectively own part of a company, that individual or entity simultaneously has no real say in the way that the company is run or managed.
Ownership of preferred stock can get passed down from family member to family member and, in companies where dividends are awarded, preferred shareholders are generally entitled to a fixed annual dividend that they receive before common shareholders get paid their dividends.
What are shareholder rights?
In addition to voting powers and specific responsibilities, most common shareholders also retain a set of basic shareholder rights. These rights will typically vary from company to company based on the rules and bylaws that were brought into effect at the point of company formation.
But, generally speaking, many common shareholders will typically benefit from the rights to:
- Receive dividends (if a company chooses to distribute dividends)
- Attend and vote in shareholder meetings
- Submit a proxy vote if they're unable to attend a meeting in person
- Inspect and approve financial records
- Claim a reasonable proportion of income if a company must liquidate assets
- Sue the company
In terms of a shareholder’s right to sue a company, it’s worth pointing out that just about anybody can sue a company as part of a direct lawsuit. But shareholders also reserve the right to file a derivative lawsuit, which is when a shareholder (or group of shareholders) sues a third party either within or outside the company on behalf of the corporation.
Again, it's worth pointing out this list of rights isn't exhaustive. A company is often free to allocate any number of rights to its shareholders, and so rights can get added or stripped retrospectively. But changes to shareholder rights will generally require a majority vote by all shareholders.
What is the difference between a shareholder and a stockholder?
There's no difference between a shareholder and a stockholder — they're the same thing, and it's okay to use these two terms interchangeably.
Both words describe an individual, company, or entity that owns one or more shares of stock in a company, trust, or non-profit.
What is the importance of shareholders?
Shareholders are critically important to any given company because they're the ones who own that company. Shareholders often may be responsible for appointing company directors and empowering them with the ability to manage the day-to-day running of all company business.
Shareholders may also need to approve any significant changes to a company's business, appointments, or strategy depending on the shareholder and company type.
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