8 Common Stockholder Rights
When you have shares of stock in a company, you’re a partial owner of that company—we’ve talked about this before. We’ve also talked about some of the perks and benefits that come with ownership. But did you know that ownership also comes with a handful of rights?
In this post, we’re primarily going to be talking about common stockholder rights because they’re—well—the most common, but some of these are also applicable to owners of preferred stock. (Not quite sure how common and preferred stock are different? We have an Investor Jargon post for that here.)
Common stockholders—being partial owners of a company—have rights. While they can vary depending on state regulations where a company’s incorporated or specific corporate bylaws, the following rights are common for common stockholders (see what we did there?):
1. Right to inspect records
This one’s pretty self-explanatory. When you own common stock in a company, you’re given the right to see the company’s financial records and notes from shareholder meetings.
2. Right to vote
If you own at least one full share of common stock in a company, you’re eligible to vote on certain business decisions, like for who should be on the Board of Directors, for instance. You can read more about shareholder meetings and how proxy voting works here.
3. Right to participate in the profits
If a company’s Board of Directors declare a dividend to common stock shareholders, they have the right to receive those dividends.
4. Right to residual claim during liquidation
This is a finance-y way of saying that if a company is forced to sell off all of their assets (aka liquidate) because of bankruptcy, common stockholders have a right to a portion of earnings after any debt has been sorted out.
5. Right to limited liability
If the company is under fire from lawsuits or in debt, shareholders are only liable for the amount of money they’ve invested in the company. The shareholder’s personal assets aren’t up for grabs.
6. Transfer rights
Common stockholders have the right to sell or transfer their shares if and when they want.
7. Preemptive rights
If a company decides to issue more shares of common stock, current stockholders have preemptive rights. This just means that they have the chance in a “rights offering” to buy enough new shares to maintain their percentage of ownership in the company. These shares are usually sold at a discounted price, and they’re transferable in the market, so the owner can sell them if they want.
8. Right to sue for wrongful acts
When shareholders have been wronged, they have the right to file what’s called a derivative suit, which is a lawsuit brought by a shareholder individually or as part of a class action suit on behalf of a company against a third party. The third party in question? It’s usually an executive officer or director in the company. The wrong? Often it’s fraud or mismanagement that’s been ignored by key people in the company. Say, for example, a company hugely overstated its earnings, giving the shareholders an inaccurate idea of how it was performing. This is something shareholders might file a derivative suit about. These lawsuits don’t usually aim to obtain monetary damages, but in most cases are generally seeking to protect shareholder interests.
And there you have it. These are the most common common stockholder rights. Like we said above, they can vary state to state, but if you own shares of common stock in a U.S. publicly-traded company, chances are you’re entitled to most—if not all—of these.