Joanne Wood Rattray | Shareholder rights: A key corporate asset

Starting a business is a scary prospect. Too often, images of sleepless nights and cliff-hanger financial scenarios, not to mention the difficulty of raising capital, hold back many from taking the plunge.

Investing in someone else’s business is the more common pathway for satisfying entrepreneurial drive, especially where that business has a proven track record and a multitude of sanguine shareholders.

However, the ‘ins and outs’ of being a shareholder remain obscure, even for many with healthy stock portfolios.

Shares represent a slice of the company. A person purchasing shares seeks financial returns – for example, in the form of dividends or share price increases – on the investment, anticipating that the company will perform well. However, many shareholders do not view themselves as business owners in the classic sense.

Shareholders, particularly those with minority holdings, typically do not participate in management of the company since the law separates ownership and control. Yet, though divorced from a company’s day-to-day management, shareholders have important rights when it comes to corporate decision-making which personify their role as company owners.

They have the right to access financial records. As owners, shareholders have the right to inspect a company’s books and records, and in this way ascertain how well the company is doing.

Shareholders have the right to sue directors and officers of the company for their misdeeds or wrongful acts.

They have a right to vote. This most important right enables shareholders to participate in corporate decision-making, including the right to appoint directors, make proposals and vote for structural changes such as mergers, acquisitions or liquidation.

They have the right to attend the annual general meeting, AGM, an annual gathering of a company’s shareholders where the directors present the company’s annual report and comment on its performance over the year. During the AGM, shareholders may elect new directors, discuss directors’ remuneration, and ask questions regarding the company’s way forward. The articles of incorporation usually reserve certain powers to the shareholders to be exercised in general meeting.

Shareholders also have the right to transfer ownership. Particularly in publicly listed companies, for example, those that trade on the Jamaica Stock Exchange, shareholders are able to quickly liquidate their shares into cash.

Directors’ Duty

The directors’ overarching duty to act honestly and in good faith is owed to the company. However, the exercise of that duty requires directors to have regard to the interests of the shareholders when determining the best interests of the company, further exemplifying the shareholders role as owners.

Share ownership diverges from the classic business ownership model when it comes to debts and liabilities. Shareholders are not responsible for the company’s debts and liabilities since the company is a separate legal entity. By the same token, the company’s assets do not belong to the shareholders.

Shareholders are not entitled to anything except for the ownership interest signified by their shares. Bear in mind, however, if a company is liquidated, creditors are first in line to have their debts paid, then bondholders, and then shareholders.

Investing by purchasing shares is baffling in other ways. Writing recently in the Washington Post, Christopher Marquis noted that though in theory the stock market reflects rational calculations as shareholders seek financial returns in companies that perform well, bubbles occur that overestimate company values and sudden corrections may jolt the market.

Even more perplexing, factors beyond economic fundamentals, like holidays and weekends, weather, and even lunar phases can affect stock market performance. Stocks may surge while the economy flounders, as happens even now during the COVID-19 pandemic.

All of this complicates the outlook for shareholders. Too often, investment for the ordinary purchaser of shares feels like a shot in the dark. Market swings negate any sense of control over their investment, save for having the option to sell. In this schematic, the exercise of shareholder rights may feel counter-intuitive. However, as Marquis points out, it is a myth that shareholders cannot make big changes in a company. Significant action, such as by the anti-plastics group that led Starbucks to consider plans to abandon plastic straws, no doubt requires a depth of collective organisation. Even minority positions can use their ownership as a platform for changing corporate behaviour, especially along environmental, social and governance lines.

However, one should not gainsay the potency of individual shareholders to influence outcomes through faithful attendance and voting, well-placed questioning and voicing of views. Fundamentally, shareholders should adjust how they view themselves, shifting from being mere siphons of financial support to seeing their role as integral players in the company’s decision-making.

Joanne Wood Rattray is an attorney-at-Law in the Kingston office of law firm DunnCox.joanne.wood@dunncox.com