What is a shareholder?
Looking for a shareholder definition? Anyone who owns at least one share in a business or company is a shareholder. A controlling shareholder owns more than half of a company's shares, while a minority shareholder owns fewer than half.
If you work for a private company, it will have shareholders. If you own a private limited company, you will be a shareholder. Shareholders can be individuals, groups of people, a partnership or an organisation.
Shareholders give a business financial security, receive a portion of its profits and oversee how the directors manage the company. A shareholder's influence over a business is typically aligned with the percentage of shares they own.
Where have you heard about shareholders?
Shareholders are frequently referred to in the media, particularly when companies hold their Annual General Meetings (AGMs). This is an opportunity for shareholders to hold their company's directors to account, especially on ethical or business performance issues. You might have heard about something called a Shareholder Spring - the time of year when shareholder rights, executive pay and remuneration packages come under the closest scrutiny from investors, often leading to high-profile disputes at some of the world's biggest companies.
What you need to know about shareholders…
A common shareholder – who can be an individual, a business or an institution – holds common shares in a company. These give the holder an ownership stake, along with the right to vote in board elections and on issues such as corporate policy, plus an entitlement to any common dividend payments.
If bankruptcy occurs, common shareholders are usually the last to get anything from liquidation. First, companies pay out all debtholders. If anything remains, then preferred shareholders are paid, followed by common shareholders. Common shares can come in classes such as A or B, with each level conferring different dividend and voting rights.
A common shareholder has the right to participate in a company's profitability during the period they own the shares. Division of profits is determined by the number of shares owned by a shareholder, and shareholders can make substantial gains over time – and of course losses if things go badly.
Shareholders also have rights to income distribution through dividend payments. If a company's board of directors declares a dividend, common shareholders are in line to receive it. But dividends aren’t guaranteed.
Common shareholders also enjoy pre-emptive rights. If new shares are issued to the public, current shareholders may buy a specific number of shares before the stock is offered to new takers. Pre-emptive rights can be attractive to common shareholders, as they’re often offered at a subscribed price on a per-share basis.
The ability to cast votes at a company's Annual General Meeting is an important part of being a shareholder. Major shifts within a publicly traded company are voted on before changes can be made, and common shareholders have the right to vote either personally or by proxy. Most common shareholder voting rights amount to one vote per share owned, which means that investors who have a larger number of shares possess a greater influence on the outcome of the vote. Common shareholders also participate in the election of the board of directors.
Preferred shareholders have a bigger claim to a company's assets and earnings. When a company has excess cash, and distributes money in the form of dividends, preferred shareholders must be paid before common stockholders. And at times of insolvency, common stockholders don’t receive any money until after the preferred shareholders are paid out.
The dividends of preferred stocks are different from – and usually greater than – those of common stock. When you buy a preferred stock, you know when to expect a dividend because they’re paid at regular intervals. But this isn’t always so for common stock, as the board of directors decide whether to pay a dividend. Because of this, preferred stock generally doesn’t fluctuate as often as a company's common stock.
Preferred stocks are sometimes called hybrid securities because of their bond-like features. Preferred stocks have a par value which is affected by interest rates: when rates rise, the value of the preferred stock falls, and vice versa. Preferred stocks can be converted to a fixed number of common shares, but common shares don't have this provision.
Shareholders contribute to company debt up to their liability limit. So, if a shareholder owns 10% of a company, they are liable for 10% of the debt. In a limited liability company, shareholders are not usually liable personally for a company's debts, but they may lose what they invested in the business.
Minority shareholder rights
The Companies Act gives all shareholders certain basic rights, but minority shareholder rights under the Act are rather limited. For example, those with a shareholding of 5% or more can require the circulation of a written resolution, to require the company to call a general meeting, and to prevent the deemed re-appointment of an auditor. Those with a shareholding of 10%, on the other hand, can call a poll vote at a general meeting, and are able to require an audit.
Minority shareholder rights can be enhanced through a shareholders’ agreement. This is an agreement entered into between all or some of the shareholders in a company. It regulates the relationship between shareholders, the management of the company, ownership of the shares and the protection of the shareholders. Such an agreement also governs the way the company is run.
Shareholders’ agreements are often used as a safeguard to give protection to shareholders, as they can provide for situations when things go wrong. An agreement can cover the management and financing of the company, the dividend policy, the procedure to follow for a transfer of shares, situations of deadlock, and the shares’ valuation.
Finally, here are a few pieces of terminology a shareholder needs to know when it comes to dividends:
- Declaration date is the day the board of directors announces its plan to pay a dividend. On that day, a liability is created, which the company records on its books; it now owes the promised money to stockholders
- In-dividend date is the final day – which is one trading day before the ex-dividend date – where the stock is ‘cum dividend’ (with dividend). This means that existing holders of the stock and anyone who buys it on that day will get the dividend, but any holders selling the stock lose their right to the dividend
- After this date the stock becomes ex-dividend
- XD is a symbol used to show that a security is trading ex-dividend. XD acts as shorthand to tell investors key information about a security in a stock quote. Sometimes just X is used to indicate that the stock is trading ex-dividend
Find out more about shareholders…
Leading business newspapers also often carry informative and insightful analyses of shareholder issues, particularly around the time of companies’ annual general meetings. The Financial Times in August 2017 released an article explaining ‘Why big companies are listening to small shareholders’. An interesting and ever-present issue in the business world.