Shareholder Rights in a Private Corporation

Shareholder rights are an issue for large and small corporations.

Stock shares provide a secured ownership interest in a business. Shareholders of the corporation are the owners of the company. Larger corporations offer different classes of stock, while smaller organizations may offer only one class of stock.

The most common forms of ownership interest in a corporation are common stock, preferred stock, and bonds. An agreement between the bondholder and the corporation determines a bondholder’s rights. But, for stock shareholders, many of their rights are provided under state law. Set up a consultation with a business lawyer in your area to make informed decisions about your shares.

What Are the Basic Rights of a Shareholder?

Some public corporations may divide their classes of stock into two classes, preferred and common stock. The basic difference between the two classes is that preferred stock shareholders have priority over common shareholders, meaning they will receive dividends before common shareholders. However, both classes generally receive the same rights under corporate law.

Those basic shareholder rights include:

• The right to vote on major decisions of the corporation, including the election of the board of directors, mergers, and liquidation
• An ownership interest, meaning shareholders’ interests in a claim for a portion of the assets of the company in proportion to their ownership interest
• Right to dividends, or profits of the corporation, when the board of directors decides to issue dividends instead of reinvesting profits into the company
• The right to transfer their ownership interest and the ability to transfer it for fair value
• The opportunity to inspect corporate books and records
• The right to sue the corporation for wrongful acts

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The Right to Vote and Influence Corporate Governance

Shareholders have voting rights on big corporate decisions that can change the company’s direction. This includes the election of directors, approving mergers, and deciding whether to amend corporate bylaws. These decisions are made at annual or special shareholder meetings, and unless the governing documents say otherwise, each share equals one vote. It’s easy to overlook this right until something goes wrong. When a board member makes a decision you disagree with, or the company takes a new direction without shareholder input. That’s why it’s important to stay engaged and understand what your vote actually gives you.

The Right to Information and Inspecting Company Records

Even small ownership stakes come with legal rights. Minority shareholders might not control the company, but they’re still entitled to fair treatment. If the majority shareholders block access to company profits, misuse corporate assets, or otherwise act unfairly, minority owners may have a claim for shareholder oppression. To prevent this, many states impose a fiduciary duty on the majority shareholders to the minority shareholders.

These cases are often fact-specific and can involve direct lawsuits or derivative actions. In serious situations, the court may order a buyout of the minority’s shares or even dissolve the business. That’s why minority shareholders should seek legal advice early, before internal disputes become full-blown legal battles.

Shareholders have the right to request to inspect the company’s books. Information that the corporate records must contain for shareholder inspection includes:

• Articles of incorporation
• Corporate bylaws
• Operating agreements
• Resolutions related to corporate stock
• Minutes of the corporate board of directors’ general meetings
• Written communications with shareholders for the previous three years
• Names and addresses of the board of directors and officers
• The most recent annual financial report of the corporation

Shareholders can obtain further records if the shareholder can demonstrate he or she is seeking those records in good faith and for a proper purpose.

Financial Rights: Dividends and Asset Distribution

Dividends are one way a corporation rewards its shareholders, but they’re never guaranteed. Under corporate law, dividends are paid only when the board of directors approves them, and only if the company is in a financial position to do so. Some preferred shareholders may receive dividends before common shareholders, but all payouts depend on the terms set in the corporate bylaws and stock agreements. Not all businesses pay dividends. Many reinvest profits back into the company to support growth, which can still increase the value of your shares over time. If a business dissolves, corporate law also defines who gets paid and in what order: creditors and bondholders first, then preferred shareholders, followed by common shareholders. Understanding these rights helps shareholders know where they stand, both during the life of the business and at its end.

What Is a Shareholder Agreement?

A shareholder agreement is a private contract that defines how the owners of a corporation will run the business, make decisions, and resolve disputes. It’s especially valuable in closely held corporations, where a small group of shareholders may have outsized influence. These agreements can control how new shares are sold or owned shares transferred, what happens if an owner wants out, and how key decisions, like mergers or leadership changes, are approved. Many state laws allow for significant flexibility in structuring these agreements, but they must comply with corporate statutes and public policy. When done right, a shareholder agreement offers stability, protects minority interests, and helps avoid costly litigation down the road.

Protecting Minority Shareholder Rights

Even small ownership stakes come with legal rights. Minority shareholders might not control the company, but they’re still entitled to fair treatment. If the majority shareholders block access to profits, misuse corporate assets, prevent minority shareholder voting, or otherwise act unfairly, minority owners may have a claim for shareholder oppression.

These cases are often fact-specific and can involve direct lawsuits or derivative actions. In serious situations, the court may order a buyout of the minority’s shares or even dissolve the business. That’s why minority shareholders should seek legal advice early, before internal disputes become full-blown legal battles.

When To Contact a Business Lawyer About Shareholder Disputes

If directors, majority shareholders, or those in control of the corporation act oppressively, illegally, or fraudulently, corporate shareholders can seek damages or other remedies against the corporation. 

A breach of fiduciary duty is defined under case law as burdensome, harsh, and wrongful conduct. It is a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members. It could be a visual departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely. Similar, but in addition to these guidelines, the majority shareholders in a corporation owe a fiduciary duty to minority shareholders.

Besides suing the corporation, shareholders are entitled to bring another form of action on behalf of the corporation: the derivative lawsuit, which is a lawsuit brought by a shareholder or group of shareholders on behalf of the corporation, alleging the corporation has been harmed by some action. Shareholders must meet certain legal requirements before filing a derivative lawsuit.

If a corporate director or officer fears an action may violate the rights of the company’s shareholders, or if a shareholder believes those in control of the corporation have not followed the law or corporate policy, they should immediately seek out advice from a law firm or an experienced corporate attorney before the corporation is harmed.