Many people buy and sell stock in companies every day, but most of them are more interested in the short-term profit to be made from trading stocks, rather than the rights they gain from owning those stocks. However, if you’re a long-term investor, or just someone interested in corporate governance, it can be helpful to know what those stocks give you, aside from some cash when they’re sold on the stock market.
First, it’s important to know what a stock, or share, is. A share in a company is, essentially, a fraction of a corporation that belongs to you. The more stock you own in the company, the greater your power in the company, and the more of its profits you are entitled to when dividends are paid out. However, even owning a single share of a company entitles you to certain rights, which you can exercise as you wish.
Every corporation, by law, must hold an annual shareholder meeting, where the company’s board of directors is elected, where an annual report is given, and where certain other kinds of business are conducted (such as proposed changes to the company’s bylaws). Every share you own in the company entitles you, by default, to a single vote at the shareholder meeting, and the more shares you own in the company, the more votes you can cast. You can also, if you choose, speak at the shareholder meeting, or appoint a proxy to vote on your behalf.
Additionally, by owning shares in the company, you get the right to sue the company if they violate your rights as a shareholder, or to sue on behalf of the company against a third party (often an executive or member of the board of directors, where the company’s management might hesitate to sue on its own). The former sort of suit is called a direct action or direct suit (since you are “directly” suing the company), while the latter is called a derivative suit (as the power “derives” from the shareholder’s right as a part-owner of the company). This allows you to use your rights as a shareholder to legally hold the company’s leadership accountable.
However, it’s worth noting that not every company has just one kind of stock. It’s increasingly common for companies to issue different “classes” of stock, which have different rights or different levels of priority. For example, some companies issue “non-voting” stock, which receives dividends but doesn’t have the right to vote at shareholder meetings. Other companies will create a hierarchy of stocks, with dividends going to the highest class of stock first, and additional dividends getting paid out to lower classes only if there’s enough money to go around.
If you’re looking to start your own corporation, whether for a business or for a non-profit organization, it is worth your time to speak with an experienced corporate law attorney. The attorneys at Wingate, Kearney & Cullen, LLP have handled many corporate and business law matters on behalf of their clients. For more information or to schedule a consultation, call (718) 852-5900.