Hey guys! In this post, we are going to dive into your questions about 'what is a corporate shareholder.'
I am a lawyer and have been doing this for more than ten years. I have had the privilege of working with a range of legal structures, and that definitely includes corporations.
Last year, when we first got locked down, I was of course a bit shocked. As time goes on, I started thinking about how I can give something back to our community. One idea was to create this blog as a source of credible, reliable information. In particular, I am hoping that this first set of blog posts are helpful for guys (and girls) who may be first time entrepreneurs.
It's all good, man.
Overview of Stuff to Learn
Incorporation is a powerful legal structure. It has both legal and business advantages, but it also comes with added complications.
As a first-time entrepreneur, you might have questions about the multiple roles within the corporation and how they relate to each other.
Sometimes the directors, shareholders, and officers are the same people or same person. But, unique individuals usually hold one or more of these roles.
In all cases, corporate shareholders have specific rights as well as responsibilities under the law. Especially if you are considering incorporating your business, you are definitely going to want to know about the rights and responsibilities of corporate shareholders.
I am going to break this topic down into four key points:
- How you might become a shareholder
- Shareholders are principals and they are represented by various agents;
- Shareholders have serious responsibilities;
- Shareholders have significant rights.
Point 1: Becoming a Shareholder
In the case of a private company, there are two ways in which someone can become a shareholder.
First, You might purchase shares directly from the corporation, i.e. that were not previously issued by the corporation. This is sometimes called "buying shares from treasury."
Second, you can purchase previously issued shares from an existing shareholder.
In both cases, your ownership of shares should be recorded in the corporation's minute-book.
Point 2: Shareholders are Principals
A corporation is a separate legal entity from its owners. In practice this means that shareholders are investors in the corporation and own the corporation's shares.
But, the shareholders do not own the property belonging to the corporation. Shareholders also do not necessarily determine the business strategy and managerial decisions of the corporation.
Instead of determining the business strategy and managerial decisions of the corporation, the shareholders have agents who are empowered to undertake these roles. These agents are known as directors and officers.
Therefore, shareholders cede power to directors and officers who 'call most of the shots.' The shareholders are the principals. The directors and officers are agents.
Now if you have studied economics, you may be familiar with the principal-agent problem. We will go into the nature of the principal-agent problem and its relevance for corporate law in other posts. For the time being, the key point is that shareholders must rely on the directors and officers.
Point 3: Shareholder have Rights
The third key point you will want to consider is that shareholders have legal rights.
Shareholders have economic interests in the business of the corporation. They also have legal rights, for example: they have the right to vote and they also have the right in certain circumstances to initiate law suits.
Why do shareholders have the right to vote? They have this right for at least two reasons.
First, ultimate control over the corporation rests with the shareholders. Under relevant principles of corporate law, shareholders are given certain, specific opportunities to exercise this control.
Second, shareholders have the right to vote because of reasons that are connected to the principal-agent problem. A very simple consequence of the principal-agent problem is that the shareholders are dependent on their agents.
But, being human, the shareholder's representatives, i.e., the directors and officers, are not perfect. Corporate law does set out standards that directors and officers must fulfill as well as criteria for assessing whether the standard has been met. Nevertheless, there is still a need for supervision. In practice, some supervisory power rests with the shareholders through their right to vote.
Point 4: Shareholders have Responsibilities
The last point for today is that shareholders have responsibilities
These responsibilities may even sometimes take the legal form of duties.
It is possible that some people may think that being a shareholder is a one-way street. But, that would be a mistake: shareholders most definitely have responsibilities as well as rights.
The single most important context in which shareholders have responsibilities is that of controlling shareholders. In Canadian corporate law, a controlling shareholder is someone who has the power to appoint the majority of a corporation's board of directors.
Canadian courts have found that controlling shareholders have common law duties towards minority shareholders.
The common law duties owed by controlling shareholders to minority shareholders may fall short of the standard associated with a fiduciary duty. But, it is quite clear that the majority must exercise its powers fairly; and, the minority may have a cause of action if the majority exercised its powers oppressively.
That is all, Folks
Thanks for reading today's post. I hope it helped you understand the role of corporate shareholders.
If you have specific questions, feel free to hit us up.