Shareholder Rights & Corporate Actions

Common stockholders are the owners of a corporation. This ownership comes with specific legal rights—and responsibilities. Understanding these rights is essential for investment advisers and their clients.

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Fundamental Rights of Common Shareholders

The Six Core Rights

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Voting Rights in Detail

What Shareholders Vote On

Common shareholders typically vote on:

• Election of board of directors
• Ratification of auditors
• Executive compensation plans (advisory "say-on-pay" votes)
• Major corporate changes (mergers, acquisitions, charter amendments)
• Authorization of additional shares
• Stock option and equity compensation plans

What Shareholders Do NOT Vote On

• Dividends: Board of directors declares dividends; shareholders cannot demand them
• Day-to-day operations: Managed by officers appointed by the board
• Specific business decisions: Product pricing, hiring, strategy

Proxy Voting

Most shareholders vote by proxy—a written authorization allowing someone else to vote their shares.

Key Proxy Rules:

• Proxy statement (Form DEF 14A) must be filed with SEC
• Contains information on all matters to be voted on
• Must disclose executive compensation, conflicts of interest
• Proxy fight: When outsiders solicit proxies to gain control or change management

In Practice

Activist investors like Carl Icahn or Elliott Management often launch proxy fights, seeking shareholder votes to replace board members or force strategic changes. These battles highlight the power shareholders hold through voting rights.

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Liquidation Rights

In corporate liquidation, assets are distributed according to a strict priority order. Common stockholders have the residual claim—they receive whatever remains after all other claims are satisfied.

Order of Priority in Liquidation

On the Exam

Questions often test liquidation priority. Remember: Secured → Unsecured → Subordinated → Preferred → Common. Common stockholders are last and frequently receive nothing in bankruptcy.

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Preemptive Rights

Preemptive rights protect shareholders from dilution—the reduction in ownership percentage when new shares are issued.

Example of Dilution Without Preemptive Rights

Without preemptive rights, your ownership dropped from 10% to 6.67%.

How Rights Offerings Work

With preemptive rights, you receive subscription rights to purchase new shares proportionally:

1. Company announces rights offering
2. Existing shareholders receive rights (one per share owned)
3. Rights allow purchase at subscription price (below market)
4. Rights have short expiration (typically 30-45 days)
5. Shareholders can exercise, sell, or let rights expire

Rights Value Formula

Value of One Right = (Market Price - Subscription Price) ÷ (Rights Needed + 1)

Important Distinctions

• Stock rights: Short-term (weeks), issued to existing shareholders, priced below market
• Warrants: Long-term (years), often attached to bonds, priced above current market

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Anti-Dilution Provisions

Anti-dilution provisions protect certain shareholders (often venture capital or preferred holders) from dilution in subsequent financing rounds.

Types of Anti-Dilution Protection

These provisions are common in:

• Venture capital investments
• Convertible preferred stock
• Convertible bonds

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Inspection Rights

Shareholders have limited rights to inspect corporate books and records, including:

• Shareholder list and contact information
• Minutes of shareholder meetings
• Articles of incorporation and bylaws
• Annual reports and financial statements

Limitations

• Must have "proper purpose" related to shareholder interests
• Cannot inspect for competitor intelligence or harassment
• Company can require reasonable notice
• May need to pay copying costs

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Transfer Rights

Shareholders of public companies have virtually unlimited ability to transfer shares:

• Buy and sell on open markets
• Gift shares to others
• Transfer to trusts
• Pledge as collateral

Restrictions

Some shares have transfer restrictions:

• Restricted stock (from private placements or employee grants)
• Control stock (held by affiliates and insiders)
• Shares with contractual restrictions (buy-sell agreements)

These require compliance with SEC Rule 144 or registration before resale.

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Corporate Actions Affecting Shareholders

Mergers and Acquisitions

When companies merge or one acquires another:

• Shareholders typically vote on the transaction
• May receive cash, stock of acquiring company, or combination
• Appraisal rights may allow dissenting shareholders to receive fair value

Tender Offers

A tender offer is a public bid to purchase shares:

• Bidder offers to buy shares at premium to market
• Shareholders choose whether to "tender" (sell) their shares
• Subject to SEC regulations (Williams Act)
• Must remain open minimum 20 business days

Spin-offs

When a company separates a division into an independent company:

• Shareholders receive shares of new company
• Typically tax-free if structured properly
• Creates "pure play" investment opportunities

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Key Takeaways

• Common shareholders have six core rights: voting, dividends, preemptive, residual claim, inspection, and transfer
• Shareholders vote on directors and major decisions, not on dividends or operations
• In liquidation, common stockholders are last in line after all creditors and preferred
• Preemptive rights protect against dilution through rights offerings
• Rights are short-term instruments; warrants are long-term
• Proxy voting allows shareholders to vote without attending meetings
• Corporate actions (mergers, tender offers, spin-offs) significantly impact shareholder value