Chapter 4, A C Fernando

Common Shareholders' Main

Rights

Voting Power on Major Issues

This

includes electing directors and

proposals for fundamental changes
affecting the company such as
mergers or liquidation. Voting takes
place at the company's annual
meeting. If you can't attend, you can
do so by proxy and mail in your vote.

Ownership in a Portion of the Company

Previously

we discussed the event of a

corporate liquidation where bondholders and
preferred shareholders are paid first.
However, when business thrives, common
shareholders own a piece of something that
has value. Said another way, they have a
claim on a portion of the assets owned by the
company. As these assets generate profits,
and as the profits are reinvested in additional
assets, shareholders see a return in the form
of increased share value as stock prices rise.

The Right to Transfer Ownership

Right

to transfer ownership means shareholders

are allowed to trade their stock on an
exchange. The right to transfer ownership might
seem mundane, but the liquidity provided by
stock exchanges is extremely important.
Liquidity is one of the key factors that
differentiate stocks from an investment like real
estate. If you own property, it can take months
to convert your investment into cash. Because
stocks are so liquid, you can move your money
into other places almost instantaneously.

An Entitlement to Dividends
Along

with a claim on assets, you also receive a

claim on any profits a company pays out in the
form of a dividend. Management of a company
essentially has two options with profits: they can
be reinvested back into the firm (hopefully
increasing the company's overall value) or paid
out in the form of a dividend. You don't have a
say in what percentage of profits should be paid
out - this is decided by the board of directors.
However, whenever dividends are declared,
common shareholders are entitled to receive
their share.

Opportunity to Inspect Corporate Books and Records

This

opportunity is provided through

a company's public filings, including
its annual report. Nowadays, this
isn't such a big deal as public
companies are required to make
their financials public. It can be more
important for private companies.

The Right to Sue for Wrongful Acts

Suing

a company usually takes the form of

a shareholder class-action lawsuit. A good
example of this type of suit occurred in the
wake of the accounting scandal that rocked
WorldCom in 2002, after it was discovered
that the company had grossly overstated
earnings, giving shareholders and investors
an erroneous view of its financial health.
The telecom giant faced a firestorm of
shareholder class-action suits as a result.

Variations
Shareholder

rights vary from state to

state, and country to country, so it is
important to check with your local
authorities and public watchdog groups.
In North America, however, shareholders
rights tend to be more developed than
other nations and are standard for the
purchase of any common stock. These
rights are crucial for the protection of
shareholders against poor management.

Corporate Governance

In

addition to the basic rights of

common shareholders, it is vital that
you thoroughly research the
corporate governance policies of a
company. These policies are often
crucial in determining how a
company treats and informs its
shareholders.

Shareholder Rights Plan

Despite

its name, this plan differs

from the standard shareholder rights
outlined by the government (U.S).
Shareholder rights plans outline the
rights of a shareholder in a specific
corporation.
A company's shareholder rights plan,
it is usually accessible in the
investor's relations section of its
corporate website or by contacting

Example

The

way a shareholder rights plan may work can be best

demonstrated with an example: let's say Cory's Tequila Co.
notices that its competitor, Joe's Tequila Co., has purchased
more than 20% of its common shares. A shareholder rights
plan might then stipulate that existing common shareholders
have the opportunity to buy shares at a discount to the
current market price (usually a 10-20% discount).
This manoeuvre is sometimes referred to as a "flip-in poison
pill". By being able to purchase more shares at a lower price,
investors get instant profits and more importantly, they dilute
the shares held by the competitor, whose takeover attempt is
now more difficult and expensive. T
here are numerous techniques like this that companies can
put into place to defend themselves against a hostile
takeover.

Sometimes There are Little Extras

Do

you receive additional things/perks?

Although free drink may be a little far-fetched there are
companies that offer shareholders little extras. For
instance, Anheuser-Busch does offer its shareholders
discounted rates to some of the company's entertainment
parks, among other things.
Other companies have been known to give their
shareholders small tokens of their appreciation along with
their annual reports.

For example, AT&Thas given shareholders a 10-minute

phone card with its annual report, McDonald's included a
voucher for free fries and Starbucks was gracious enough
to give shareholders a free cup of coffee.

Conclusion

Buying

a stock means ownership in a company and

ownership gives you certain rights. While common
shareholders might be at the bottom of the ladder
when it comes to liquidation, this is balanced by other
opportunities like share price appreciation. As a
shareholder, knowing your rights is an essential part
of being an informed investor - ignorance is not a
defence.
Although the Securities and Exchange Commission
and other regulatory bodies attempt to enforce a
certain degree of shareholder rights, a well-informed
investor who fully understands his or her rights is
much less susceptible to additional risks.