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Navigating Your Responsibilities and Entitlements as a Shareholder in a Firm

Embarking on the journey of purchasing shares and becoming an investor in a company is a thrilling endeavor. Whether you’re acquiring shares to initiate an investment portfolio, expand your financial assets, or explore additional income streams, grasping your role as a shareholder is paramount. Drawing from our extensive experience in conflict resolution, the legal professionals […]

Navigating Your Responsibilities and Entitlements as a Shareholder in a Firm

Navigating Your Responsibilities and Entitlements as a Shareholder in a Firm

By Aylward Game - Sep 6, 2023 Business Law

Embarking on the journey of purchasing shares and becoming an investor in a company is a thrilling endeavor. Whether you’re acquiring shares to initiate an investment portfolio, expand your financial assets, or explore additional income streams, grasping your role as a shareholder is paramount. Drawing from our extensive experience in conflict resolution, the legal professionals at Aylward Game Solicitors have witnessed the complications and exasperation that can arise when shareholders misconstrue their rights and responsibilities.

Understanding the Shareholder Role

Within the landscape of a company, a shareholder assumes the role of a partial owner. Every company is required to have at least one shareholder.

You attain the status of a shareholder under these circumstances:

  • The company issues shares to you.
  • An existing shareholder within the company transfers their shares to you (usually in exchange for a sum), and the company officially records the transfer.

Rights Accorded to Shareholders in a Company

The scope of your entitlements as a shareholder hinges on the type of company in which you hold shares (public or private) and the class of shares you possess (common or preferred shares). Additionally, shareholder rights are influenced by the company’s constitution (if applicable), the ‘replaceable rules’ outlined in the Corporations Act 2001 (Cth), and any executed shareholder agreements.

In general, shareholders enjoy the following privileges:

  • The right to attend shareholder meetings and cast votes on specific matters (e.g., appointment and removal of directors).
  • The right to sell your shares, although certain restrictions might apply.
  • The right to participate in corporate initiatives offered by the company, such as rights issues, share offerings, or share buybacks.

Duties and Responsibilities of Shareholders towards a Company

Given that a company is a distinct legal entity, shareholders’ obligations are primarily limited to any unpaid sums tied to the shares held by them. Additional obligations, if present, will be explicitly outlined in the company’s constitution and/or a shareholder agreement.

Key Distinctions between Shareholders and Directors

Discerning disparities between shareholders and directors is pivotal:

  • Shareholders act as partial owners of a company, while directors are accountable for managing the company’s business operations.
  • Shareholders’ responsibilities generally revolve around any outstanding sums linked to the shares they possess. Conversely, directors are subject to an array of responsibilities dictated by federal, state, and territorial laws.

Navigating Potential Challenges

While the acquisition of shares is a customary practice, it is essential to remain vigilant about the prevalent challenges we’ve observed:

Limited influence over company management

It’s crucial to recognise that as a shareholder, your ability to influence the company’s management and strategic trajectory is confined to voting on pivotal matters during shareholder meetings. In show-of-hand voting, each shareholder usually possesses one vote. Alternatively, in a poll-based voting system, shareholders often have one vote for each share they hold.

Hurdles in accessing company information

Shareholders have restricted access to company and financial information. In the context of small proprietary companies and small companies limited by guarantee, shareholders typically need to command at least 5 percent of the votes to prompt these companies to generate and deliver financial reports and directors’ reports for a fiscal year.

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Challenges in divesting shares

Selling shares in a public company usually poses minimal challenges on the Australian Securities Exchange (ASX). However, in the case of shares held in a private company, the process can be intricate. The company’s constitution might impose constraints on the how and when of share sales, and finding potential investors for a niche, in a private company could prove challenging.

FAQ

What is the role of a shareholder in a company?

A shareholder in a company assumes the role of a partial owner. This status is attained either when the company issues shares to you or when an existing shareholder transfers their shares to you with the company’s official record.

What rights do shareholders have in a company?

Shareholders typically have the following privileges: the right to attend shareholder meetings, the right to cast votes on specific matters, the right to sell shares (with potential restrictions), and the right to participate in corporate initiatives offered by the company.

What are the duties and responsibilities of shareholders toward a company?

Shareholders’ obligations are primarily related to any unpaid sums tied to their shares. Additional responsibilities, if any, will be explicitly outlined in the company’s constitution and/or a shareholder agreement.

How do shareholders differ from directors in a company?

Shareholders are partial owners of a company, while directors are responsible for managing the company’s business operations. Shareholders’ responsibilities generally revolve around their shares, while directors have a broader range of responsibilities dictated by laws.

What challenges might shareholders face when it comes to influencing company management?

Shareholders have limited influence over company management, primarily through voting during shareholder meetings. The extent of influence depends on the voting system (show-of-hand or poll-based), with each shareholder typically having one vote per share.

What challenges can shareholders encounter when selling their shares in a private company?

Selling shares in a private company can be intricate due to potential constraints imposed by the company’s constitution on the sales process. Finding potential investors for private company shares can also be challenging, and shareholders may face hurdles related to the timing and method of share sales.

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