Buying shares and investing in a company can be an exciting time. Whether you are buying shares to start an investment portfolio, build your wealth or possibly have another income stream, it is important to understand your role as a shareholder. As experts in dispute resolution, Slater and Gordon has seen the confusion and frustration that can be caused when shareholders misunderstand their rights and obligations.
What is a shareholder?
A shareholder is a part owner of a company. All companies must have at least one shareholder.
You become a shareholder in a company if:
- the company issues shares to you; or
- an existing shareholder in the company transfers their shares to you (usually for a price) and the company registers the share transfer.
What rights do shareholders have in a company?
Your rights as a shareholder will depend on the type of company you hold shares in (public or private) and what class of shares you hold (ordinary or preference shares). Shareholders’ rights will also depend upon the company’s constitution (if it has one), the ‘replaceable rules’ set out in the Corporations Act 2001 (Cth) and any executed shareholder agreements.
Generally, shareholders enjoy the following rights:
Right to attend shareholder meetings and vote on certain issues (e.g. appointment and removal of directors)
Right to sell your shares (there may be restrictions imposed)
Right to participate in corporate actions offered by the company (such as rights and share issues or share buybacks)
What obligations do shareholders have to a company?
Because a company is a separate legal entity, shareholders’ duties are generally limited to any unpaid amounts on shares held by that shareholder. Any other obligations will be specifically provided for in the company’s constitution and/or a shareholder agreement.
What are the major differences between shareholders and directors?
The major differences between shareholders and directors are:
- Shareholders are part-owners of a company, whereas directors are responsible for the management of the company’s business activities
- Shareholders’ duties are generally limited to any unpaid amounts on shares they hold, whereas directors have range of duties under federal, state and territory law
Although it is common for people to buy shares, it is important to take note of the common pitfalls we have seen:
Less control over company management than expected
It is important to remember that as a shareholder, the extent to which you can manage the company and control the direction in which it grows is restricted to voting on key issues at shareholder meetings. Where voting occurs by a show of hands, usually each shareholder has one vote. Alternatively, if voting occurs by poll, usually each shareholder has one vote for each share they hold.
Difficulty accessing company information
Shareholders have very limited access to company and financial information. In small proprietary companies and small companies limited by guarantee, shareholders need at least 5 percent of the votes to be able to direct those companies to prepare and send to shareholders, a financial report and directors’ report for a financial year.
Difficulty selling your shares
If you hold shares in a public company, selling your shares on the Australian Securities Exchange (ASX) should be relatively easy. However, if you hold shares in a private company, the process can be difficult. The company’s constitution may restrict how and when you can sell your shares and finding someone to invest in a niche, private company may be difficult.
How we can help
Slater and Gordon can help you by:
- Providing you with advice about your rights and obligations as a shareholder in a company
- Assisting you to negotiate a resolution regarding an existing dispute with company or a shareholders dispute
- Representing you in any legal proceedings relating to a company or shareholder dispute