A primer on the role of shareholders

ABC’s hit show “Shark Tank” has brought a good deal of attention to the inner workings of the business world. The show is designed to help struggling entrepreneurs find investors to help build a growing business. Although entertaining, this is just one way a business can grow. Other businesses may find capital through the use of shareholders.

Shareholders are individuals who provide money to a business in exchange for certain legal rights. The process results in the shareholder owning stock in the company. As a result, the stockholder has some say in what happens in the business. Exactly how much say has often been debated and the role of the shareholder appears to be undergoing an evolution that could lead to confusion and commercial litigation.

A recent article in the Huffington Post addressed this issue, noting that the commissioner of the Securities and Exchange Commission (SEC) is pushing back on the freedoms shareholders have to question certain business decisions.

Role Of The Shareholder

Shareholders do not technically own the business; instead, they own securities or stocks. Shareholders provide the capital the business needs to grow and, in exchange, have a certain claim over profits. How this translates into control over the company is unclear. Some in the business community argue that the power to make decisions lies with directors while others say businesses are most successful when shareholders guide the process.

The Harvard Business Review recently addressed this debate, noting that the move to give power to shareholders in the 1970s has caused a “muddled mess.” Because shareholders only have claim to securities, the final say in the decision-making process generally goes to the board of directors. In addition, the current role of shareholders may become even less powerful as some executive officers are pushing for proposals from shareholders to be ignored.

Shareholder Proposals

Shareholders can make recommendations for the company in a shareholder proposal. Generally, a shareholder must meet certain criteria to qualify to make a proposal in the first place. One way this criterion may be satisfied is if a shareholder owns a certain percentage of the company.

Shareholders are criticizing the move to step away from proposals. They argue that proposals provide a valuable voice to shareholders in the direction of the business.

Shareholders’ Rights Threatened? Legal Counsel Can Help.

Recourse is available for those who feel their rights as a shareholder were violated. As a result, those facing a business dispute should contact an experienced business litigation attorney to discuss their situation and help better ensure that all legal rights are protected.