Shareholders Duties

by Rose Johnson

Individuals who purchase shares of a corporation's common stock have certain duties and rights — enforced by federal and state laws — within the corporation. A majority shareholder is among those who together control 51 percent or more of a corporation's outstanding shares of common stock. Minority shareholders own less than 50 percent of the outstanding shares. The duties of majority shareholders differ from those of minority shareholders. Shareholders must understand their duties and rights to remain in compliance with securities laws and protect their investment interest in a corporation.

Fairness

Majority shareholders must exercise a duty of fairness when dealing with a controlled corporation and minority shareholders. A duty of fairness includes full disclosure to affected parties. Minority shareholders may challenge certain actions of majority shareholders if a conflict of interest exists or if the majority shareholders are not acting in the best interest of the company. According to an article written on the American Bar Association's website, examples of situations minority shareholders may challenge include majority shareholders entering into significant contracts with the corporation or attempting to eliminate minority shareholders of the organization through a freeze-out, a technique used to force minority shareholders to accept cash payments for their shares so that the majority shareholders can acquire all of the remaining shares of the corporation.

Voting Rights

Shareholders do not have the right to vote on day-to-day management decisions. One of the duties and privileges of minority shareholders is the right to vote on the corporation’s board of directors, who in turn appoint managers. The election of directors takes place during scheduled meetings of shareholders, show may appoint proxies to vote on their behalf. This occurs in many public corporations. According to an article written on the website of eNotes, a shareholder must submit in writing the appointment of a proxy, and the proxy is not required to be a shareholder. Other topics shareholders might vote on in a meeting are potential mergers, changes to the articles of incorporation and amendments to the corporate bylaws.

Fiduciary Duties

In many corporations, corporate officers and directors are majority shareholders. Minority shareholders who feel as if majority shareholders failed in their fiduciary duties may file a lawsuit in a federal court to protect their ownership interests. According to Paula J. Dalley of the Houston Business and Tax Law Journal, majority shareholders have fiduciary duties because they possess the power to make decisions that affect the financial well-being of minority shareholders. A breach of fiduciary duty involves all of the corporation’s shareholders and should be addressed through a derivative suit, which acts as representative of a group of shareholders instead of only one.

Shareholder Liabilities

In most cases, shareholders are not personally liable for decisions made by the corporation. Creditors may not pursue shareholders if the corporation is behind on its debt. However, stock investments are not guaranteed by the FDIC. If a company fails financially, shareholders may lose their entire investments. In the case of bankruptcy, holders of common stocks are the last to get paid if anything is left over after all assets are sold to pay for liabilities.

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