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San Diego Corporations: What are Shareholder Rights?

When you become a shareholder of a San Diego corporation or any corporation in California, you become an owner of some interest in the company. As an “owner,” you have certain rights, just like the owner of land has certain rights, like the owner of an automobile has certain rights, etc. Ownership in general can be defined as a bundle of rights associated with possession. You buy shares of stock or other equities in a corporation and as such, you have rights.

San Diego Corporate Law: Where are My Rights Defined?

Your rights as a shareholder are defined in three places – corporate articles of incorporation/bylaws, shareholder agreements (if any) and California law.

San Diego Corporate Law: What are My Shareholder Rights?

In general, in some quantity, from as low as “none” to as high as “all,” a San Diego shareholder has the following rights:

  • Right to be treated fairly by other shareholders
  • Right to review books and records
  • Right to receive profit distributions
  • Right to vote for corporate directors
  • Right to control the corporation
  • Right to sell shares

The right to be treated fairly is the strongest right. This simply means that the other shareholders have to treat you fairly, particularly with respect to money. If you own shares that are entitled to a profit distribution, your shares must receive the same distribution as other shareholders. For example, you cannot receive a $10 distribution while other shareholder get $100 distribution. In general, this right cannot be limited and is created by law.

The right to review books and records is also a right created by law and one that, generally, cannot be limited. This right means that, upon reasonable notice and a corporate-related reason, a shareholder can review various corporate records like the minute book, financial statements, etc. This right helps enforce the right to be treated fairly.

The right to receive profit distribution when distributions are made CAN be limited up front, but such limitations are rare. At the same time, there is no right to INSIST upon a profit distribution. That decision is made by the board of directors. San Diego and California corporations can create classes of shares, for example, “common shares,” “preferred shares,” “profit shares,” etc. Each class of shares is defined by the articles of incorporation and the corporate bylaws. Whatever class of shares you buy must be defined in advance. Thus, if you buy shares that limit profit distributions, that limitation or those limitations must be defined up front.

The right to vote is also a right that can be limited. Voting and non-voting share classes are common. If you buy non-voting shares, you must be notified of that limitation up front. By agreement or by the articles of incorporation, voting shares can be broadly defined or narrowly defined. In general, one share equals one vote; but that can be redefined. Sometimes “preferred shares” entitle the holder to cast 10 votes for each share. Voting rights for shareholders are generally limited to “major” corporate decisions,, changes to the bylaws and electing the corporation’s board of directors. Unless otherwise stated, a majority of the voting shares will elect the board. The board controls the corporation including hiring managerial employees.

The right to control the corporation only exists if you have enough votes to elect the Board. If you do not have enough shares/votes to elect the majority of the Board, you are considered a “minority shareholder.” You do not have the right to control, but you have the right to be treated fairly, you have the right to profit distributions when distributions are made, and you have the right to vote.

The right to sell your shares depends on whether there is a market for the shares. With large publicly-traded corporations, the right to sell is often sort of assumed because it is so easy to sell the shares. However, with small, closely-held corporations, the right to sell may not exist as a practical matter if there is no buyer. In general, you cannot INSIST that the corporation buy back your shares. Furthermore, the right to sell is often limited and/or prohibited for small corporations by agreement or in the articles of incorporation/bylaws. But such limitations must be set out prior to purchase of the shares. Aside from limitations in a shareholder agreement or in the bylaws, if you have a buyer, you have a right to sell your shares.

Call San Diego Corporate Law Today

If you want more information or need legal advice relating to setting up your San Diego corporation, call experienced business attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” for 2015, 2016 and 2017 by Contact Mr. Leonard by email or by calling (858) 483-9200.

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Schedule a Consultation: 858.483.9200