Session 03 | Stockholder Rights and Responsibilities | NRICHMINDS Stock Market Investing

Reading

Background

This lesson is designed to help you think beyond just the profits and losses associated with stock ownership and trading in the Stock Market Game. What does it mean to be a responsible stockholder in a corporation?

Owners of common stock have the right to information about the company. In fact, most corporations have investor relations departments to provide information to and hear from investors. Shareholders also have the right to a share of the company's profits in the form of dividends, if allocated by the board of directors. And they have the right to vote for the members of the corporation's board of directors and on the various issues that come before the board at annual shareholder meetings.

Rights come with duties. Shareholders have the responsibility to submit proxies when they cannot attend meetings in person, and the responsibility to read about prospective board members and proposals so they can be educated voters. They also have the right to submit their own proposals. Often, it is individual shareholders who raise issues about whether a company is behaving as a socially responsible citizen, or issues related to corporate governance. Shareholders also have the right to sell their shares and to buy more shares.

In this session, you will examine various issues facing a corporation and decide whether, and how, you can take action as a shareholder in each situation.

Key Terms

Vocabulary

Tap a card to flip it and reveal the definition.

Annual Report

By law, each publicly held corporation must provide its shareholders with an annual report showing its income and balance sheet. It usually includes a message from the chairman, a description of operations, and an overview of achievements.

Liquidation

The process by which the assets of a business are converted to money.

Long Position

The condition of owning stock. The value of a long position is a stock's current share price multiplied by the number of shares owned.

Proxy

An absentee ballot for a shareholder vote. If you own common stock in a U.S. corporation, you can vote in person at the annual meeting, or authorize the board to vote on your behalf using a proxy, submitted by mail, phone, or online.

Shareholder

An individual or company (including a corporation) that legally owns one or more shares of stock in a company. Shareholders are the owners of a corporation.

Goals

Performance Objectives

By the end of this session, you will be able to:

Determine the rights of stockholders in various situations.
Draw conclusions about the actions individual shareholders can take as responsible corporate owners.
Define: proxy, annual report.

What You'll Use

Materials

Fact Sheet 1: Rights and Responsibilities of Corporate Shareholders
Activity Sheet 1: The Rights of Stockholders in Practice

Warm-Up

Springboard Activity

Imagine you own 1,000 shares of Chew Toy, Inc., the largest producer of interactive toys for dogs and cats. You have more than doubled your money since you first invested in the company four years ago.

The company has recently taken the following actions:

The board of directors has declared a $2 per share dividend.
Management has declared that workers can no longer bring their dogs to work.
Despite recent questions about his performance and policies (e.g. the CEO's dog was allegedly paid $35,000 for posing in the company's catalogues), the board has awarded the CEO a $500,000 bonus.
The company has decided to issue a new stock offering.

The company is holding its annual meeting in Little Rock, Arkansas, and you cannot attend, though you want to vote on several issues on the agenda. You would like to vote against the new policy banning dogs at work. You feel strongly that the CEO's bonus is too exorbitant, especially in light of the controversial payment to his dog. You would also like to buy more shares in the company before outsiders drive up the price.

Discuss: What might you be able to do to have your opinions taken into account during Chew Toy Inc.'s annual meeting? List the three most effective ways to impact the company's actions.

This is a discussion prompt, so there is no single correct list, but a strong answer grounded in shareholder rights would include:

Submit a proxy. Since you cannot attend in person, you can still vote your 1,000 shares against the dog policy and against re-electing directors you disagree with, by completing and returning your proxy ballot (by mail, phone, or online).
Introduce or support a shareholder proposal. You have the right to submit your own proposal to the board, for example asking the company to reconsider the CEO bonus structure or the dog policy, and to have it considered at the annual meeting.
Buy more shares on the open market. Your right to sell shares and to buy more shares is independent of attending the meeting. You can increase your position at any time through your broker; you do not need to wait for or attend the annual meeting to do this.

A fourth option worth mentioning: since shareholders have the right to speak at the annual meeting, if you could send a representative or submit written comments in advance, that is another avenue, though your proxy vote is the most direct way to make your position count if you cannot attend.

Fact Sheet 1

The Rights and Responsibilities of Stockholders

Stockholders of common stock are granted special rights, including:

The right to vote (usually one vote per share owned) on matters such as elections to the board of directors.
The right to share in distributions of the company's income, usually in the form of dividends, if declared by the board of directors.
Though rare nowadays, the right to receive stock certificates as evidence of ownership.
The right to purchase new shares of stock issued by the company, usually before the general public is offered the IPO.
The right to information about the company.
The right to sell shares.
The right to a company's assets during a liquidation, subordinate to the rights of the company's creditors, including bondholders.
The right to speak at the annual meeting of the corporation.
The right to introduce proposals to be considered by the board of directors at the annual meeting.

A person with even one share of stock in a corporation with a million shares outstanding is still a corporate owner, with all the rights of ownership as someone owning 10,000 shares. Since each share generally represents one vote, the more shares you own, the more power you have to vote those shares for or against individuals and issues.

The most important responsibility of the shareholder is to be well informed. Shareholders should read not only the corporate annual report, but all of the information that comes with an announcement of the annual meeting, quarterly reports, special notices, and other corporate communication.

Since annual meetings occur all over the country, shareholders who cannot attend still have the opportunity to vote their shares. Along with the notice of the annual meeting comes a proxy form. This form, when signed and returned by the shareholder, is voted in accordance with the shareholder's wishes. In fact, most individuals, pension plans, mutual funds, and corporate holders of stock vote this way.

On liquidation: Stockholders typically receive nothing if a company is liquidated after a declaration of bankruptcy (if the company had had enough to pay its creditors, it would not have entered bankruptcy). A stock may still have value after a bankruptcy filing if there is a possibility the company's debts will be restructured, meaning the timing, amount, or method of repayment is altered.

Activity Sheet 1

The Rights of Stockholders in Practice

Read each situation. Using Fact Sheet 1, decide whether you have any rights as a stockholder, explain your answer, and reveal a model response.

GOVERNANCE

You own 425 shares of ZEF common stock. You think the members of the company's board of directors should not also be top management, for example, the Chairman of the Board should not also be CEO. As a stockholder, do you have any rights in this situation?

YES You have several rights here. You can vote against (withhold your vote from) any director nominee who also holds an executive role you disagree with. You also have the right to introduce a proposal at the annual meeting, for example, a proposal recommending the company separate the Chairman and CEO roles, and the right to speak at the meeting to explain your position. Your 425 shares give you 425 votes on these matters.

DISCLOSURE

You are a shareholder in PRF Holdings and want a copy of the company's audited financial report for last year and a copy of the prospectus offering new stock to the public, but you want this report before non-stockholders are told about the offering. Do you have any rights in this situation?

PARTIAL You do have the right to information about the company, including the annual report, and as an existing shareholder you generally have the right to purchase new shares before the general public is offered the IPO. However, you do not have a right to receive material financial information ahead of when it is made available to the public. Public companies must disclose material information broadly and fairly rather than giving select shareholders an early look, so your right is to the same annual report and prospectus other shareholders and the public eventually receive, and to a pre-emptive opportunity to buy new shares, not to advance access to the numbers themselves.

SOCIAL RESPONSIBILITY

You think the AIR company is using way too much oil and should change to using wind power for running its factories. You are a stockholder. Do you have any rights in this situation?

YES This is exactly the kind of issue individual shareholders often raise. You can submit a shareholder proposal asking the company to study or adopt wind power, speak to the issue at the annual meeting, and vote for board candidates who share your views on environmental policy. You cannot personally order the company to switch energy sources; that operational decision belongs to management, but you can use your voice and vote to push the board toward it.

SOCIAL RESPONSIBILITY

You believe that workers at EBS Productions should be paid at least double the national minimum wage. You own 800 shares of EBS. Do you have any say on how EBS pays its workers?

INDIRECT SAY You have an indirect say, not a direct one. Wage-setting is a management decision, not something an individual shareholder can dictate. But you can introduce a proposal on worker pay for consideration at the annual meeting, speak about it publicly at the meeting, and vote against directors who you feel are not addressing the issue. With 800 shares, your vote carries some weight, though real change on an issue like this usually requires organizing support from other shareholders too.

VOTING

You cannot attend the next shareholders' meeting; however, you want to vote on a number of issues coming up before the board of directors and you want to vote against two of the directors. You only own 50 shares of MSS. Is there anything you can do?

YES Absolutely. You can submit a proxy, an absentee ballot that lets you vote on every item on the agenda, including voting against the two director nominees, without attending in person. Owning only 50 shares does not limit this right; every shareholder, regardless of how few shares they own, can vote by proxy.

BUYING MORE

You have owned shares of Ollie Enterprises for three years and watched your 100 shares triple in value. You want to increase your ownership of stock in this company but cannot attend the next meeting of Ollie Enterprises stockholders. Can you do anything in this situation?

YES Buying more shares has nothing to do with attending the annual meeting. Shareholders have the right to buy more shares at any time, through the stock market, independent of meeting attendance. Separately, you can still vote your existing 100 shares on the meeting's agenda items by submitting a proxy.

BANKRUPTCY

You own 200 shares of stock in GWB and the company has gone bankrupt and still owes its creditors $1.2 million. You still have not received your money back for your investment and you want that money. What rights do you have as a shareholder?

LIMITED / LIKELY NONE Your right to a company's assets during liquidation is subordinate to the rights of the company's creditors, including bondholders. Since GWB still owes creditors $1.2 million, those creditors are paid first, and if there isn't enough left over after they are satisfied, shareholders typically receive nothing. Your stock may still retain some value only if the company's debts are restructured rather than fully liquidated, but you do not have a right to be repaid ahead of, or equal to, creditors.

SOCIAL RESPONSIBILITY

You are very upset that GWB is clearing acres of trees in Washington to build a new factory 100 miles east of Seattle. You own 500 shares and want to make your views known. What options are open to you as a shareholder? If you did not own any shares, would you have any rights in this situation?

YES, AS A SHAREHOLDER As a shareholder, you can submit a proposal opposing or seeking review of the tree-clearing plan, speak at the annual meeting, vote against directors who support the project, and, if you feel strongly enough, sell your shares in protest. If you did not own any shares of GWB, you would have none of these shareholder rights. You could still act as a private citizen, for example through public advocacy or local environmental regulations, but you would have no standing to vote, propose, or speak at GWB's shareholder meetings.

Reflection

Assessment

Using your knowledge of the rights and responsibilities of stockholders, which rights or responsibilities do you think are most important to you? Explain your answer.

This is a personal reflection question, so answers will vary. A well-reasoned sample: "The right to vote and the responsibility to stay informed matter most to me, because they work together. My vote is only meaningful if I actually read the annual report and proxy materials first. If I ignore that responsibility, I am effectively handing my voice to whoever else shows up informed, usually large institutional shareholders." A strong answer should name a specific right or responsibility from Fact Sheet 1 and explain, in the student's own words, why it matters to them personally, not just restate the definition.

Apply It

Application

"A friend of mine, who is an investor, saw what I was teaching and said: 'Give me a break! No one pays attention to all of that printed material that comes through the mail. They just throw it out. The big shareholders are on the board of directors and of course they want the company to make money, so I leave it up to them to keep the company going strong. My only responsibility is to stay out of their way.'" Based on what we've learned, how would you respond?

A strong response would push back on two points. First, staying uninformed is not a neutral choice; it is the opposite of the shareholder's most important responsibility. If most small shareholders think this way and throw out their materials, they leave decisions entirely to whichever large holders or insiders do vote, which can concentrate power in ways that don't serve the average investor. Second, "the big shareholders are on the board" does not guarantee their interests are perfectly aligned with every shareholder's, which is exactly why individual shareholders have the right to introduce proposals, speak at meetings, and vote against management when they disagree, tools this friend is choosing not to use. Staying out of the way is a valid choice, but it is a choice with a cost, not a responsibility fulfilled.

Go Further

Enrichment Activities

Novice Level

Select two companies from the Dow Jones Industrial Average, go to their websites, and find out what they say about shareholder rights and responsibilities. Prepare a brief essay, no more than 250 words, discussing your findings and your assessment of whether the company does a good job covering this topic for its shareholders.

Apprentice Level

Research the Sarbanes-Oxley Act. How has its passage impacted the rights and responsibilities of shareholders? Do you think these changes are beneficial to stockholders? Explain.

These are open-ended research assignments. Since they call for current information from company websites and legal analysis, they are intentionally left without a model answer here. Please verify anything a student finds against the primary source (the SEC's site or the company's own investor relations page) before treating it as fact.

Added by NRICHMINDS NEW · NOT IN SOURCE PDF

Extra Practice Scenarios

Four additional scenarios to stretch the same concepts a bit further.

MERGERS

You own 300 shares of TRK common stock. The board has agreed to a merger with a competitor, and the deal requires shareholder approval before it can close. You think the merger undervalues the company. Do you have any rights here?

YES Major corporate actions like mergers typically require a shareholder vote, so you can vote your 300 shares against approving the deal, either in person or by proxy. You can also speak at the meeting to explain your objection, and you can look into your state's appraisal rights, which in some cases let a dissenting shareholder demand a court-determined fair value for their shares instead of the merger price, though the availability of that option depends on the state and the deal's structure.

DILUTION

You own 600 shares of NOVA. The company just announced it will issue 10 million new shares to raise cash, which will reduce your percentage ownership of the company. Do you have any rights to protect your ownership stake?

PARTIAL You have the right to purchase new shares of stock the company issues, usually before the general public is offered them, sometimes called a pre-emptive right. If NOVA grants that right to existing shareholders, you could buy enough of the new offering to keep your percentage ownership from shrinking. Not every company offers this right to every shareholder class, though, so whether you can fully protect your stake depends on NOVA's specific offering terms, which you'd need to check in the offering documents.

EXECUTIVE PAY

You own 150 shares of BLT. You think the CEO's pay package, which includes a large stock bonus tied to short-term stock price rather than long-term performance, encourages risky decision-making. What can you do?

YES You can vote on any "say-on-pay" proposal the company puts to a shareholder vote (many public companies hold these periodically), vote against compensation committee members up for re-election, and submit your own shareholder proposal recommending the pay structure be tied more to long-term performance. Your vote alone won't set policy, since these votes are often advisory rather than binding, but it is a legitimate and recognized way to register your concern.

INFORMATION RIGHTS

You own 50 shares of QLD and want to see the full list of other shareholders so you can contact them about organizing a vote against a board proposal. Do you have a right to this?

DEPENDS You have a general right to information about the company, such as the annual report and proxy materials, but the right to obtain a shareholder list is more specific and typically depends on state corporate law (most U.S. companies are incorporated in a specific state, often Delaware) and usually requires you to state a proper business purpose for the request. This is not something Fact Sheet 1 covers directly, so treat this as a flag to research your specific state's requirements rather than a guaranteed right.

🔒 Free to Unlock — Just Sign Up

Background

Vocabulary

Performance Objectives

Materials

Springboard Activity

The Rights and Responsibilities of Stockholders

The Rights of Stockholders in Practice

Assessment

Application

Enrichment Activities

Extra Practice Scenarios