Business Advisory: Shareholders

Shareholders and their rights

Shareholders’ rights include financial rights and governance rights.

• Financial rights:
  • Shareholders may receive dividends and funds from the winding-up of a company.
• Governance rights
  • Shareholders, depending on the class of shares they possess, have the right to vote on certain decisions impacting the company and have a right to receive company reports.

Shareholders, because they input capital into the company are effectively the ‘owners’ of the company. The board of directors represent and must act in the interests of shareholders.

Decisions that require shareholder approval

Typically, a special resolution at the company’s general meeting (i.e. at least 75% of the vote) is needed to change:

• The company’s name;
• Adopt, amend or repeal the company’s constitution;
• Change the company’s type (e.g. from proprietary to public);
• Reduce the share capital; and
• Change the rights entitled to shareholders.

As well as appointing Directors, shareholders may also determine the remuneration of Directors.

Do shareholders always have a right to receive dividends?

Not necessarily! Profits can either be reinvested back into the company or paid as dividends. It is up to the board of directors if any profits are paid as dividends and how much.

Dividends are either ‘franked’ or ‘unfranked’ – franked dividends are those upon which a company has already paid tax on. Shareholders are able to claim back the amount stated on the franking credit attached.

Important of a Shareholders Agreement

Shareholders’ agreements govern the shareholders’ relationship with the company and their rights and responsibilities, as well as the protection of both parties’ interests. They are vital in order to determine situations where:

• The shareholder wishes to sell their share(s);
• If disputes arise between the shareholders and the directors of the company; and
• What happens upon the death or disablement of a shareholder or partner (this issue is covered in greater detail in Buy/Sell Agreements).

Common disputes include the right to get information about company operations, the company acting contrary to the interests of its shareholders and employees as well as the company failing to hold general meetings.

A shareholders’ agreement will provide certainty as to the processes used in such circumstances.

If you have further questions, please contact frank@franklaw.com.au

This is not legal advice.