Do Small Business Investors Have the Right to Take Over and Issue Shares Without Owner's Permission?

Shareholders’ Rights and Responsibilities

Many companies are owned by their shareholders. Shareholders are ultimately responsible for appointing directors and members of the management team. They are not responsible for the actions of the company. Likewise, they do not deal with the daily running of the business unless they are also directors. They may be able to make some decisions regarding the business. Customarily, the shareholders determine how a company is owned and managed.

The rights of shareholders are based on the type of shares they own, which is referred to as the class of shares. The specifics related to the class should be included in the shareholder’s agreement and articles of incorporation. Company shareholders will often have basic responsibilities to uphold, including taking at least one share of a limited company, agreeing to contribute to the value of their shares, accepting the power to change the structure of the company, transferring shares to other investors, issuing additional shares after the company is formed, granting rights and powers to company directors and appointing and removing directors. In exchange for their investment, shareholders often receive dividends based on the number and value of shares.

Ordinary Shares

Many new companies issue ordinary shares, which gives every share equal rights. Each person who owns a share often has the right to attend general meetings, the right to receive dividends, the right to cast one vote at a general meeting and the right to receive a distribution related to the remaining capital if the business closes. Shareholders also have the right to access the articles of incorporation.

In exchange for investing money in shares, the investors receive a portion of the profits in return. The financial responsibility of the shareholders is restricted to the value of the shares. If the business is in debt and cannot afford to pay bills, this is the company’s responsibility, not that of the shareholders.

Minority Shareholders

Minority shareholders are shareholders who own less than 50 percent of a company’s issued shares. They generally have less control over managing and directing the business. They have less power because all of their shares can be cancelled out by majority shareholders. Another distinct difference between minority shareholders and majority shareholders is that they are only required to contribute the nominal value toward company debts.

Shareholders’ Agreement

The instructions regarding management are usually included in the shareholders’ agreement. This agreement typically incorporates provisions related to new investors and how they become part of the agreement. These agreement often include complex provisions, such as vesting terms and additional mechanisms that explain how they can get a return on the investment. The agreement usually also contains specific instructions regarding the issuance of shareholders. It usually includes provisions for how a shareholder can get out of the business by selling his or her shares or taking other action. There may also be provisions related to forcing out a shareholder or having ways to dilute a shareholder’s share and weight in the business.

Additionally, shareholder agreements may explain how disagreements are handled, who will be on the board, which shareholders will have decision-making activities and whether a shareholder can be ousted from the business.

State Laws

State laws may establish ground rules for establishing a business and regulations regarding the issuance of shares. In addition to complying with the shareholders’ agreement, the business must comply with state laws. The business must usually provide articles of incorporation and other documents with the secretary of state’s office.

Legal Assistance

Individuals who want assistance with structuring their business a certain way or who want help with establishing a shareholders’ agreement may decide to contact a lawyer who is knowledgeable in this area. He or she can discuss the type of business that the owner wants to establish, who will own shares in the business, how many shares should be issued, the relative contribution to receive a share, such as time, cash, intellectual property or other contribution, the tax treatment of the business and provisions regarding vesting in the business. Individuals who would like more information about shareholders’ agreements can discuss their concerns and goals with a business lawyer.

Provided by HG.org

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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