Basic Concepts Of Common And Preferred Stocks - The Rights

Stock Voting Rights

Common stockholders, unlike preferred stockholders, have the right to vote for the corporate board of directors, who, in turn, have complete control of the company. Each stock gives the stockholder one vote for each director position that is up for voting, but that vote may be apportioned in 2 different ways. Statutory voting allows using all votes for each of the vacancies for the board of directors; cumulative voting increases the number of votes that a stockholder can use for a particular candidate. For instance, if there are 4 different vacancies on the board and a stockholder owns 500 shares, then a statutory voting privilege allows the stockholder to cast 500 votes for each of 4 candidates for the 4 vacancies for a total of 2,000 votes, but no more than 500 can be cast for any candidate. Cumulative voting would give the shareholder 2000 votes (500 X 4) that could be apportioned in any way: all 2000 votes for one candidate, or 1,000 for one, 500 to each of two others, and none to the others, for instance.

If a stockholder cannot attend a meeting to vote, then he can cast his vote by proxy through the mail, or having someone else at the meeting to cast his vote.

However, the voting privilege is not as much as a privilege as the word may suggest:

• Shareholders don't select the nominees.

• Directors can win without a majority, so withholding votes is usually ineffective. However, many companies are requiring majorities for directors to be elected.

• When stocks are held in street name, your broker can vote your shares without your permission, but starting in 2010, they will require your permission.

• Stocks held by a mutual fund or pension are technically owned by the fund, so only the fund's managers can vote the shares.

• The Securities and Exchange Commission may adopt a new rule that would require that companies include in their proxy materials the nominees of shareholders of large companies who own at least 1% of the shares.

Right To Information

In addition to the reports that a shareholder receives, which includes an audited financial statements every year, he also has the right to the minutes of the meetings of the board of directors and to examine the list of stockholders, although these rights are not usually exercised.
 

Pre-emptive Rights

A pre-emptive right is the right of existing stockholders to purchase new issues of the company stock before it is offered to the public, so that existing stockholders can maintain proportionate ownership of the company, if desired. Although most states have laws that give shareholders pre-emptive rights, the company may, depending on the law, pay stockholders a fee to waive their pre-emptive rights or the pre-emptive rights may exist only if so specified in the corporate charter. Pre-emptive rights were more prevalent in the past, but are rare today.

When the corporation does give its stockholders pre-emptive rights, it generally issues subscription rights that show how many shares the stockholder can buy and at what price. For instance, if shareholder John Doe owns 10% of the company, and the company issues 100,000 new shares of stock, then the company will allow John Doe to buy at least 10,000 shares of stock before the stock is presented to the public, so that he can maintain his proportionate ownership of the company. He can refuse to buy any new issues, or only some of them, but then his ownership percentage in the company will decline, and along with it, the number of pre-emptive rights received in any future rights offering.

Rights To Dividends

A corporation does not have to distribute profits to shareholders in the form of dividends, and indeed, many growth companies re-invest profits for greater growth rather than distribute them to shareholders, but if the company does declare a dividend, which is equal to a specific amount for each share of stock, then common shareholders are entitled to the dividend amount times the number of shares that they own. However, common shareholders have inferior rights to dividends than preferred shareholders, if the company has preferred shareholders.

No Stock Rights For Beneficial Owners Of Shares Held In Street Name

Most retail investors use brokers to buy and sell stock, and these stocks are usually held in the broker's name or the street name as it is usually called. This is done so that the securities are readily available for trading and it reduces the costs of transferring certificates. It also allows the broker to lend out the securities for a fee to others who want to sell the stock short. Because the stocks are actually in the name of the broker, the broker's customers who actually bought or borrowed the stock are considered to be the beneficial owners of the stock, and, hence, they have no stock rights—no right to vote, to receive information or dividends. In fact, the registrar of the stock does not even have the names of the beneficial owners, only the real owners who are the brokers for the stocks held in street name.

However, most brokers do pass the information and dividends that they receive for the stock to the beneficial owners, and they will generally vote the way the beneficial owners request.

However, there could be a problem with voting if the stocks were lent to be sold short, because a broker does not have the voting rights for stock lent out or sold short; otherwise more votes could be cast than are allowed by the number of outstanding stocks. However, a broker may still be able to vote the stocks according to the instructions of the beneficial owners if the broker has other shares of the same stock that was not lent out and if some of the beneficial owners have not sent instructions to vote a particular way. However, if the broker does not have enough shares to satisfy all requests to vote, then the votes may be apportioned according to the number of requests for voting and the number of shares held by each beneficial owner compared to the number of shares available for voting. For instance, suppose John is the beneficial owner of 300 shares of XYZ stock and Jane is the beneficial owner of 500 shares of XYZ stock, and both use the same brokerage, but their broker lent out 400 shares to be sold short. If John and Jane both issue voting instructions for different board candidates, then the broker can only vote half of the shares still retained, so the broker would vote 150 shares according to John's instructions and 250 shares according to Jane's.

There is no similar problem for dividends, because borrowers of stock are required to pay the dividend to the lenders of the stock.