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Being an active Shareholder

Previously we looked at what stockbrokers are and what their role is.  In this article we will   look at duties and rights of shareholders.

Being an active shareholder starts with the understanding of different types of financial securities a company can issue and rights/laws attached to those securities. Companies generally issue one or more of types of securities inorder to raise capital.They can issue ordinary shares, preference shares and debentures or bonds. Investors who buy shares (ordinary or preference) are actually buying an equity or ownership interest in a company.  Buying debenture or bond is a kind of loan to the company.  In return, the investor receives interest and repayment of the face amount of the bond at the end of period (maturity).

Usually the company's charter will state that, only ordinary shareholders have voting privileges and preference shareholders must receive dividends before ordinary shareholders. The rights of bondholders are determined differently because a bond agreement represents a contract between the issuer and the bondholder. The payments and privileges the bondholder receives are governed by the indenture (terms of the bond/ contract).

Shareholder rights may be summarised as:

  • Voting on major company issues: Ordinary shareholders, unlike preference shareholders, get to vote on strategic and other issues affecting the company e.g. appointing the board of directors (management), change of company names, etc.
  • Share profits & losses: The company management may declare a portion of the profits generated during a specific financial year as dividends. The company does not necessarily distribute all profits made to shareholders. The remaining money is left in the company for future development of the business, and hopefully generates more profits and thereby increasing share value.
  • Right to company information: Through annual reports and other company publications, you will be informed of your company’s activities.
  • Suing for wrongful acts: Shareholders can sue directors of any wrongful act such as enriching themselves at the expense of the company, corporate scandals, etc.
  • Pre-emptive rights: Should a company wishes to issue additional shares, it should offer them firstly to existing shareholders before inviting outsiders.
  • Liquidation: Bondholders and other creditors must be paid firstly, preference shareholders will be next and ordinary shareholders will be the last to be paid, they are the corporate equivalent of hyena that eats, after the lions have eaten their share.

 Moreover, minority shareholders are offered protection by the legislation in cases of corporate transactions such takeover, mergers & acquisition so that they don’t get bullied by shareholders who have majority shares or a big controlling stake.

Therefore active shareholding can only come through with the correct understanding and application of these rights.

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