These Are the Rights You Have as a Shareholder of a Corporation

Not Legal Advice. I am not an Attorney. Nothing here constitutes legal advice and should never be construed to establish an attorney-client relationship. For legal advice, please seek out a lawyer.

Corporations, and the subsequent law surrounding them, have a long history in modern society. Corporations have an ‘endless lifespan’ so they are the ideal legal vehicle for expansive businesses and any business looking to carry on a legacy. Simply entrusting one person to an entire business, or an expansive network like the Catholic Church could spell disaster. Instead, these expansive entities throughout history developed the first remnants of what became the modern-day corporation. Over centuries of Jurisprudence and rich people screwing each other over, developed the modern-day corporate law.

As a preface here, I am often asked why I don’t like SAFE’s in the context of equity crowdfunding and investing. While I am not going to act like these rights are particularly expansive, they can be important if you end up on the wrong side of an investment. These are “base” rights that have been given to shareholders, and duties from the directors to the corporation, over the years to ensure an at least somewhat level playing field. SAFE’s are a completely new invention and haven’t been litigated in any capacity, and don’t have these rights, based on current laws.

Vote, Sue, Sell

At the end of the day, those are your rights as a shareholder. Obviously, I will get into it a bit more of this, without getting too much into the weeds, but that's it. There are tons that go into this, so let's get into it.

Sell

We’re starting here because it’s the simplest of all of the rights. You, as a shareholder, have a right to sell your stock. I know, it might seem kind of inherent and self-explanatory, but it wouldn’t be given as a right if someone didn’t try to restrict that ability. In general, the corporation cannot limit your ability to, or pass a resolution that makes hinders your ability to, sell your stock.

For example, if the corporation is intentionally suppressing the value of your stock in order to get you to sell, or does a freeze-out merger resulting in a big payday for the majority shareholder, but you get a raw deal, then this can all infringe on your rights as a shareholder. The underlying idea here is, as a shareholder your contribution to the corporation is purely monetary, so, you should have the right if you don’t agree with management's decisions since, unless you’re a majority shareholder, you have no say. You can effectively vote with your wallet.

Vote

Another way you can vote is, well, by voting. The main thing this entails is voting the board of directors, who make the big decisions for the company, and “fundamental transactions”. Fundamental transactions are basically just statutory mergers, voting to sell the company and dilution past a certain percent. But, it can include a host of other things typically included in the corporate bylaws. Another part of this is this is a right to information and inspect the companies books with a good reason.

Neither of these rights can be infringed, and if they are, you can sue. For example, a corporation MUST hold a shareholders meeting, by law, at least once a year. The actual time frame differs based on states, but it's usually like 14–15 months. If they don’t hold that shareholder meeting, if they do something like move the shareholder meeting around too much to try and make it harder for you to vote, and so on, you can sue to force a shareholder meeting, or for interfering with your rights as a shareholder.

Sue

This is both how you enforce the first two rights and enforce claims against the company for breaches of fiduciary duties.

Directors and Officers of corporations are ‘agents’ of those corporations, and thus have these fiduciary duties to the corporation. These include:

Duty of Care

Duty of Loyalty

Oversight Liability

Anytime a director breaches one of these duties, a shareholder can sue the directors and they can become personally liable, on behalf of the corporation. Further, if the breach is against you, the shareholder, then you can file a ‘direct suit’ and recover personally.

What this looks like, for example, is if Elon Musk went out and said “No shareholder meeting this year.” then the corporation has no suffered any damages, but you, as a shareholder, have a right and interest to vote and can file a direct suit against the board to enforce your ability to vote. This also includes things like improper dilution, ‘Freeze Outs’, and a host of other shady tactics corporations will use to take a pile of cash and screw over minority shareholders. Anytime your investment is hurt, but the corporation is unharmed, its a direct suit.

However, if Elon were to go out and sell one of his former Beverly Hills mansions to Tesla for 100x the going market price, you’d file a “derivatives suit” alleging a breach of the duty of loyalty. Meaning the shareholders would either petition of the board of directors to sue Elon to be held personally liable, or you would go to the courthouse and allege futility (Aka, there’s no way the board would approve this suit, but we need to sue) and you would sue the board/Elon on behalf of the corporation, and any damages would be paid back to the corporation out of the pockets of the Directors.

Duty of Care

The Oversight liability generally falls under the Duty of Care, and generally just means that the board will make informed and rational decisions. For example, if the Board were to go and deliberate for 10 minutes and sell the company or sold the company to a corporate looter who bought the company, and they sold all the assets to others and pocketed the money, that's a breach of the duty of care. This generally means that Boards have to have due diligence when making decisions for the company, they have to be reasoned, and usually involve third parties coming in with expert opinions. They can’t just haphazardly approve things or let the company crumble under their watch from bad decisions.

Further, there’s oversight liability which says that if, for example, your company was secretly running a Ponzi scheme or an illegal drug smuggling ring, the board has to implement reporting mechanisms in place and monitor those mechanisms to make sure that doesn't happen. Now, just because it does happen, doesn’t mean this was breached, but it could mean that.

Duty of Loyalty

This has two parts:

Self-Dealing

The Corporate Opportunity Doctrine

Both of these can actually pretty easily get bypassed, but essentially, Directors can’t “self-deal” and any opportunity that was presented to a director that is in the same line of business as the corporation, must first be presented to the corporation.

Going back to Elon Musk selling his mansion example. That’s self-dealing, but actually, it could be legal. Obviously, Elon selling it at 100x the market price to the company isn’t legal, but as long as “the majority of the disinterested directors approve the transaction” then it's not a breach of loyalty. So, if these people have no interest in the Mansion, and Elon sold it for the market price, then it would fall under the “Business Judgement Rule” and no liability.

Further, the corporate opportunity doctrine is satisfied if the opportunity is first presented to the corporation, then denied, then the director is allowed to take the opportunity for themself. Meaning, if a director got a sweet deal to buy Rivian for cheap, that director would first have to go to Tesla and ask if they want to buy Rivian, and if they say no, the director can buy it.

That’s It

It’s really not that much, but you could see how it could matter. In the context of equity crowdfunding, if you’re investing in a small company that has gone radio silent for a period of time, and you want to hear how your investment is doing, just find out when their last shareholder's meeting was. Once you know that, find out the limitations based on their state of incorporation, and if it is over that threshold, you can file a suit against them in Court to compel a shareholders meeting. If you got improperly diluted, there was a big sale/merger for way more than it’s worth, and you feel like you got stiffed, you can potentially recover, or request “appraisal rights” and receive fair value for your shares, potentially. You get the idea. It’s not much, but it’s enough so that you can hold a board accountable, and you have some recourse if you get screwed over.