The Rights of a Shareholder in a Proprietary (Private) Limited Company

What are the rights of a shareholder in a private limited company? Whether it’s your first time buying shares, you’re diversifying your sizeable portfolio, or you’re looking to build a passive income stream, it is first important to understand the rights of a shareholder in a private limited company.

As Townsville’s most trusted legal service, with over 125 years of experience, we at wilson/ryan/grose have seen the frustration and confusion that arises when shareholders misunderstand or misinterpret their shareholder rights all too many times.

If you’ve been asking yourself, “what rights do I have as a shareholder?” it is vital to first understand just what the position a shareholder is before being able to understand your rights as a shareholder.

What is a Shareholder in Business?

A shareholder is a part-owner of a company, regardless of how much or little you’ve invested.

You become a shareholder in a company if: 

1. The company issues shares to you; or
2. A previous shareholder in the company transfers their shares to you (typically for a price), and when the company registers this transfer. 

A shareholder does not participate in the company's daily business activities they have invested in; rather, they enjoy certain rights and responsibilities as a shareholder. So, what rights do shareholders have?

Rights of a Shareholder in a Private Limited Company

The rights of a shareholder in a private limited company will depend on what type of shares are held, be it ordinary shares or preference shares.

Preference Shares vs. Ordinary Shares

Ordinary shares carry no special or preferred rights, and ordinary shareholders will be the last type of shareholders to be paid out in dividends. There is some risk as an ordinary shareholder; if the company ‘goes under’ or is ‘wound up’, ordinary shareholders may miss out on being paid dividends as preference shareholders are paid first.

Preference shares give their shareholder ‘preference’ over ordinary shareholders when it comes to payments of dividends or upon the closure of a company. Preference shares may offer a guaranteed dividend payment set at a specific level, providing a sense of certainty. However, this means preference shareholders may miss out on the potential for higher dividends beyond the specified level in the event a company exceeds initial expectations.

What Rights Do I Have as a Shareholder?

Shareholders rights will depend on the company’s constitution (if it has one), any executed shareholder agreements, and the guidelines and rules set out in the Corporations Act 2001 (Cth).  

As a general rule of thumb, shareholders enjoy the following rights:

1. Right to access financial records of the company 
   As part owners of the company, shareholders can inspect a company’s books or records to judge how well the company is doing. Companies often provide audited financial statements or reports to the shareholders for this purpose.
2. Right to attend shareholder meetings and vote on certain issues
   Arguably the most important right a shareholder has, this right enables shareholders to participate in certain aspects of corporate decision-making, including the right to appoint directors, the right to make proposals, and the right to vote on certain major decisions.
3. Right to attend the Annual General Meeting (AGM)
   An Annual General Meeting (AGM) is the annual gathering of a company’s shareholders, where the directors of the company present the shareholders with the company’s annual report, commenting on its performance over the year. In this meeting, shareholders have the opportunity to comment on the path forward and give opinions on certain decisions.
4. Right to sue for wrongful acts
   The rights of a shareholder in a private limited company include the right to sue directors and executives for wrongful acts.
5. Right to transfer ownership
   When considering ”what rights do shareholders have?”, one of the most important rights a shareholder has is the ability to trade their ownership interest or shares, subject to the governing documents of the company.  Shares in public companies may be traded on the ASX. 

Common Difficulties Experienced by Shareholders

Although many people buy shares, there are some common difficulties experienced by shareholders, including:

• Less control over company management than expected
• Difficulty in accessing company information
• Difficulty in selling your shares 

Shareholders do not have much control over company decisions, and often can only vote on key issues, often need at least 5% of votes to obtain financial information, and may experience restrictions on when exactly they can sell their shares as per a company’s constitution. 

How wilson/ryan/grose Can Help

Understanding the rights of a shareholder in a private limited company can be hard to navigate alone.

At wilson/ryan/grose, our experienced, dedicated, and diligent team of business lawyers can advise you in the negotiation of shareholder disputes, offer advice as to your rights and obligations as a shareholder, and represent you in any legal proceedings related to shareholder issues. 

As regional Queensland’s leading experts in business law, we’ll work tirelessly to achieve the best result for you.

If you require assistance in the area of share ownership or shareholder dispute resolution, contact us on 1800 974 529 to discuss how we can best help you move forward.