Overview – Understanding Shareholder Rights in Canada
While many investors are keen on purchasing shares of companies that satisfy their investment criteria, some forget that shareholders are afforded special corporate and legal rights.
Some investors mistakenly assume that shareholders play a passive role when it comes to corporate affairs, and that only a company’s management has a say in how a company is run, but that is only partially true.
Although shareholders aren’t responsible for the day-to-day affairs of a business, a responsibility that is left to the management team, that doesn’t mean they can only sit idly and hope for the best.
In reality, shareholders are partial owners of a business, whether they own 100 shares or 1,000,000. Therefore, shareholders have every right to participate in certain corporate affairs and cannot simply be cast aside by management.
This article will focus on shareholder rights in Canada and will look at the powers an investor has once they own shares of a company. Other countries have similar shareholder rights but some nuances exist, so for the sake of simplicity, our focus will be limited to Canada.
The Fundamental Right of Every Shareholder
No doubt, the most important point so many shareholders forget is that owning shares means having an ownership interest in a company.
Read that again. Shareholders are owners of the company. Not the CEO, not the management team, the shareholders.
In many instances, CEOs and management teams receive company stock as part of their compensation packages, so many executives are also co-owners of the company they work for, along with any external shareholders.
Recall from a previous article that one class of shares, common shares, affords shareholders voting power. Each share represents one vote.
If a faction of investors wants to pass a certain motion or push a certain agenda, they must ensure their faction controls the most voting power, or successfully convince other factions or individual investors to vote in favour of their motion.
An example of shareholders banding together to affect change is Engine #1, a hedge fund that successfully appointed two of its nominees to ExxonMobil’s Board of Directors after convincing larger shareholders to join their cause.
Therefore, the legal entity (e.g. mutual funds, hedge funds, other institutional investors, individual investors) who possesses the most shares is the de facto “owner” of the company, with that ownership shared between other legal entities with fewer shares.
For example, Warren Buffett “owns” Berkshire Hathaway because he possesses the most shares and, consequently, has the most voting power. Similarly, Jeff Bezos is the “owner” of Amazon because he has the most shares out of all shareholders, and therefore also possesses the most voting power.
The Board of Directors
Although shareholders are owners of a company, not every shareholder may necessarily work at or have any other relation with the company other than owning their shares.
Large publicly traded companies usually have thousands, if not tens of thousands, of shareholders. Obviously, with so many distinct parties it is virtually impossible for all investors to meet and make decisions.
Instead of having all investors meet regularly, a small group of individuals is tasked with representing the interests of all shareholders.
This group is called the Board of Directors, usually abbreviated as “the Board”. Directors are appointed to the Board by shareholder vote.
The Board of Directors represents a company’s shareholders. They are responsible for overseeing a company’s management on behalf of the shareholders and ensuring the needs of shareholders are satisfied.
Boards are comprised primarily of individuals not affiliated with the company: Directors are usually executives of other companies, retired executives, academics, and sometimes individuals who previously held some form of public office (e.g. Stephen Poloz, the ninth Governor of the Bank of Canada, is a member of Enbridge’s Board).
Directors are comprised of individuals both from outside and within the company. At least one person from within the company is appointed to the Board, and this is usually (though not always) the CEO.
Every Board of Directors is led by an individual whose responsibility is to ensure the Board is run as smoothly as possible and to maintain contact with the CEO and other high-level executives.
This individual is known as the Chairman of the Board. The Chairman is appointed by the Directors; sometimes, the Chairman is also the CEO.
It is usually not advisable to have one individual hold the titles of CEO and Chairman, because the Chairman is responsible for overseeing the body that oversees the CEO. Being CEO and Chairman means the CEO is essentially overseeing themselves.
Below is a diagram detailing the relationship between shareholders, the Board, and upper management.
Minimum Shareholder Rights
According to the Government of Canada, if a company issues only one class of shares (e.g. only common shares), then those shares must have, at minimum, the following shareholder rights:
- the right to vote
- the right to receive dividends (if the Board of Directors has declared any)
- the right to receive the remaining assets of the company after it is dissolved
The Government of Canada proceeds to explain that if a company chooses to issue more than one class of shares, each of these three rights must be assigned to at least one class, but one class does not need to have all three shareholder rights. Each right can be assigned to more than one class of shares.
Longer List of Shareholder Rights
After receiving their shares, Canadian shareholders have the following rights:
- Vote at shareholder meetings (assuming their shares have voting power).
- Receive a share of the profits (i.e. dividends).
- Receive a share of the assets of the company when the company is dissolved.
- Be notified about shareholder meetings and attend them.
- Elect and dismiss board members.
- Appoint the auditor of the company (or waive the requirement to have an auditor).
- Examine and copy corporate records, financial statements, and directors’ reports.
- Receive the corporation’s financial statements at least 21 days before each annual meeting.
- Approve major or fundamental changes.
It’s important not to conflate “rights” with “obligations”. For example, every shareholder has the right to vote, but they aren’t forced to do so, much like how some people choose not to vote in government elections.
At best, shareholders are encouraged to exercise their rights. You aren’t going to lose your shares because you chose not to vote at this year’s annual shareholder meeting – in fact, you aren’t even obligated to attend the annual shareholder meeting at all.
Resolutions
When shareholders decide to vote on a specific issue, decisions are made by ordinary, special, or unanimous resolutions.
- Ordinary Resolutions: these resolutions require a majority (50% plus 1) of votes. Electing directors, appointing auditors, or approving by-laws and by-law changes are carried out by ordinary resolutions.
- Special Resolutions: in this case, special resolutions require the approval of two-thirds (2/3) of the votes cast. Decisions that require special resolutions include fundamental changes (e.g. changing the company’s name), or when selling a substantial portion of a company’s assets.
- Unanimous Resolutions: this type of resolution requires the approval of every investor. An example of a special resolution would be the decision to forego having an auditor.
Unlimited Power? Unfortunately Not
While shareholders enjoy a variety of rights, that does not mean they can bully the Board of Directors or management into doing all their biddings.
For example, the right to dividends. Although shareholders have the right to receive dividends, the company is not obligated to pay them, assuming they have a valid reason not to.
Some companies, such as Berkshire Hathaway and Tesla, do not pay dividends, citing that the funds are best kept in the company to be reinvested for future projects and other initiatives, thereby increasing shareholder value via an increase in share price.
Berkshire Hathway’s Class A shares have long been ranked as one of the most expensive stocks in the world, and Tesla’s share price has also increased dramatically since 2020.
Because they’ve successfully delivered on their promise to increase shareholder value by retaining all earnings, there’s really no need for investors to revolt and suddenly demand a dividend.
Also, although shareholders have the right to request corporate records and financial data, companies are not obligated to share all information.
Companies can keep certain records and pieces of data private while being obligated to release others.
For example, a shareholder cannot request Coca-Cola to disclose the recipe for their beverage concentrate (i.e. the specific mix that makes the Coca-Cola drink), as it is considered an important trade secret by Coca-Cola and is central to their business success.
While shareholders can access a wide variety of information, they cannot access everything. Some corporate records may undermine certain competitive advantages or business operations if disclosed to the public, and subsequently, end up in the hands of competitors.
Companies are required to disclose certain documents, such as earnings data, executive pay, and annual reports, but they are not required to reveal everything.
Wrapping Up
Being a shareholder affords an investor several rights that they can freely exercise as they please.
Shareholders are owners of a company and therefore have a voice when it comes to specific corporate matters and deciding who oversees a company’s management.
While shareholders enjoy several rights, that does not mean the company has to obey all demands. Companies may choose to forego paying dividends or to retain certain bits of highly sensitive information deemed too important to be publicly disclosed.
