Rights & Responsibilities as a Shareholder: What Should You Consider as a Shareholder?
Right to a Lot
When you invest in a company and buy shares, you gain various rights. For instance, you can sell your shares at any time, provided you find a buyer. You are therefore not normally bound to remain a shareholder for any specific period.
Right to Have Your Voice Heard
A company’s annual meeting, known as the annual general meeting (AGM), is open to all shareholders. Typically, the financial results of the previous year are presented, the board of directors is elected or re-elected, and decisions are made about potential dividend distribution.
The AGM is an opportunity for you as a shareholder to meet those who govern the company and vote on the proposals put forth by the board and sometimes other shareholders. It gives you a chance to influence the company’s future. The individual with the most shares usually has the most say at an AGM. However, everyone has the right to stand up and speak for their cause. This allows even small shareholders to try to convince larger ones to vote for a proposal and have their say in how the company is governed. It’s important to note that different decisions require different majorities. For instance, changes to the articles of association require a larger majority (if the shares have equal voting rights), so at least two-thirds of the shares represented at the meeting must vote in favor. However, to issue new shares (the general meeting decides on a rights issue), a simple majority is usually sufficient, meaning that the decision has received more than half of the votes cast at the meeting. In Sweden, companies can have different classes of shares (read our article on A- vs B-shares: HERE), but the difference in voting power cannot be greater than 10 times, for example, 10 votes for an A-share and 1 for a B-share.
Right to Information
To keep track of how the company you’ve invested in is actually progressing, you, as a shareholder, have the right to access information. Companies on the stock exchange are therefore required to report on their financial situation every quarter. The information requirements that apply to listed companies are not applicable to these unlisted companies. Therefore, they do not have the same obligation to report their financial performance, which can be a risk in itself. Therefore, newsletters, information meetings, the AGM, and the annual report are important sources of information in an unlisted company.
Right of Pre-emption When the Company Issues New Shares
When a company needs to raise new money, it often issues more shares than those already in existence (read more about share issues: HERE). For existing shareholders, this means that their shares will be diluted, representing a smaller portion of the company after the new shares are issued. The more shares, the smaller the portion of the company each share represents. Therefore, existing shareholders often have the right of pre-emption to buy the new shares or to be involved when something else happens with the shares in a company. Read more about Dilution: HERE.
Profits Can Become Dividends
A company can have a high valuation even if it is not making a profit (e.g., Klarna or Spotify). As an investor, you want to get a return, either by selling shares or through dividends. If a company you own shares in has made a profit, the AGM may choose to distribute parts of the profit to the shareholders or retain the money within the company for use in its development. This is how it works with a dividend:
- The company must prepare an annual report every year. The annual report summarizes all income and expenses for the past year. Usually, you can also read about the company’s future plans.
- If the company has made a profit, the board presents a proposal for how the profit should be used. How the profit is used depends on the existing plans and the financial situation of the company, and often, consideration is given to the external environment.
- If there are plans for investments in the coming years, the board may propose that the company’s profit be saved instead of being distributed to the shareholders. By retaining the profit within the company, it can be used to finance and expand the operations. This can be a strategy to ensure adequate resources for planned investments and enable growth in the company.
- If no major investments are needed or if there is money left after setting aside funds for investments, the board may instead propose to distribute all or parts of the profit to the shareholders.
- At the AGM, shareholders vote for either the proposal put forward by the board or alternative proposals that arise at the meeting.
- The company pays a dividend to you for each share you own. Normally, dividends are paid once a year, but it has become more popular to pay on a quarterly or semi-annual basis (common in, for example, the USA). Keep in mind that depending on your tax situation, the state wants its share.
But responsibilities? Almost none.
As a shareholder, you have no responsibilities towards the company in which you buy shares. You do not need to pay the company’s debts, even though you receive a share of its potential profits. You do not need to be involved in deciding the company’s future, even though you have the right to do so. You can buy a share and not think about it again until the day you sell it.
No responsibilities, almost.
As mentioned, you have no responsibilities towards the company, but you have responsibilities towards the state or sometimes other shareholders.
Shareholders must report their shareholdings, dividends, and the profits made from the sale of shares. You do this through your income tax return in the years you sell shares. In the listed environment, it’s quite straightforward as you usually receive a pre-filled K4 form from your broker, which is sent along with your income tax return. In the unlisted environment, it’s also relatively simple, and you manually fill in a K12 form (which is quite similar to a K4) instead.
In unlisted companies, it’s also common to have shareholder agreements that regulate the relationship between shareholders (you can read more about shareholder agreements: HERE).
As always, it’s important to do your own research and consult a financial advisor before making investment decisions.
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