Shareholders need to know or understand their rights

Financial Standard

By Odhiambo Ocholla

As the debacle and wrangles in the board of listed firm CMC Holdings continues, it is important for other shareholders who have invested interest to understand and know what their right are in the company or any other listed company.

Buying a share means ownership in a company and ownership gives you certain rights. Though the wrangle is not healthy for investors’ confidence it’s commendable that Capital Markets Authority is moving with speed to find a solution and get to the bottom of the problem by appointing a forensic auditor to investigate alleged fraud at the firm. The rights of shareholders are largely set out in the company’s bylaws.

Shareholders must be proactive in exercising their legal rights to protect their investments in the companies they have invested interest. Investors who buy shares enjoy a number of rights pertaining to their ownership.

As part of investors’ education, it’s significant for shareholders to appreciate their rights and responsibilities in the companies, which they are invested.

Shareholder’s Rights

Shareholders have the right of voting on major issues. This includes electing directors and proposals for fundamental changes affecting the company such as mergers or liquidation. Further shareholders do have a right of ownership in a portion of the company. Also shareholder has a right to transfer ownership of his shares freely through the Nairobi Securities Exchange.

This, in other words, means you are allowed to trade your share on an exchange. The right to transfer ownership might seem ordinary, but the liquidity provided by stock exchanges is extremely important. Liquidity is one of the key factors that differentiate stocks from an investment like real estate. If you own property, it can take months to convert your investment into cash.

Because shares are so liquid, you can move your money into other places almost instantaneously. Further shareholders or investors have a right to dividend entitlement. Also shareholders have opportunity to inspect corporate books and records.

This opportunity is provided through a company’s public filings, including their annual reports. This isn’t such a big deal, as public companies are required to make their financials public. Strong and enhanced shareholder rights are crucial for the protection of shareholders against poor management.

Legal rights

Minority shareholders in most companies typically have little power to influence the governance of the companies and the conduct of its business through the exercise of their voting rights. The majority shareholder or shareholders have enough shares of the company’s shares to control the business.

But minority shareholders are not without legal means to protect their interests in the listed companies, and they are not without legal remedies to obtain redress for wrongdoing by corporate insiders and other persons in control of the companies. Shareholders cannot protect their interests and directors cannot fulfill their fiduciary duties, without access to information about the activities of the company and its financial performance.

When a shareholder has been denied the benefit of his or her investment in a company because of the improper actions of corporate insiders and other persons in control of the company, including controlling shareholders or directors of companies, the shareholder has legal remedies.

If a controlling shareholder uses his ability to control the company for his own benefit and in a manner that is detrimental to the other shareholders, a minority shareholder may be able to bring a suit for damages directly against the controlling shareholder for breach of fiduciary duty. If the company itself has been ripped off and suffered a loss as a result of wrongdoing by a corporate insider, a shareholder may be able to bring a lawsuit to pursue the legal claim.

Mr Ocholla is an Investment Banker. Email: [email protected]

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