[This is the second article in a two-part series on the rights of corporate ownership.]
Voting trust certificates: In some instances (particularly in those cases where a company is having financial difficulties), management responsibilities may be temporarily transferred to an outside organization that then operates as a trustee for the company. Stockholders’ voting rights may be relinquished to this board of trustees (also known as a voting trust), and the trustee (typically a commercial bank) issues voting trust certificates to stockholders in place of their stock certificates.
All of the benefits of ownership except the power to vote are retained by the stockholders. The trustee will vote those shares for as long as the voting trust is in existence. Unlike a proxy (the primary way a stockholder can transfer voting rights), the voting power transfer of a voting trust certificate is usually long-term.
Voting trust certificates trade just like stock certificates while the voting trust is in existence. At the dissolution of the voting trust, new stock certificates are exchanged for the voting trust certificates.
When a corporation raises capital through the sale of common stock (or securities convertible into common stock), it may be required by law or by its corporate charter to offer the securities to its common stockholders before it offers them directly to the public. Stockholders then have what is known as a preemptive right to purchase enough newly issued shares to protect their proportionate ownership in the corporation.
To illustrate, a person who already owns 1 percent of the stock of XYZ Corporation will have a preemptive right to purchase 1 percent of any new stock issue. Preemptive rights help ensure that stockholders’ rights (such as voting rights) are not diluted at the issuance of new stock. The subscription price for such an issue of additional stock (that is, the price at which existing stockholders will be able to acquire new shares) is usually lower than market value at the time the rights are offered.
Limited liability: Common stockholders cannot lose more than they have invested in the stock of a particular corporation (in other words, they cannot be forced to pay off the debts of a corporation going through bankruptcy proceedings).
Inspection of corporate books: Stockholders have the right to obtain lists of stockholders, receive annual reports and so on. Inspection rights do not include the right to examine the detailed books of accounts, the minutes of directors’ meetings or financial records.
Protection of the corporation: Stockholders may take the company’s management (including members of the board of directors) to court if they believe that it has committed wrongful acts that could harm the corporation.
Restraint of illegal acts: Stockholders may take action against the board of directors of a corporation to restrain it from acting in a manner inconsistent with the corporate charter.
Residual claims to assets: When a corporation ceases to exist, the stockholder, as owner, has a right to corporate assets. The right is residual in that a common stockholder may make a claim only after all debts and other security holders have been satisfied.
Quote of the Week: “You’re only as good as the people you hire.” — Ray Kroc
Bart Ward is the chief executive officer of Ward & Co. Ltd. an Anoka based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.