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Sub: Finance

Topic: Financial Markets

Legal Rights and Privileges of Common Stockholders
The common stockholders are the owners of a corporation, and as such they have certain rights and privileges.  Control of the Firm A firm’s common stockholders have the right to elect its directors, who, in turn, elect the officers who manage the business. In a small firm, the largest stockholder typically serves as president and chairperson of the board. In a large, publicly owned firm, the managers typically have some stock, but their personal holdings are generally insufficient to give them voting control. Thus, the managers of most publicly owned firms can be removed by the stockholders if the management team is not effective. State and federal laws stipulate how stockholder control is to be exercised. First, corporations must hold periodic elections to select directors, usually once a year, with the vote taken at the annual meeting. Frequently, onethird of the directors are elected each year for a 3-year term. Each share of stock has one vote, so the owner of 1,000 shares has 1,000 votes for each director. Stockholders can appear at the annual meeting and vote in person, but typically they transfer their right to vote to another party by means of a proxy. Management always solicits stockholders’ proxies and

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Sub: Finance

Topic: Financial Markets

usually gets them. However, if earnings are poor and stockholders are dissatisfied, an outside group may solicit the proxies in an effort to overthrow management and take control of the business. This is known as a proxy fight.  The Preemptive Right Common stockholders often have the right, called the preemptive right, to purchase any additional shares sold by the firm. In some states, the preemptive right is automatically included in every corporate charter; in others, it is used only if it is specifically inserted into the charter. The preemptive right enables current stockholders to maintain control, and it also prevents a transfer of wealth from current stockholders to new stockholders. If it were not for this safeguard, the management of a corporation could issue additional shares at a low price and purchase these shares itself. Management could thereby seize control of the corporation and steal value from the current stockholders. For example, suppose 1,000 shares of common stock, each with a price of $100, were outstanding, making the total market value of the firm $100,000. If an additional 1,000 shares were sold at $50 a share, or for $50,000, this would raise the total market value to $150,000. When total market value is divided by new total shares outstanding, a value of $75 a

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Sub: Finance

Topic: Financial Markets

share is obtained. The old stockholders thus lose $25 per share, and the new stockholders have an instant profit of $25 per share. Thus, selling common stock at a price below the market value would dilute its price and transfer wealth from the present stockholders to those who were allowed to purchase the new shares. The preemptive right prevents such occurrences.

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Sub: Finance

Topic: Financial Markets

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