What is a Shareholder? Understanding the 3 Types of Shareholders According to the Latest Regulations

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When exploring the stock market, one fundamental concept is the shareholder. In this article, we will break down what a shareholder is, the three main types of shareholders in a joint-stock company, and the rights they hold. This will enhance your knowledge of the stock market, helping you make more informed investment decisions.

What is a Shareholder?

A shareholder is an individual or organization that owns at least one share of a joint-stock company. According to Article 4, Clause 3 of the Enterprise Law 2020, shareholders are contributors of capital, and their investment corresponds to the number of shares they own in the company.

Shareholders can be categorized into major and minor shareholders based on the percentage of shares they hold. Major shareholders typically have a significant influence on company decisions, while minor shareholders hold smaller stakes.

For instance, a major shareholder may own 10% of a company, giving them more voting power in critical business decisions. A minor shareholder, holding less than 1%, will have less influence but still receives dividends.

Types of Shareholders

Shareholders in joint-stock companies are divided into three primary categories: common shareholders, founding shareholders, and preferred shareholders.

1. Common Shareholders

Common shareholders are individuals or organizations holding common shares in the company. They have voting rights at shareholder meetings and are entitled to dividends declared by the company.

Example: If you own common shares of a large corporation, you can vote on company policies and receive dividends based on the company’s profits.

2. Founding Shareholders

Founding shareholders are those who signed the founding charter of the company and hold at least one common share. They contribute capital at the initial stages and have specific privileges, particularly in the first three years of the company’s formation.

For instance, founding shareholders must collectively hold at least 20% of the common shares when the company is registered.

Example: If you were one of the original investors in a startup, you would be considered a founding shareholder, with certain rights and responsibilities for at least the first three years.

3. Preferred Shareholders

Preferred shareholders are divided into three main types, based on the type of preferred shares they hold:

Voting Preferred Shareholders

These shareholders have more voting power than common shareholders. However, only founding shareholders or government-authorized organizations can hold voting preferred shares.

Example: A founding shareholder holding voting preferred shares may have two votes per share, doubling their influence compared to common shareholders.

Dividend Preferred Shareholders

Dividend preferred shareholders receive higher dividends than common shareholders or a guaranteed fixed amount annually. However, they typically do not have voting rights.

Example: If a company pays a 5% dividend to common shareholders, dividend preferred shareholders might receive 8% as part of their special agreement.

Redeemable Preferred Shareholders

These shareholders hold shares that can be repurchased by the company under certain conditions or at the shareholder’s request.

Example: A shareholder might receive their invested capital back after five years if they hold redeemable preferred shares.

Rights of Shareholders

Each type of shareholder has distinct rights and responsibilities, as outlined by law.

Rights of Common Shareholders

• Voting Rights: Common shareholders can vote at general meetings, with one vote per share.
• Dividend Entitlement: They are entitled to dividends as decided by the general meeting.
• Pre-emptive Rights: They have the right to purchase newly issued shares proportional to their current holdings.
• Transferability: Common shares can be freely transferred, though restrictions may apply to founding shareholders in the first three years.

Rights of Founding Shareholders

• Founding shareholders have similar rights to common shareholders but face restrictions on transferring their shares within the first three years.
• They must hold at least 20% of common shares when the company is registered.

Rights of Preferred Shareholders

• Voting Preferred Shareholders: They have enhanced voting power on significant company matters.
• Dividend Preferred Shareholders: They receive higher or guaranteed dividends but usually cannot vote.
• Redeemable Preferred Shareholders: They can request the company to repurchase their shares, depending on the terms.

Duties of Shareholders

Shareholders are obligated to:

• Fully pay for the shares they have committed to purchase.
• Comply with the company’s bylaws and governance rules.
• Follow the resolutions passed by the board of directors and the general meeting of shareholders.

Example: If you agree to purchase 100 shares of a company, you must pay for all of them, regardless of market fluctuations.

Strategic and Existing Shareholders

Besides the primary categories of shareholders, there are also strategic and existing shareholders.

Strategic Shareholders

Strategic shareholders are investors with expertise in finance and long-term commitments to the company. They provide valuable resources like financial support, materials, and market access, helping the company grow.

Example: A multinational corporation that invests in a local company as a strategic partner to offer guidance and resources for expansion.

Existing Shareholders

Existing shareholders are those who already hold shares when the company issues new ones. They have the right to buy new shares according to their current ownership percentage.

Example: If you own 5% of a company and it issues more shares, you will have the opportunity to maintain your 5% stake by purchasing new shares.

Conclusion

Understanding the various types of shareholders and their rights is crucial for anyone involved in the stock market. Whether you are a common shareholder, a founding shareholder, or hold preferred shares, each role comes with specific privileges and responsibilities. With this knowledge, you can confidently navigate the stock market and make informed investment decisions.