Section 1.4: Rights of Common Stockholder 

  • Voting rights (statutory vs. cumulative).

  • Dividend process (Declaration, Ex-dividend, Record, Payable → “DERP”).

  • Transferability, inspection rights, and preemptive rights

Overview

  • Stockholders (shareholders) are owners of a corporation and have specific rights that come with their ownership.

  • While they do not control daily operations, they can influence corporate policy through voting rights and share in the company’s profits (dividends)

🏛️ Basic Rights of Common Stockholders

Common types of securities include:

  • Right to Receive Dividends (if declared)

  • Right to Vote (for the Board of Directors and major corporate matters)

  • Right to Transfer Ownership (sell or gift shares freely)

  • Right to Access Corporate Information (annual reports, financials)

  • Preemptive Right (maintain proportional ownership when new shares are issued)

Dividends

What Are Dividends?

  • Dividends are distributions of a company’s profits to its shareholders.

  • They are not guaranteed — only paid if approved (declared) by the Board of Directors (BOD).

  • The amount received is based on the number of shares owned..

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Types of Dividends

  • Cash Dividend Paid in cash — sent by check or directly deposited into the brokerage account (“street name”). Usually paid quarterly. Taxed in the year received. May be qualified (lower tax rate) or nonqualified (taxed at ordinary income rate).

  • Stock Dividend Company issues additional shares instead of cash. Shareholder owns more shares, but at a lower cost per share. Not taxable when received; cost basis is adjusted downward.

  • Product Dividend Company distributes its own products to shareholders (rare). Generally taxable as ordinary income.

💡 Example (Stock Dividend Calculation)

  • An investor owns 200 shares at $60/share = $12,000 total value.

  • If the company declares a 20% stock dividend, the investor receives 40 new shares (200 × 20%), now owning 240 shares total.

    • New cost basis = $12,000 ÷ 240 = $50/share.

📅 Important Dividend Dates (DERP)

  • D – Declaration Date The Board of Directors approves the dividend payment and sets the record and payable dates. Company makes it official.

  • E – Ex-Dividend Date Set by FINRA or the exchange. The first day the stock trades without the dividend. Must purchase before the ex-dividend date to receive dividend.

  • R – Record Date The stockholders of record on this date receive the dividend. Must own the stock as of this date to qualify.

  • P – Payable Date The dividend is paid to shareholders of record. Dividend disbursing agent sends payment.

🧠 Remember:

  • DERP = Declaration, Ex-dividend, Record, Payable.
    To receive a dividend, an investor must buy the stock before the ex-dividend date.

🗳️ Voting Rights

  • Common stockholders typically have the right to vote on:

    • Election of the Board of Directors (BOD)

    • Major corporate changes, such as mergers or charter amendments

    • Because attending meetings in person is not always possible, shareholders may vote by proxy — a written authorization allowing another person to vote on their behalf.

Types of Voting

  • Statutory Voting One vote per share, per director position. Benefits large shareholders.

  • Cumulative Voting Shareholder can allocate all votes to one or more candidates. Benefits smaller shareholders.

Example:

  • XYZ Corp elects 3 directors.
    A shareholder owns 100 shares.

    • Statutory voting: 100 votes per seat (max 100 votes per candidate).

    • Cumulative voting: 300 total votes (100 × 3) — may allocate all 300 to one candidate or split them.

🔁 Transferability of Shares:

  • Common stock is freely transferable — investors can sell or gift shares without company approval.

  • Transfers usually occur electronically through brokerage accounts.

📊 Right to Corporate Information:

  • Shareholders have limited access to company records, including:

    • Minutes of board meetings.

    • List of shareholders.

    • Annual audited financial statements (Form 10-K).

    This promotes transparency and protects shareholders’ interests.

⚖️ Preemptive Rights:

  • Existing shareholders often have the right of first refusal if the company issues new shares.
    This allows them to maintain their proportional ownership and avoid dilution.

  • 💡 Example: If a shareholder owns 10% of the company, they have the right to buy 10% of new shares issued to keep that same ownership percentage.

✅ Quick Review Summary

  • Dividends Paid only if declared by BOD; can be cash, stock, or product.

  • Voting Vote for BOD and major matters; can be statutory or cumulative.

  • Transferability Shares can be sold or gifted freely.

  • Access to Records Can review corporate books and annual reports.

  • Preemptive Rights Maintain proportional ownership when new shares issued.

  • Dividend Dates (DERP) Declaration, Ex-dividend, Record, Payable. Must own before ex-date to receive dividends.

Next Section

✺ Review questions ✺

  • Declaration, Ex-dividend, Record, Payable (DERP).

  • The Board of Directors (BOD).

  • Cumulative voting.

  • No — must purchase before the ex-dividend date.

  • The right of shareholders to buy new shares first to maintain their ownership percentage.