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What are Shareholders’ Legal Responsibilities to Each Other?

A shareholder is a person who has an ownership interest in a company. The extent of the ownership interest depends upon the amount of stock in circulation and the amount of stock owned by an individual investor. A publicly traded company may have thousands or millions of shares, each owned by small investors. Minority shareholders may have little power to impact the company operations in these cases. A closely-held private company, on the other hand, may have just one, two, or a handful of shareholders. The shareholders in this case have a much bigger ownership stake and are a much bigger force in shaping the business’ future.

It is important to understand shareholders’ legal responsibilities to each other so you will know what to expect when purchasing an ownership share or shares.  The California business litigation lawyers at Brown & Charbonneau, LLP can provide advice if you are a shareholder who needs help interpreting what your rights are. Our attorneys can also help to develop a comprehensive shareholders agreement designed to protect the interests of all parties.

What are Shareholders’ Legal Responsibilities to Each Other? 

When trading a publicly-traded company, you usually have some legal responsibilities to your fellow shareholders who are also trading the stock, but your obligations are much more limited than in a closely-held company. Obviously, you must comply with insider trading rules, and avoid illegal behaviors like pumping the stock to try to manipulate its price.  However, there are not usually shareholder agreements between the shareholders outlining each owner’s rights and responsibilities.

A shareholder is given votes on business decisions based on the amount of shares he owns. You should always vote for what you believe is best for the long-term viability and profitability of the business.

You do not, however, necessarily have any specific duty to the other shareholders regarding what you do with your stock shares or how your decision affects co-owners. A company could become the victim of a hostile takeover, for example. While the takeover could change the balance of the power and some shareholders (along with company board members) may be against the takeover, you do not have to come to an agreement with the co-owners. You don’t have to respect the wishes of your fellow shareholders by voting no to the takeover or by refusing to sell the stock.

In closely-held private companies, the actions of any individual shareholder are going to have a much bigger impact on how the company does business. These companies are smaller and shareholders may become involved in day-to-day operations of the business. Shareholders often work directly for the company and have contracts in place to protect them.

A shareholder in a privately-held company may have a shareholder agreement in place dictating his specific responsibilities and may be limited in when and how he can sell shares. He also has a fiduciary duty to other shareholders to act in the company’ best interests. The fiduciary obligations a shareholder of a closely-held company are are much greater than obligations of shareholders of a public-traded business.

Expert business litigation lawyers can help you understand shareholder responsibilities so give us a call as soon as possible if you need assistance with a business matter. 714-505-3000