A shareholder or stockholder is an individual or company (including a corporation) that legally owns one or more shares of stock in a corporation.  A company's shareholders collectively own that company.  Thus, such companies strive to enhance shareholder value.

Stockholders are granted special privileges depending on the class of stock, including the right to vote (usually one vote per share owned) on matters such as elections to the board of directors, the right to propose shareholder resolutions, the right to share in distributions of the company's income, the right to purchase new shares issued by the company, and the right to a company's assets during a liquidation of the company. However, stockholder's rights to a company's assets are subordinate to the rights of the company's creditors. This means that stockholders typically receive nothing if a company is liquidated after bankruptcy (if the company had had enough to pay its creditors, it would not have entered bankruptcy), although a stock may have value after a bankruptcy if there is the possibility that the debts of the company will be restructured.

Shareholders' Meeting

A shareholders' meeting is a meeting, usually annually, of all shareholders of a corporation (although in large corporations only a small percentage attend) to elect the Board of Directors and hear reports on the company's business situation. In larger corporations top management hold the proxies signed over to them by many of the shareholders to vote for them.

Shareholders' Agreement

A shareholders' agreement (sometimes referred to in the U.S. as a stockholders' agreement) is an agreement between the shareholders of a company relating to the ownership and management of the company.

In strict legal theory, the relationships between the shareholders (as between themselves) and between the shareholders and the company are regulated by the constitutional documents of the company. However, where there are a relatively small number of shareholders it is quite common in practice for the shareholder to supplement the constitutional documents with a shareholders' agreement, particularly where the company is in the nature of a joint venture.

Rationale

There are a number of reasons why the shareholders must wish to supplement (or supersede) the constitutional documents of the company in this way:

1. a company's constitutional documents are normally available for public inspection, whereas the terms of a shareholders' agreement, as a private law contract, are normally confidential between the parties.
2. contractual arrangements are generally cheaper and less formal to form, administer, revise or terminate.
3. the shareholders might wish to provide for disputes to be resolved by arbitration, or in the courts of a foreign country (meaning a country other than the country in which the company is incorporated). In some countries, corporate law does not permit such dispute resolution clauses to be included in the constitutional documents.
4. greater flexibility; the shareholders may anticipate that the company's business requires regular changes to their arrangements, and it may be unwieldy to repeatedly amend the corporate constitution.
5. corporate law in the relevant company may not provide sufficient protection for minority shareholders, who may seek to better protect their position by using a shareholders' agreement
6. to provide mechanisms for removing minority shareholders which preserve the company as a going concern.

Characteristics

Shareholders' agreements obviously vary enormously between different countries and different commercial fields. However, in a characteristic joint venture or business start-up, a shareholders' agreement would normally be expected to regulate the following matters:

1. regulating the ownership and voting rights of the shares in the company, including:
   • Lock-up provisions
   • restrictions on transferring shares, or granting security interests over shares
   • pre-emption rights and rights of first refusal in relation to any shares issued by the company
   • "tag-along" and "drag-along" rights
   • minority protection provisions
2. control and management of the company, which may include:
   • power for certain shareholders to designate individual for election to the board of directors
   • imposing super-majority voting requirements for "reserved matters" which are of key importance to the parties
   • imposing requirements to provide shareholders with accounts or other information that they might not otherwise be entitled to by law
3. making provision for the resolution of any future disputes between shareholders, including:
   • deadlock provisions
   • dispute resolution provisions
4. In addition, shareholders' agreements will often make provision for the following:
   • the nature and amount of initial contribution (whether capital contribution or other) to the company
   • the proposed nature of the business
   • how any future capital contributions are to be made
   • the governing law of the shareholders' agreement
   • ethical practices or environmental practices
   • allocation of key roles or responsibilities

Board of Directors

In relation to a company, a director is an officer (that is, someone who works for the company) charged with the conduct and management of its affairs. A director may be an inside director (a director who is also an officer or promoter or both) or an outside, or independent, director. The directors collectively are referred to as a board of directors. Sometimes the board will appoint one of its members to be the chair of the board of directors.

Theoretically, the control of a company is divided between two bodies: the board of directors, and the shareholders in general meeting. In practice, the amount of power exercised by the board varies with the type of company. In small private companies, the directors and the shareholders will normally be the same people, and thus there is no real division of power. In large public companies, the board tends to exercise more of a supervisory role, and individual responsibility and management tends to be delegated downward to individual professional executive directors (such as a finance director or a marketing director) who deal with particular areas of the company's affairs.

Another feature of boards of directors in large public companies is that the board tends to have more de facto power. Between the practice of institutional shareholders (such as pension funds and banks) granting proxies to the board to vote their shares at general meetings and the large numbers of shareholders involved, the board can comprise a voting bloc that is difficult to overcome. However, there have been moves recently to try and increase shareholder activism amongst both institutional investors and individuals with small shareholdings.

Election & Removal

In most legal systems, the appointment and removal of directors is voted upon by the shareholders in general meeting.  Directors may also leave office by resignation or death. In some legal systems, directors may also be removed by a resolution of the remaining directors (in some countries they may only do so "with cause"; in others the power is unrestricted).  Some jurisdictions also permit the board of directors to appoint directors, either to fill a vacancy which arises on resignation or death, or as an addition to the existing directors.

In practice, it can be quite difficult to remove a director by a resolution in general meeting. In many legal systems the director has a right to receive special notice of any resolution to remove him; the company must often supply a copy of the proposal to the director, who is usually entitled to be heard by the meeting. The director may require the company to circulate any representations that he wishes to make. Furthermore, the director's contract of service will usually entitle him to compensation if he is removed, and may often include a generous "golden parachute" which also acts as a deterrent to removal.

Business Judgment Rule

The business judgment rule is a case law-derived concept in Corporations law whereby a court will refuse to review the actions of a corporation's board of directors in managing the corporation unless there is some allegation of conduct that (1) violates (a) the directors' duty of care, (b) duty of loyalty, or (c) duty of good faith; or (2) that the decisions of the directors lacks a rational basis. Courts often analyze the rational basis requirement as part of the director's duty of good faith.

In effect, the business judgment rule creates a strong presumption in favor of the Board of Directors of a corporation, freeing its members from possible liability for decisions that result in harm to the corporation. In short, it exists so that a Board will not suffer legal action simply from a bad decision.

The rationale for the rule is the recognition by courts that, in the inherently risky environment of business, Boards of Directors need to be free to take risks without a constant fear of lawsuits affecting their judgment.  The presumption raised by the business judgment rule may be rebutted by the plaintiff. Typically, defensive actions that are based on threats that are unreasonably perceived, disproportionate to the perceived threat, or "cram a management alternative down shareholder's throats" will successfully defeat presumption of the business judgment rule.

Exercise of Power

The exercise by the board of directors of its powers usually occurs in meetings. Most legal systems provide that sufficient notice has to be given to all directors of these meetings, and that a quorum must be present before any business may be conducted. Usually a meeting which is held without notice having been given is still valid so long as all of the directors attend, but it has been held that a failure to give notice may negate resolutions passed at a meeting, as the persuasive oratory of a minority of directors might have persuaded the majority to change their minds and vote otherwise.

In most common law countries, the powers of the board are vested in the board as a whole, and not in the individual directors.  However, in instances an individual director may still bind the company by his acts by virtue of his ostensible authority.

Fiduciary Duties

Because directors exercise control and management over the company, but companies are run (in theory at least) for the benefit of the shareholders, the law imposes strict duties on directors in relation to the exercise of their duties. The duties imposed upon directors are fiduciary duties, similar in nature to those that the law imposes on those in similar positions of trust: agents and trustees.  In relation to director's duties generally, two points should be noted:

1. the duties of the directors are several (as opposed to the exercise by the directors of their powers, which must be done jointly); and
2. the duties are owed to the company itself, and not to any other entity.  This doesn't mean that directors can never stand in a fiduciary relationship to the individual shareholders; they may well have such a duty in certain circumstances.

Good Faith

Directors must act honestly and in bona fide. The test is a subjective one—the directors must act in "good faith in what they consider—not what the court may consider—is in the interests of the company... "  However, the directors may still be held to have failed in this duty where they fail to direct their minds to the question of whether in fact a transaction was in the best interests of the company.

Difficult questions can arise when treating the company too much in the abstract. For example, it may be for the benefit of a corporate group as a whole for a company to guarantee the debts of a "sister" company, even though there is no ostensible "benefit" to the company giving the guarantee. Similarly, conceptually at least, there is no benefit to a company in returning profits to shareholders by way of dividend.

Proper Purpose

Directors must exercise their powers for a proper purpose. While in many instances an improper purpose is readily evident, such as a director looking to feather his or her own nest or divert an investment opportunity to a relative, such breaches usually involve a breach of the director's duty to act in good faith. Greater difficulties arise where the director, whilst acting in good faith, is serving a purpose that is not regarded by the law as proper.  Not all jurisdictions recognised the "proper purpose" duty as separate from the "good faith" duty however.

Unfettered Discretion

Directors cannot, without the consent of the company, fetter their discretion in relation to the exercise of their powers, and cannot bind themselves to vote in a particular way at future board meetings.  This is so even if there is no improper motive or purpose, and no personal advantage to the director.

This does not mean, however, that the board cannot agree to the company entering into a contract which binds the company to a certain course, even if certain actions in that course will require further board approval. The company remains bound, but the directors retain the discretion to vote against taking the future actions (although that may involve a breach by the company of the contract that the board previously approved).

Conflict of Duty & Interest

As fiduciaries, the directors may not put themselves in a position where their interests and duties conflict with the duties that they owe to the company. The law takes the view that good faith must not only be done, but must be manifestly seen to be done, and zealously patrols the conduct of directors in this regard; and will not allow directors to escape liability by asserting that his decision was in fact well founded. Traditionally, the law has divided conflicts of duty and interest into three sub-categories:

Transactions With the Company

By definition, where a director enters into a transaction with a company, there is a conflict between the director's interest (to do well for himself out of the transaction) and his duty to the company (to ensure that the company gets as much as it can out of the transaction). This rule is so strictly enforced that, even where the conflict of interest or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it.

However, in many jurisdictions the members of the company are permitted to ratify transactions which would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle should be capable of being abrogated in the company's constitution.  In many countries there is also a statutory duty to declare interests in relation to any transactions, and the director can be fined for failing to make disclosure.

Use of Corporate Property, Opportunity or Information

Directors must not, without the informed consent of the company, use for their own profit the company's assets, opportunities, or information. This prohibition is much less flexible that the prohibition against the transactions with the company, and attempts to circumvent it using provisions in the articles have met with limited success.

Competing With the Company

Directors cannot, clearly, compete directly with the company without a conflict of interests arising. Similarly, they should not act as directors of competing companies, as their duties to each company would then conflict with each other.  In practice, it is not wholly unusual to see directors serve for two or more companies in competing fields, but it is tacitly assumed that they may only do so if the companies consent.