Companies require funds to begin or expand their operations. These companies usually rely on equity finance to finance their strategies.
Apart from these, they also have the option to get debt or hybrid finance. In some cases, however, these finances may not be available or not a viable option. Therefore, companies will rely on traditional equity finance.
Equity finance comes when a company issues its shares to investors. Usually, this process requires several steps until the company receives funds.
Once it gets those funds, the company can implement the strategy it requires. Due to the issuance of these funds, the investors become the company’s shareholders. Usually, shareholders stay forever unless they transfer their funds.
Shareholders are one of the most prominent financers for any company. Most companies are the only source of funds. However, there are several types of shareholders that companies may have.
Each shareholder acts differently and constitutes a unique relationship with it. Before discussing those types, however, it is crucial to understand what shareholders are.
What is a Shareholder?
A shareholder is an entity that acquires a company’s shares and owns them. Usually, the process includes buying any shares issued by the company in the market.
However, some shareholders may also acquire stocks from the stock exchange. This process involves paying existing shareholders to transfer their shares to another.
Either way, shareholders are entities that hold a company’s shares.
In most cases, shareholders are individuals that buy a company’s shares. However, it may also include other legal entities.
For example, other companies can also acquire other companies’ shares. In both circumstances, the legal identity of the entity allows them to obtain those shares. Overall, there are no restrictions regarding who a shareholder can be.
When shareholders buy and hold a company’s shares, they will be considered part-owners. This ownership depends on their holdings.
For example, if a shareholder owns 1,000 of the 10,000 shares a company has issued, they will be a 10% owner. In most cases, the shareholders will also receive the same voting rights for their shares.
Being a shareholder gives entities several rights. Firstly, it includes the voting rights mentioned above. These voting rights allow shareholders to influence a company’s decisions.
The second comes in the form of the distribution of profits. Known as dividends, shareholders will receive a percentage if companies allot their earnings. Apart from these, shareholders may also receive other rights based on their jurisdiction.
Overall, a shareholder is a company’s part-owner based on the holdings of its shares. They may include individuals or other legal entities.
Usually, shareholders acquire shares from the company directly. Some shareholders may also obtain them from a market. Once they purchase a company’s stock, they can receive the various rights mentioned above.
What Are the Types of Shareholders?
In most cases, the classification of shareholders occurs based on the type of shares they hold. Most companies have two stock types. These include common and preferred stocks.
Therefore, there are two primary types of shareholders. These include equity shareholders, who buy common stocks, and preference shareholders, which opt for the latter.
Equity shareholders get all the benefits of ownership of a company’s common stock. These include voting rights, which allow them to vote in company meetings.
Similarly, it contains the right to receive dividends when the company distributes them. However, these entities do not get preference in several situations.
On the other hand, preference shareholders do not get the same rights as common shareholders. Usually, this involves no voting rights in company meetings.
They also don’t receive traditional dividends. Instead, preference shareholders get regular payments, which is not a distribution of profits. In essence, these payments resemble interest payments on loans.
The classification of shareholders occurs based on the share class they hold. This classification helps them understand their rights and relationship with the company.
In some cases, however, shareholders may also fall into other categories. These categories do not include the same classification based on their holding. Instead, it may involve the way they interact with the company.
What is an Activist Shareholder?
An activist shareholder is a classification of shareholders based on their interaction with the company. These shareholders use their equity stake in a company to coerce its management. However, they must own enough holding to have their voices heard.
In most cases, a 10% or higher shareholder can constitute an activist shareholder. The higher their holding, the better their chances of creating a change.
Activist shareholders arise from the concept of shareholder activism. This process involves several shareholders exerting their influence or control over their actions.
Activist shareholders usually seek to cause a positive change or improvement in the company’s operations. In some circumstances, these changes may relate to social responsibility.
Other times, it may concern improving the returns on their investments.
Activist shareholders may have various goals. Usually, these goals differ from one group to another. In most cases, these objectives may be financial, for example, growth of wealth or financial performance.
However, it may also involve non-finance goals, for example, environmental issues, social responsibility, etc. While the latter may also relate to external stakeholders, activist shareholders can use their equity stake to expedite the process.
Activist shareholders usually target a company’s operations. However, they may also oppose its directors or management in specific decisions.
As mentioned, they use their votes or equity stake to cause changes. In some cases, however, it may be unsuccessful.
Therefore, activist shareholders may also explore other options. These may include proxy fights, publicity campaigns, or even litigation.
An activist shareholder is a party that uses its equity stake to request a change. Their objectives for this process may differ.
In most circumstances, activist shareholders can cause a change without a significant holding. However, they can also explore other methods if unsuccessful initial efforts are.
What Do Activist Shareholders Do?
A shareholder owns a company’s shares, which also gives them voting rights. However, not every shareholder can control or impact a company’s operations.
Activist shareholders use the concept of shareholder activism to elicit change from the company. This process occurs due to the principal-agent problem where the management may not respond to shareholders’ wishes.
Activist shareholders use their position as the principal to require a change from the underlying company. They use their equity stake to influence their decisions.
Usually, the more stocks they hold, the more they can get their voices heard. However, it is not crucial to own a controlling interest. Although these shareholders may not own a majority stake, they can still use various options to gain traction.
Activist shareholders use a variety of offensive techniques to cause change. As mentioned, they may seek financial or non-financial goals.
For example, they may use the media to gain attention and elicit other shareholders’ awareness. They may even threaten litigation to meet their demands in more dire circumstances.
However, activist shareholders do not elicit change for the sake of it. Usually, these shareholders have an objective related to the company’s shareholding.
These activists don’t work to attract adverse attention to the company. Instead, they seek to bring positive changes that can help them meet their objectives.
Conclusion
A shareholder is an entity that part-owns a company and can impact its operations. Several classifications may exist for shareholders.
Of these, activist shareholders are holders that use their equity stake to require a change in a company’s operations. Usually, they have a goal in mind, which they can achieve by causing the company to meet their demands.
