Shareholders' rights law is a part of the all-encompassing business law and securities law. The Securities and Exchange Act of 1934 requires public companies, or companies with stocks trading in exchange houses, to register and disclose financial and any major events that shareholders should know about. Since 1934, numerous legislation, such as the Shareholder Bill of Rights Act of 2009, have been enacted in order to protect and provide more rights to shareholders and address events that have affected shareholders through the years. Shareholders' rights law is derived mainly from the Securities and Exchange Act, subsequent federal legislation, state laws, and court decisions. In addition to laws and agencies created by law to protect shareholders' rights, there are also numerous private organizations, both at state and international levels, which serve as additional watchdogs for shareholders' rights.
Under the law, shareholders are protected by virtue of their being owners of stocks in a corporation. The law provides for priority in the hierarchy of securities issued by the company. Bondholders have the highest priority, followed by preferred stockholders, with common stockholders having the least priority. Each class of securities have accompanying rights and privileges. Bondholders are guaranteed payment but they do not have the same level of control over the corporation as the common stockholders, which have voting rights. Preferred stockholders receive dividends prior to common stockholders, but common stockholders stand to earn a substantial return of investment when the corporation is performing well.
Common stockholders, under the law, are given more rights over the day-to-day management of the corporation, compared to the other classes of securities. Common stockholders are part owners of the company, which means they have a say and a stake in the corporation. Common stockholders can vote on major issues affecting the company, such as mergers and acquisitions, compensation and incentives to executives and directors, and bankruptcy and liquidation. In addition, common stockholders can elect a person or several persons as members of the company's board of directors and present proposals relating to environmental, governance, and social issues. The right of common stockholders to probe into the corporation's books and records is a fundamental, but not absolute, right.
Common stockholders can also file so-called derivative actions to pursue the company for any act that is in violation of the Securities and Exchange Act. One of the common issues arising from shareholders' rights law, would be a corporation's failure to publicly disclose on financial reports and major company events, or the corporation's misrepresentation of these information. Corporations are required by law to disclose the truthful standing of the company in order for shareholders to make informed decisions as to subsequent actions, such as pulling out of stocks. There are numerous instances of companies misrepresenting their finances in disclosures with the U.S. Securities and Exchange Commission, causing shareholders to file shareholders' suits. Stocks are volatile and its prices are easily affected by any movement of the company, which means stockholders are always on the lookout for major events in the company in order to minimize losses with respect to their investment. Shareholders rights' law attorneys are knowledgeable of both the rights of shareholders and how to protect these rights and in litigating against corporations when these rights have been trampled upon.