In recent years, thanks to innovations among stockbrokers and stock trading reformed by Robinhood and Revolut, the buying and selling of securities has completely changed. New generations no longer call their broker to buy a security, and they do not even intend to open their laptop, since trading shares today is roughly as simple as ordering a pizza.
You can realise more than just profit on your security
One of the purposes of trading listed shares is to realise capital gains, where the profit comes from the difference between the purchase price and the sale price. However, in addition to capital gains, certain shares may also entitle us to receive dividend payments from the given company. Dividend payment naturally does not arise from the generous charity of the company limited by shares, but from the membership rights attached to the share, which belong to the owner of the share at any given time.
This share entitles its owner to 2 free scoops of ice cream per month
In a broad sense, a security is nothing more than a unilateral legal declaration. Its subtypes include old-fashioned instruments such as bills of exchange and cheques, but shares also fall into this category. A share is a security that embodies membership rights exercisable in a given company.
Under Hungarian regulation, classic shareholder rights include the right to participate in the general meeting, the right to vote and, last but not least, the right to dividends. However, based on the permissive rules of the Civil Code, the scope of shareholder rights may be further expanded, and only our imagination — and the legal framework — can limit the creation of such rights. By creating other share classes, almost any right embodied in a security can be established, so it is not excluded that a confectionery operating as a company limited by shares could offer free scoops of ice cream to shareholders, for example upon presentation of the share.
Security or business quota?
When looking for investment opportunities, we probably do not primarily examine the corporate form of the target company. Although the share of a company limited by shares often functions similarly to the business quota of a limited liability company — for example, both entitle the holder to exercise certain rights in the company — there are still plenty of differences between the two. In general, it can be stated that provisions and principles negotiated in an investment agreement can be incorporated much more easily into the deed of foundation of a limited liability company. For example, in the case of a limited liability company, certain rights and obligations may be linked directly to the persons of the members. In the case of a company limited by shares, however, these rights are not linked to the persons of the shareholders, but to the share itself, which is owned by the given shareholder. In most cases, from this point on the situation becomes so complicated that even highly experienced investors greatly require legal support.
Rights attached to shares complicate even the simplest cases. The shares of a company limited by shares consist, on the one hand, of ordinary shares, which provide the classic shareholder rights mentioned above. For rights differing from these, such as drag-along or tag-along rights, the company limited by shares must issue different classes of shares. In the best case, this should be done in such a way that the rights and obligations attached to the shares cover, as far as possible, everything the parties negotiated in the investment agreement. As a result, however, the process is not only costly, but also requires a great deal of paperwork and administration from corporate, regulatory and legal perspectives.
An intermediate solution may be available if the investor trusts the target company enough not to require that its rights arising from the investment agreement be transferred to the level of the shares. In this case, however, the rules negotiated in the investment agreement are not incorporated into the articles of association of the company limited by shares, the shares embodying the individual rights are not issued, and as a result the investor is protected exclusively by the investment agreement.
So what about Tesla shares?
A Tesla shareholder may exercise their voting rights at general meetings. In theory. Under Hungarian regulation, shareholder rights may be exercised if the shareholder has been entered in the company’s share register. In Tesla’s case, however, shareholders may fall into two categories. On the one hand, there are “stockholders of record”, meaning shareholders recorded in the share register whose shares come directly from Tesla, and on the other hand there are “beneficial owners”, whose shares do not come directly from the company but indirectly from a bank or broker, so they may effectively be considered the beneficial holders of the share. Therefore, if we are not Tesla founders, we most likely belong to the second group. According to Tesla’s official information regarding its 2020 annual general meeting, beneficial owners of shares had to receive information concerning the exercise of their voting rights not directly from Tesla, but from their broker.
„No Guarantee of Rights”
Most brokers protect themselves in their general terms and conditions so that they do not ultimately remain liable if the shareholder is unable to exercise certain rights after all. This is no different, for example, in the case of Revolut either, where point 1 of the general terms and conditions already states that, regardless of the fact that we purchased shares through them, we should not assume that we can exercise the rights arising from those shares. They even expressly highlight that the payment of dividends attached to a share and the exercise of voting rights are not guaranteed. It should be added, however, that most market-leading dividend-paying companies limited by shares could not afford, even due to reputational loss, for dividends not to be paid to their shareholders for some reason. Moreover, browsing online forums, most people have spoken positively about being able to exercise the voting rights attached to their shares even where those shares were held with smaller mobile brokers.