Residual Claim

Marguerite Vale owns 200 shares of Halloway Chemical common stock, held in her own name. Which of the following does that ownership NOT entitle her to do?

1. A.Inspect Halloway's list of shareholders and its annual financial statementsShe can do this. Inspection of the shareholder list and the financials is a standard common shareholder right.
2. B.Vote on a proposed merger of Halloway into another corporationShe can do this. Mergers and other fundamental changes are put to a shareholder vote.
3. C.Receive a proportionate share of any assets remaining after creditors and preferred shareholders are paid in a liquidationShe can do this. That residual claim is precisely what common stock represents, even though it ranks last.
4. D.Require the board to declare a dividend in a year in which Halloway is profitableCorrect as the exception. Dividends are declared at the board's discretion; common shareholders cannot compel one.

Why: Common shareholders hold a bundle of rights: voting on directors and on fundamental corporate changes such as a merger, inspecting the shareholder list and the corporation's financial statements, and taking a residual claim on assets in liquidation after creditors and preferred shareholders are satisfied. The one thing that bundle never includes is control over the dividend. Declaring a dividend is a board decision, and even a profitable company may lawfully retain everything it earns.

In a corporate liquidation, a common stockholder's claim on the remaining assets is...

1. A.Equal in priority to preferred stockholdersPreferred ranks ahead of common in liquidation.
2. B.Last, after creditors and preferred stockholdersCorrect — common stock has a residual claim, paid only after everyone else.
3. C.First, ahead of all creditorsCommon stockholders are paid last, not first.
4. D.Ahead of bondholders but behind preferred stockholdersBondholders (creditors) are paid before all stockholders.

Why: Common stockholders have a residual claim: they are paid last, after secured and unsecured creditors, bondholders, and preferred stockholders.