Principal Stockholder

Definition

A Principal Stockholder is an individual or entity that owns a significant number of shares within a corporation. According to rules established by the Securities and Exchange Commission (SEC), a principal stockholder is one who owns 10% or more of the voting stock of a registered company. This level of ownership usually grants the principal stockholder substantial influence over the company’s decisions and operations.

Examples

Individual Investor: Jane Doe owns 15% of the shares of ABC Corporation. As she owns more than 10% of the company’s shares, she is classified as a principal stockholder.
Corporate Investor: XYZ Investment Group owns 12% of DEF Corporation. By holding more than the 10% threshold, XYZ Investment Group is considered a principal stockholder in DEF Corporation.
Family Holdings: The Smith family holds collectively 20% of shares of GHI Enterprises. Because they participate and vote as a bloc, the family is regarded as a principal stockholder.

Frequently Asked Questions

What qualifies someone as a principal stockholder?

An individual or entity becomes a principal stockholder when they own 10% or more of a corporation’s voting stock, as per SEC guidelines.

Why is the role of a principal stockholder significant?

Principal stockholders often have significant influence over corporate decisions, including voting on major initiatives, electing board members, and shaping company policies due to their large stake.

Are principal stockholders subject to specific reporting requirements?

Yes, principal stockholders must adhere to specific reporting requirements under SEC rules, including the disclosure of their holdings and transactions in those shares.

How do principal stockholders influence corporate governance?

By owning a substantial percentage of voting stock, principal stockholders can sway key decisions, exert control over the board of directors, and impact corporate strategy and governance practices.

Voting Stock

Voting Stock refers to shares in a corporation that come with voting rights, allowing the shareholder to vote on matters of corporate policy and the election of the board of directors.

SEC (Securities and Exchange Commission)

The Securities and Exchange Commission (SEC) is a U.S. government agency responsible for enforcing federal securities laws, proposing securities rules, and regulating the securities industry, the nation’s stock and options exchanges.

Beneficial Owner

A Beneficial Owner is an individual who enjoys the benefits of ownership even though the title of property or security might be in another name.

Online References

Suggested Books for Further Studies

“Corporate Governance and Accountability” by Jill Solomon
“The Intelligent Investor: The Definitive Book on Value Investing” by Benjamin Graham
“One Up On Wall Street: How To Use What You Already Know To Make Money In The Market” by Peter Lynch

Fundamentals of Principal Stockholder: Corporate Governance Basics Quiz

### Who is classified as a principal stockholder? - [ ] Anyone owning any amount of shares in a corporation. - [x] Anyone owning 10% or more of voting stock in a corporation. - [ ] Anyone who votes in shareholder meetings. - [ ] Any executive member of the corporation. > **Explanation:** According to the SEC rules, a principal stockholder is an individual or entity owning 10% or more of the voting stock in a corporation. ### What is the primary benefit of owning 10% or more of a company’s stock? - [ ] Receiving higher dividends. - [ ] Getting discounts on company products. - [x] Exerting substantial influence over corporate decisions. - [ ] Automatic election to the board of directors. > **Explanation:** Principal stockholders have substantial influence over corporate decisions and operations due to their significant ownership stake. ### Are principal stockholders required to disclose their holdings? - [x] Yes, they must adhere to SEC reporting requirements. - [ ] No, they can choose whether to disclose. - [ ] Only if the corporation requests it. - [ ] Only for public companies. > **Explanation:** Principal stockholders must comply with SEC reporting requirements and disclose their holdings and transactions involving the company’s stock. ### What voting right do principal stockholders typically have? - [x] Voting on matters of corporate policy and board elections. - [ ] None, only financial benefits. - [ ] Voting exclusively on dividend policies. - [ ] Deciding daily operations. > **Explanation:** Principal stockholders can vote on significant corporate policy issues and the election of the board of directors. ### Can a family collectively be considered as a principal stockholder? - [x] Yes, if their collective holding is 10% or more. - [ ] No, each individual must be evaluated separately. - [ ] Only if each member has a board seat. - [ ] Only in privately-held companies. > **Explanation:** If a family collectively holds 10% or more of the voting stock and votes as a bloc, they are considered a principal stockholder. ### What agency enforces the rules concerning principal stockholders? - [ ] Federal Bureau of Investigation (FBI) - [x] Securities and Exchange Commission (SEC) - [ ] Internal Revenue Service (IRS) - [ ] Federal Trade Commission (FTC) > **Explanation:** The SEC enforces federal securities laws and the rules regulating principal stockholders. ### What might a principal stockholder influence in the company? - [x] Corporate governance and policy decisions. - [ ] Day-to-day operational activities. - [ ] Employee hiring decisions. - [ ] Setting office hours. > **Explanation:** Principal stockholders influence corporate governance and significant policy decisions, not day-to-day operations. ### Why are principal stockholders important to monitor by the SEC? - [ ] To ensure they receive dividends first. - [x] To prevent market manipulation and fraud. - [ ] To provide them additional voting rights. - [ ] To control the quality of the company’s products. > **Explanation:** Monitoring principal stockholders helps prevent market manipulation, promote transparency, and ensure fair trading practices. ### Which document must principal stockholders file with the SEC? - [ ] Form 1-A - [ ] Form S-3 - [x] Form 3, 4, and 5 - [ ] Form 144 > **Explanation:** Principal stockholders must file Form 3, 4, and 5 with the SEC to report their ownership and transactions in the corporation's stock. ### How does a principal stockholder’s decision affect minority shareholders? - [ ] It has no impact. - [ ] Only operationally. - [x] By influencing overall company decisions and policies. - [ ] Exclusively in profit sharing. > **Explanation:** Principal stockholders' decisions directly influence the company’s governance, potentially impacting minority shareholders' interests.

Thank you for learning about the critical role of principal stockholders in corporate governance and completing our quiz. Keep progressing in your financial and corporate governance knowledge!