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Common shares are a type of security

Common shares have been described as residual claimants in the corporation because they have a claim to receive the income and assets of the corporation after all other claims have been satisfied. The common shareholders are directly concerned with the success of the business enterprise because their return is direclty linked to the corporation's profitability. The value of the common stock increases as the as the value of a firm increases. In contrast, claims of creditors and preferred shareholders are usually fixed. Once fixed claims have been paid, all remaining value is for the benefit of the common sharehodlers.

Common shares have lower priority and greater risks of loss than other securities but have the potential for greater return than other investments. Because of the risk and expectations, common shareholders are usually given significant control of the corporation through voting rights to select the board of directors to manage the corporation with the goal of increasing its value.

A significant issue in corporate law is the allocation of power between the shareholders and the directors and officers. The primary source for the allocation of power within a corporation is state law. Although the common shareholders are owners who select the directors to act on their behalf, the relation between them is not legally an agency/principal relationship.

In an agency relationship, the law requires the agent to act for the benefit and under the control of the principal. In the corporate context, the principals (the shareholders) do not control the decisions of the agent (the directors). Once elected, the directors must act on behalf of the corporation and all of the shareholders, not for the group that elected them. This system makes economic sense if one views owners as the suppliers of equity capital and passive investors and the managers as the investment specialists.

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