What happens when a company buys back all / all - 1 of their stock?
I was chatting with my boss (who is also co-founder), and he’s been unable to find out what happens when a company buys back all of it’s stock. I opined that companies can own shares of other companies, and send a representative to shareholder meetings, so… would the company now be controlled by it’s own representative? That doesn’t seem to make any sense. OTOH, if it has no input at all, then if it buys all-but-one of it’s own shares, then the person with the last share has effective control of the company, which also doesn’t make sense.
Is this process disallowed somehow? Allowed, but impractical for some reasons? Happens, but with different consequences?
Well, I’m not a securities analyst, but as I understand it, when “the company” acts it is really the shareholders – the owners – who act, and management is merely executing their will.
So when Foo, Inc., buys back its stock what is actually happening is that some of the shareholders (whoever doesn’t sell in the buy-back) are buying back the stock held by other shareholders (those who do sell). When you get down to one shareholder, he now owns the company outright, and he can do whatever he likes. He can, for example, simply refuse to sell any of his shares for any price, which is just effectively taking the company private. He can abolish the shares, or change their number arbitrarily, although that may involve some kind of legal filings with the SEC for all I know, and possibly complicate his tax return.
But I don’t see a way that the last shareholder can direct management to buy his own shares. That would sort of be like directing my lawyer and accountant, acting as my agents, to buy my own car. They might well ask: and deliver it to whom, exactly?
Why doesn’t that make sense? At that point, the last shareholder doesn’t just have “effective” control; he or she has full control of the company. At that point, it’s privately held. Actually, I suspect that the status would change before the company got down to one share. Below 500 shareholders the company isn’t required to file with the SEC. And once the number of shares gets low enough, I expect it will get delisted from the exchange, for being too thinly traded.
By the way, for an example, look at the computer company Dell. Until late last year, it was a public company. Then the founder, Michael Dell, took it private with the assistance of a private equity firm. There are almost certainly more than one share of the company and more than one shareholder but the company no longer needs to make statements about its financial performance.