How easy is it for a rich person to buy out most of a company's stock?

Factual Questions
1

Suppose Bill Gates one day suddenly takes a liking to XYZ Company, and decides he must have a big say in XYZ’s affairs, and decides he wants to buy up most of XYZ’s stock. That stock is currently selling for $27 a share. It is no difficulty at all for Gates, given his immense wealth, to just offer up a buying price of $50 per share (let’s say the company has a million shares, all of which are already owned by others.) Most shareholders would be happy to sell to Gates at once.

Now, what legal obstacles might arise in Gates’ path to becoming majority shareholder? Do companies usually have a rule prohibiting any one individual from owning any more than a minority-fraction share of total stock?

Also, what if XYZ is a semi-public owned company, such as a government-run airline (like a national air carrier?)

Finally, what percentage of stock does an individual usually have to own to have truly tyrannical power? 80%?

2

Why wouldn’t 50.1% be sufficient?

3

I had read that there are safeguards built in to prevent a mere 51% from being able to ride roughshod over the 49%, but don’t know what those safeguards are.

4

You are describing a hostile takeover. There are various methods that can be used to attempt the takeover, and various strategies that can be used by the target company to fend off such a takeover attempt. More information on hostile takeovers here.

5

Thanks, figured there had to be a term for it.

6

Companies can have different classes of common stock that have differing voting rights. A Class B share of Berkshire Hathaway, for instance, gives you 1/1500th of the voting rights of a Class A share. Consequently, the mix of shares that would give you voting control differs by company according to how their stock is structured; I’m not sure if one could usefully characterize a “usual” case.

Warning: most of my knowledge about stocks & bonds comes from playing Railroad Tycoon.

7

There’s also poison pill strategies, where a taken-over company becomes problematic or worthless to the taker-over. Having said that, I don’t know what a common poison pill would be.

8

Poison pills take varied forms. Often, they are a “shareholder rights” plan allowing smaller shareholders to buy more shares at a reduced price if any shareholder amasses more than a certain percentage of the company, thereby reducing the takeover artist’s interest in the company (along with the value of everybody’s shares, and there’s the rub). Investopedia’s definition:

9

The SEC requires anyone whose shareholdings in a publicly traded company exceed 5% to file a Schedule 13D report. Subsequent material changes to the holdings also need to be notified, and the SEC puts notifications on a publicly accessible database. So as your raider’s shareholdings gradually grow, other investors would realise that there is something going on; for instance, other market participants might start to speculate on Bill Gates’ interest in that company and buy shares themselves, which, in turn, can make the takeover prohibitively expensive.

10

The easiest way to handle such a takeover attempt would be to simply contact the Board of Directors and make an offer. Send a letter saying something akin to, “I’m interested in buying XYZ and taking it private. I offer 130% of the current share price as of date X/X/XX.”

After that happens the board can consider the offer. If they accept it as in the best interests of the shareholders it can either just be accepted or go out to a vote. There may be provisions allowing shareholders to either take case for their shares or accept shares in the new firm - or even a third firm if they prefer. I generally advise my clients to take the cash and we’ll find something useful to do with it.

11

This surprises me - the BOD can basically force me to sell my investment? I’m not doubting it (this is your line of work), it had just never occurred to me that it was possible.

Or is it that a majority of the shareholders will likely follow the board’s recommendation and sell a controlling interest, so there is no sense of me with my 45 shares fighting it?

12

It’s also possible that there will be some set of shareholders who between them hold a majority, who collectively decide that they just won’t sell, even at the significantly-inflated price. This might be a negotiating strategy, because they think (correctly or not) they can talk Gates into paying even more, or it might be for non-financial reasons, such as wanting a company to stay in the family.

13

‘Hostile takeover’ and OP’s question don’t entirely overlap. The purchaser might

  1. Just buy the stock bit by bit in normal market transactions. That’s not considered a hostile takeover even if management/board of directors of the company doesn’t like it.
  2. Management/board might accept the buyer’s plan for an organized tender offer (a single transaction where all willing shareholders sell at a single designated price), not hostile.
  3. When the buyer presents such a single offer against management/board’s objection, that’s a hostile takeover.

There are no restrictions on 1. in the US other than reporting as was mentioned in a previous answer, assuming it’s a minority stake. The management of a public company can’t tell investors in the market who to sell their stock to. And if a single activist investor has even 10% of the shares of a company where no other single entity holds nearly that % (which is often true of big companies), they can often exert a large element of control, if not ‘truly tyrannical’ however that might be defined.

In 2, existing management/board agrees with the organized takeover process so they and the acquirer work together to try to get over any hurdles in local laws where the company is incorporated (govt authorities might object due to antitrust, national security, industrial policy, etc concerns)

In 3, the management/board take advantage of any company bylaws, encourage a competing bid from more friendly parties, try to enlist govt help, etc to thwart it.

But again hostile/friendly ‘takeover’ is talking about an organized process to bid for a majority or all of a company’s shares at a price, usually at a premium to the prior market clearing price. Which usually makes sense if you want a majority rather than risk driving up the price in individual transactions to an average perhaps higher than that single premium price. But if a ‘rich person’ just wants a degree of effective control, and the existing shareholdings are diffuse, then they can just buy up a sizable minority stake in normal market transactions. It happens often, is more common than hostile takeover battles which have become relatively unusual in recent years.

14

It can’t, but having the consent of the BOD makes it easier for the acquirer to take over the target. That is because (1) a BOD which disagrees with a takeover offer might try to engage in a series of defensive tactics to fend off the takeover; (2) many (particularly small) shareholders are more likely to be convinced that it is in their own interest to accept the offer if the BOD says so.

Having said that, in some jurisdictions there is a process for majority shareholders to legally force minority shareholders to sell their shares to them, in order to acquire complete ownership. This is called a squeeze-out. This requires a very large existing majority, however (95% in Germany), and thus typically comes at a much later stage after a successful hostile takeover, rather than as a strategy to perform such a takeover.

15

The rules for buy-outs of publicly traded companies are laid out by the regulatory bodies that govern the exchanges on which the companies are traded. They vary by jurisdiction. There are tender offers, hostile takeovers, etc. Companies, private equity firms, sovereign wealth funds, private individuals, that are in the business of buying other companies, employ attorneys, financial engineers, etc. to make sure that they are abiding by the laws of the land when they begin to undertake such plans.

16

On the question of small minority shareholders that don’t wish to sell their stake, there are various techniques that can be done, to force the sale. If I own 95% of the stock of a company that I have acquired in a tender offer of shares, but there are a handful of shareholder that make up the remaining 5% that didn’t sell, then I can make the company to declare a reverse stock dividend, that effectively reduces the number of shares outstanding. Say there are a million shares outstanding. They company can say now that they are reducing the number of shares to 10,000. So for every 100 shares you own you turn them in and you get 1 share in return. This will force a significant number to sell. You can keep repeating this till there are no other shareholders.

17

You are basically describing a tender offer. The Securities and Exchange Commission has issued rules governing the fair administration of a tender offer. For a basic introduction to those rules, see here: https://www.sec.gov/fast-answers/answerstenderhtm.html

No.

Well, the United States doesn’t have a government run airline that has issued stock, so this is hard to contemplate. The closest examples I can think of are Fannie Mae and Freddie Mac. They have a complicated history as Congressionally-chartered but privately-owned companies that issued debt. That debt wasn’t supposed to be backed by the federal government but when the Fannie Mae and Freddie Mac couldn’t meet their obligations during the financial crisis, the U.S. government stepped in to make their bondholders whole. In the process, the government took a 79.9% equity interest in each of the companies but there are minority shareholders in those companies to this day.

For most companies, any amount over 50% will be plenty. For companies with large, dispersed, unorganized, and uninvolved shareholders, a much smaller percentage may suffice to get control. However, even a controlling interest in a company may not be enough for true tyrannical power over other shareholders.

Generally speaking, the directors of the corporation owe a duty to the corporation itself and to all of its shareholders, not just to the majority shareholder. So, the board should not take action that unduly disadvantages minority shareholders. That said, there is a lot of room for disagreement (and lawsuits) when a closely-held corporation makes decisions that seem to benefit the controlling shareholder more than other shareholders.

Nope. He was discussing a friendly takeover because the shareholders are mostly happy to accept the price offered.

True but can’t we keep it simple for the OP before we complicate things even more? :wink:

Yes, some companies try to make it difficult to be acquired unless the board and/or management approves.

Absolutely true, if Bill Gates were to try to quietly acquire a company by buying a few shares at a time on the market without anyone noticing. It doesn’t really work that way.

Different companies’ charters permit their respective boards of directors different authority. Acquisitions of some companies can be approved by the board and acquisitions of others require shareholder approval.

Good post.

18

This is a great post, but one nit–a friendly/hostile takeover refers to whether the board (i.e. company management) supports the deal–not shareholders. If a majority of stockholders won’t accept the price offered, there is no deal.

19

The poison pill I was aware of - one company adopted a pill that basically said - if any single shareholder acquires 20% of outstanding shares, at that point the board may(may) authorize issuing extra shares to every other shareholder - so that let’s say, instead of 1M shares for the company, there would now be 1.8M. The value of the takeover artist’s 200,000 shares suddenly is almost half. IIRC, this company sold - with consent of the board - for several hundred million, so trying a hostile takeover could cost them say, $50M. (When Air Canada and Canadian Pacific were fighting over who gets who, Air Canada signed long-term commitments with some partners that would have been expensive to break, thereby reducing its value as a merger).

Note the difference between large shareholders and the board. The large shareholders may control the board, nominate and vote members onto the board - but the board itself is obligated to look out for *all *shareholders, even the minor ones. If they lose sight of this obligation, the SEC and class-action lawsuits are waiting to remind them of it. If you want to see what happens with boards, and are bored, read Barbarians at the Gate. The management of RJR-Nabisco thought they could pull a fast one - talk their tame board into letting them (management) buy out the company at $55 a share, since share prices were well below what they should be, the company was oozing money. they had good old boy board members with executive jet privileges and all sorts of perks. The board balked, said legally they had to go by the book, ask publicly for competing bids. KKR jumped in and started bidding the price up. When the dust settled - $108.

Also note the board may include executives, but the board is a separate entity from management. Management makes the decisions and approved day-to-day operations. The board approves these actions, budgets, general directions,etc. (or boots the CEO out).

Absolutely, the board may simply buy out the minority shareholders. Most takeovers involve a requirement to acquire a specific percentage of stock (say 66%, but 50%+1 works) If the buyout company reaches that goal, the board may declare they are going private, they are recalling all shares at “fair market value” and handing 100% ownership to the buyer. BUT - the whole process must be fair. One grumpy stockholder can’t stop the deal; but if there is a significant question about whether the offer is actually fair, the courts could tie up the deal for years. Or… the buying company may decide to keep running it as a partially owned subsidiary, and let the minority shareholders keep their shares. The danger is that the taken-over company’s management must be very careful not to give the new majority shareholders any special consideration at the expense of the shareholders. That is generally too much hassle, if the whole point was to make the company part of a bigger empire working together.

(Let’s say you’re a company that makes transmissions, or airbags, or tires. Ford acquires 60%. If you give too good a deal to Ford, or fail to chase other customers, the remaining 40% might figure you’re not working in their best interest as well - and sue.)

20

That’s not a nit, it’s a straight up correction but you’re right and I was wrong. I don’t know what I was thinking. You’re absolutely correct. I attribute my error to spending 9 weeks of COVID-19 related house arrest. At least I can leave to walk the dog.