I’m trying to understand a little bit about the concept of share buybacks. When a share is bought back by a company, it’s in effect, destroyed right? That is, if a company manages to buy back all but one of it’s shares, the sole person who owns that single share is now the 100% owner of the company? Is that right or am I missing something?
And what happens if a company manages to buy back all it’s shares? Who now owns the company? Does it exist in some sort of financial limbo? It seems like this would be incredibly difficult to do but what would happen if it did occur?
I’ll admit to still getting the hang of the stock thing, but I think you’ve got it all backwards. If a company has 100 shares out there and buys back 99 of them, they’d have control of 99% of their business and the sole person who owns that single stock would essentially own nothing (or at least that would be the case when a company has millions of shares).
If the company buys back all it’s shares it would basically be like going private (the opposite of going public). I think the only reason it would be difficult to do is because, as it became obvious as to what was going on, the price would get more and more expensive.
Okay, I’m hardly expert in this, but I think Shalmanese is on the right track. In these terms, it’s easier to think of a company in terms of a proxy for its owners; it can do many things on its own, but it can’t really control itself, legally speaking.
If you have five owners with equal 20% shares, and the company buys owner B’s share through a buy-back, that’s basically the other four agreeing to buy their partner out using corporate cash on hand or whatever. B’s share is dissolved to make it clearer that the four owners now have 25% share in the company. If you kept that stock on the books, then all four of them would have an equal say in voting it, and so on.
So, who’s doing the buying out if the company buys back the last share? Who’d authorize it? Only a few situations make sense to me:
The company manager (not a stock holder) is trying to pull off something shady without the owner’s permission
The company is really a white elephant for some reason and the owners are trying to dump it by making it an independent entity.
I asked this in a slightly different form and got the answer that it can’t as it can not possess the assets to buy that last share without liquidating itself in the process - as that last share would be the value of the entire company.
Now if someone willed there stock back to the corp we have a interesting situation.
That can’t be right – publicly traded companies take themselves private all the time. They buy up all the shares and turn it into a private company. I’m sure there’s legal papers to be filed with the SEC, but the prices of the final share isn’t a factor.
Hell, if the company owns 51% of the shares, they should be able to just set a price and buy back the shares at that point. Don’t want their offer? All you’re left with is shares in a nonexistent corporation (though I believe you can get the set price at any time).
In other words, the company will announce it’s buying back all outstanding shares at $15. after which it will not be traded. You can get the $15, but nothing more.
“a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the company’s outstanding equity; that is, cash is exchanged for a reduction in the number of shares outstanding.[2][3] The company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance.”
“because a company can’t act as its own shareholder, repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced. When this happens, the relative ownership stake of each investor increases because there are fewer shares, or claims, on the earnings of the company.”
So, when a company buys back its shares, it either annihilates them or makes them inactive. A company does not vote about itself like one of its shareholders.
As for what would happen if all shares were bought back, most jurisdictions must either have a specific requirement that, to be a company, there must be shareholders and that a company cannot be its own shareholder or there is likely some broad “Don’t screw about and try to be too clever” section of the relevant statutes.
Going private: Going private is different than buying back all your shares. Going private just means that your shares and other forms of equities cannot be publically traded. The company will still have shareholders.
Generally speaking a company cannot force you to sell its shares back to it. It certainly cannot own 51% of the shares and force the other 49% to sell at a price it sets.
If a company buys back its shares (in the open market at the market price) it can retire them, in which case the other owners just own a larger percentage, or it can hold them as treasury stock. It does the latter sometimes when it needs shares to distribute when options are exercised and it has sold all the shares authorized. It can also do that even if there are authorized shares it has not yet sold.
In the unlikely event that the company does buy back all but one of its shares, then the person holding that one share owns the entire company. The company still could have debt outstanding, of course. That person could vote him/her/self CEO or chairman.
When a company goes private, it does not buy back its shares with its own assets (though it may do some of that first). Rather private individuals, usually the management and employees, buy up the shares. It is private only in the sense that the shares are often no longer publicly traded on an exchange. There are still shareholders, and typically they could sell their shares; however, it will be more difficult as their won’t be an active market.
For example to be listed on the NYSE, a company must have at least 2000 shareholders holding at least 100 shares each and at least 1.1 million shares.
A company cannot buy back all of its shares. The question is illogical. It wouldn’t have enough assets to buy all of the stock unless it paid a sham of a price for the last shares.
The people that are equating this to going private are incorrect. That just means they are no longer guying to have public shareholders. They will still have private shareholders. For example, Michael Dell recently took Dell Computers public. That doesn’t mean it no longer has shareholders. It means that Dell and his group of investors now own all of the stock, and it is no longer publicly traded.
I am very rusty but I believe that if a company buys back all its shares, the Board owns the company either as individual nominal shareholders or as a form of partnership and the articles of the company would be amended appropriately.
Consider how a company is set up. You tcan buy a company off the shelf and the founder owns the whole company. The owner at that point can start issuing shares to others in exchange for money or skills provided to the company. Articles of association will describe the relationship between shareholders and the board. The reverse would apply as a country returned towards a private company and maybe to a wholly owned company.
A mistake being made above is that if a company bought most of its own shares, it would revert to control of the remaining external shareholders. In fact the board would hold the voting rights of the shares it had bought back.
In the UK at least of a company purchases more than a certain percent of the shares it must offer to buy all shares outstanding at that rate. Similarly if a company or an individual buys more than a near totality of shares it can force remaining shareholders to sell to the individual or company.
This hypothetical relies on a sole share-holder selling his shares back to the corporation for less than they are worth. I guess that’s possible, but the most plausible scenario would be a liquidation where the last shareholder is paid with the entire assets of the corporation for his shares.
Its not illogical. It could pay out 100% of asset, and therefore have zero asset left. It would cease to exist, which is a possibility for any company. This implies that its asset is cash, or easily liquifiable.
For the case of an organisation/industry that continues to exist and function and has has a positive value… well they wouldn’t buy back 100% of shares …
Of course, for a publically listed company, there are rules about the number of shares, and the ownership of them… the buy back of too large % of shares would be blocked and be done some other way… eg as a takeover with a well defined owner taking over. SO the example was never going to apply for a public (or large) company.
For a private company that is not too sophisticated in definition, we can continue the idea.
What if there are two shares left. Company has $2 of total worth, being merely $2 in cash. Buys the last share for $1 - a far price, and then cease to exist as a company.
Well there is the 2nd option at the time the 2nd last share is bought back… suppose the owner of the last share says, “hey, its worth more than $1, its worth $100,000 !”, and as 100% owner, he can say “I’'m not accepting $1, I am now 100%, owner , I am now the director … back to work !”.
Unless there was already a custom contract to stop that, the 100% owner should have 100% control of the company.
In theory Not for profit organizations act as if they have no owner.
But in practice they tend to pay high directors (etc) fees… and other means of passing off profit as cost.
If the company buys back its stock, why does it have to be owned by anybody? It’s been ages since I took that one accounting class, but IIRC the intrinsic value of a stock issue is based on the company’s equity balance. Any portion of that equity, or none at all may be issued as stock; and in the case of sole proprietors and professional practices, stock may never be issued.
So if Gigantopithecus Industries can raise the money and buy back its stock, why doesn’t the situation simply revert to how things were before it ever sold any stock?
Also, who said that any outstanding stock is necessarily equal to 100% of the equity?
Before the stock was issued the company was owned by someone unless it had no value. And by definition the outstanding stock is equal to 100% of the equity, that’s what stock is, a portion of the ownership of the corporation. There are all kinds of stock and varying types of corporations, but that’s how things generally work.
As I have said I am rusty, but IIRC a company has two options if it buys back shares - it can extinguish them, thus reversing the original process of raising money against the future success of the company, or it can register the bought back shares in the name of the company, allowing the board to exercise voting rights via such shares.
IIRC - again, been decades since Accounting 101 - the shares bought by a company(its own shares) cannot be exercised. If a company buys 80 of 100 shares of itself, then the remaining 20 shares comprise the voting shares. If there’s one outstanding share after the buybacks, then that 1 share is 100% control of the company. After all, a dividend payout to shares controlled by the company, if they were active, would simply mean the money goes back into the company to be paid out again to the remaining shareholders.
Any significant buyback has to be approved by the board, and/or voted on by the shareholders.
The directors and the CEO work on behalf of the shareholders. How does buying back shares and voting other than the remaining shareholders wish follow the will of the shareholders?
When you read about “we bought 51% and force the other 49% to sell” you are confusing a buyout with a buyback. The SEC has rules to protect the minority shareholders. People dealing in shares cannot make “sweetheart deals” to cut out minority shareholders. Typically someone trying to buy more than 10(?) of a company must announce their intentions. Anyone trying to buy 100% or 50% of a company must also announce the fact, and give a general offer to buy all shares from all owners for the same price no special deal for Joe who has the 20% you need).
Once a group has the 51% and has satisfied the offer according to SEC rules, then they can dissolve the shares(?) pay the outstanding minority holders the going rate, and redefine the company as a private business, subsidiary of Global Domination Inc., etc.
Suppose a company has $1B of cash on hand and $10B of debt. The net value of that company could quite conceivably be less than $1B. If there was only 1 share left, that share would quite likely be worth less than $1B. Suppose the company now takes some or all of the $1B in cash and buys that 1 share. Who own the company?
I am not an accountant but that analysis (company with one billion in assets but ten billion in debts) is perhaps ignoring the value of goodwill. That company may have nine billion in brand name, customer base, intellectual property, etc.
Why? They have a contractual deal with the company, and that deal does not include ownership of the company unless it fails to pay its debt and they go to BK court.
They may (though I think you actually meant “ten billion”). That’s why I wrote “quite conceivably” and “quite likely”.
It’s not very uncommon for a company to be worth less in market value than it has in cash, especially when there are large amounts of debt involved.
[I actually remember one case where this situation prevailed even with no debt involved - it was a telecom that had cashed in on a big IPO during the tech boom, but kept losing money thereafter. Eventually the market value sank below their cash assets - the market essentially betting that the company would not cash out but would just continue with their futile efforts to turn a profit and would burn through all the cash - which is what happened in the end.]