I really don’t know, but if I was owed money from a company that had just spent all of its assets buying back worthless stock I’d sue the board to have them declare bankruptcy. At that point with no assets and great debt, and no owners in this ridiculous circumstance I don’t see how they could fight back. However I am not a lawyer or an accountant, or any great expert on the subject at all, I’m sure state by state there are regulations that cover this situation even if some post hoc reasoning needs to be applied.
Suppose I argue that the company then had control of 99% of their business. Then, I ask, who has control of those controllers?
Look up the concept of “Treasury Stock”. A corporation generally cannot vote the shares of itself that it owns. So that single share then becomes the sole controlling share of the company, and the owner of that then effectively owns and controls 100% of the company.
Interesting point. Or, perhaps the company took advantage of market drift, stockholder panics, etc. to buy back their shares below book value. Sometimes stock drifts below corporate book value for various reasons.
Another way this could happen could be a lawsuit. Say, Conglom-O, Inc. sues Billy, who owns 100% of Conglom-O, for some reason unrelated to the stock ownership. Maybe Billy ordered some Conglom-O stuff to be shipped to his home and the deliveryman tripped and fell and was injured. Billy loses the suit, and refuses to pay. Conglom-O applies to the court to seize Billy’s assets, and the court awards him Billy’s stock portfolio, which includes 10% of IBM and 100% of Conglom-O. The horror.
Or, perhaps, maybe Conglom-O is one of those companies that still issues Bearer Shares that do not have to be registered under an owner’s name and can be traded by hand and stuffed in desk drawers for decades. One day, a mysterious masked stranger approaches Conglom-O headquarters with a business proposition. Sell 5 flatscreen TV’s and 10 years HD service for whatever is in this locked chest <mysterious sounds>. Conglom-O’s Manager of the Day, for some reason, agrees. Service contract is signed and the chest is taken to the company’s security department to be broken into and opened. They open the chest, and find… 100% of the stock of Conglom-O, and a note from the former owner thanking them for all the great days and mentioning that since he (the former owner) thinks that Conglom-O is doomed, the deal he got was good enough. Cue laughs, and then serious ponderings by Corporate Counsel on what the situation now is. Does the current Board of Directors effectively become a self-perpetuating entity that controls itself and elects its successors? Does the stock get divided among the Board? Among all employees? Does the company escheat to the government, so the company is now a government-owned enterprise?
You say it’s not an illogical question but then agree that if it is bought out it is the same as liquidation of the company and that the company would no longer exist. In other words, it buying back all of its shares and continuing to exist is not logical.
But what would happen if, after the deal was made, check signed, etc., a company employee was somehow not informed and continued to work, making a small additional profit? E.g. Johnny Cubeboy didn’t get the memo due to IT glitches and worked an additional day, making $200 profit for the “company”. Who gets that money? Does Johnny keep it? Does it go to the former stockholders? Does the CEO get it?
Goodwill is an asset that would be on the balance sheet. The hypothetical was of a balance sheet with only cash and debt.
Well, if he was performing work on behalf of a company that no longer existed it would seem he was an independent contractor.
I think the hypothetical is getting pretty far fetched though. This is a company with one share outstanding, no assets other than cash, and yet it still has employees that are capable of performing work that generates a profit? It can’t have possibly sold anything since that would have been an asset. It must just be performing services that don’t require any any equipment or anything.
Look up fraudulent conveyance.
You very possibly could. But the fundamental question is still: until you forced the company into bankruptcy and seized its assets, who owns the company?
I am familiar with fraudulent conveyance. Please be more specific as to what your point is here.
That the transaction to distribute the cash out of the company would be a textbook example of fraudulent conveyance. The creditors would be able to claw back the cash and use it to partially satisfy their debt. The stockholder is not going to be able to distribute all of the assets of the company and leave the company insolvent.
That might be true if the company declared BK shortly afterwards. (In that case any number of transactions would come under scrutiny.) But most companies are not relying on accumulated cash to pay their debts - they are relying on ongoing profits. If this comes to fruition, then the issue would be moot.
Either way, it ignores the more fundamental question of who owns the company from the time the last share is purchased.
Good question, beats me. Maybe someone can find an actual case. Without any assets or owners the corporation might no longer exist under the law. I know of a case where a small corporation folded up because it had no assets left and the owner (president or CEO I guess) told me his lawyer (perhaps not the corporation’s lawyer though) told him to answer all correspondence by saying the corporation was defunct. I’m not aware that ‘defunct’ is a legal term though.
The credit agreements governing their debt would clearly not permit the type of transaction you are talking about. The corporate formation documents would almost certainly not permit the type of transaction you are talking about. A corporation can not exist without owners.
You are basically asking about what happens if through a sham fraudulent transaction this fluke event occurs and no one attempts to void using any of the means of their disposal.
But in this case, there still are assets (until and unless they get seized by creditors) and debts etc.
I have no idea if this is true, so I’m not disputing it. But suppose it’s correct, then here’s another hypothetical.
A company has zero debt and $1B in assets, and 100 shares left. The shares are worth $10M each (ignoring goodwill etc. for simplicity). Then a court issues a $50B judgement against the corporation in some civil case, and the value of the shares goes down to $1M each. The company uses $100M to buy all 100 shares. Then the verdict is overturned on appeal, and the value goes back to $900M. Who owns the company?
That could be and I’m not disputing this, but it’s a different answer than the one which was being provided earlier.
The CEO and Board are obliged to operate in the best interests of the shareholders and the company. In what way does buying back 100% of the shares help the shareholders?
If it’s to relieve them of “underwater” share value, then that’s fraud upon the debt holders of the company, since the obligation of the company and its managers is to operate in good faith - i.e. not to play games.
In fact, any transactions made “in anticipation of bankruptcy” can be reversed by the judge - so if the company sells the corporate Rolls-Royce to the CEO’s nephew for $1 a day before filing for bankruptcy, that can be nullified. (IIRC, they can go back 6 months)
Similarly, if the company is $10B in debt and gives the shareholders the $1B cash to clean out the treasury, that may be reversed in bankruptcy court. There was no obligation to buy the shares, there is an obligation to pay as much debt as possible at bankruptcy.
You can construct weird situations where a company comes into possession of its shares - but essentially, a company cannot plan to do so.
There were plenty of cases where the share price was below market or liquidation value. RJR Nabisco (“Barbarians at the Gate”) the shares were in the $40’s because the tobacco business was already considered “not good” in the 80’s. the board in buyout considered $55 a good starting price. the final number was $107, IIRC.
Greyhound and A&P were also companies whose buyout artists benefitted from an accounting “trick” - assets are valued at their purchase price. Thanks to inflation, antiques like those companies had acquired, and carried on the books, downtown real estate acquired at 1920’s through 50’s prices. While business and profits declined, so did share price - but buried in the assets was incredibly valuable property. Buyout artists tried to take advantage of shareholders who did not realize the true worth of the company.
I’m not following your math here. If they had $1B in assets before and then had a $50B judgement against them they would be worth $49B. How would the company use $100 million to buy the shares? The court would never allow that. The transaction would never be allowed to take place. But beyond that, if you changed it to make the math work, the selling shareholders would almost certainly get whatever additional proceeds are received following the liquidation of the company.
ISTM that you have your numbers mixed up (as well as conflating assets with market cap). Please double-check.
And there is no “liquidation of the company” in this scenario.
This is becoming increasingly goofy. LonghornDave has it exactly right, though I can simplify his explanation.
Let us imagine a company with one share. Obviously, that share represents 100% ownership, and must be held by a single individual (or another corporation). That person has complete control of the board of directors.
So, why would this person with complete control of the business bother to buy back his own interest? The simple answer is that he wouldn’t. If you wanted to liquidate the company’s assets, you would simply do it and wind up the corporation.
Even if you wanted to allow the corporation to retire its last share, you couldn’t. A corporation (other than a nonprofit*) can’t own itself.
*nonprofit corporations don’t really own themselves but they have members rather than owners.
Where does this valuation come from?
Here’s another question:
Suppose 2 corporations each buy a majority of the shares in each other. Which company owns which? (I believe there have been instances where two companies have simultaneously attemped hostile takeovers of each other, but I’m not aware of cases in which both have succeeded.)
That’s not technically true, because it could take some time to replace the BOD.
Why he would want to is a separate question from what would happen if he did. But beyond that, the decision to buy back the share would be made by the BOD, which as above might be holdovers. (Which is besides for the fact that it could be rational for a person to prefer a buyback to a liquidation if he thinks the market cap of the company is higher than the liquidation value, and/or wants to avoid various associated costs.)
$1B/100.
This is getting ridiculous. I’m not conflating assets with market cap. If anything I am equating the market value of the equity with the book value of the equity. You can forgive me since we’re talking about a private company (only 100 shareholders) that starts with book value equaling market value since the only balance sheet account is cash. The balance sheet of this company had only $1B cash to start with. Then they had a $50B judgement against them creating a new liability and book equity of $49B. Now, you may be saying that they have a market value for their equity of $100 million due to the market’s perception of the true value of the judgement. And now the management of the company has somehow decided to speculate against their shareholders’ interests and bought them out. That transaction would not be allowed. Even if it was there is absolutely no upside to doing the transaction. If the judgement is upheld then they have committed fraud by trying to remove assets from the company in order to avoid a debt. If the judgement is reversed then they have sold out at a discounted position.
It would never have occured to me - nor should it have - that an artificial bookeeping entry declaring “book equity of $49B” has any relevence here. It doesn’t.
As a practical matter, in this situation the company would have more cash available than the market value of the company, making this a scenario where the sole shareholder might rationally accept a buyout from his own company.
I deliberately specified that the judgement was reversed, so no need to consider the situation where it’s upheld. As you say, the shareholder sold out at a discounted position. Now what?