If a company buys back all it's shares, who owns the company?

Factual Questions
41

You think a board of directors of a company with one owner is going to act against the interests of that one owner? They will have the legal fiduciary duty to act in that owner’s best interest. Trying to trick him out of his money runs pretty contrary to that.

How have they established that the market value is higher than the liquidation value? There is no market in this scenario. They’re settling for less than the liquidation value by definition since they are liquidating only a portion of the assets. If they are not and the remaining assets are not sufficient to cover the liabilities then they are committing fraud, and the transaction will be reversed anyways.

Sure, but later on in your example $1B minus $50B equals $100 million. I guess this is because somehow there is an established market value in a security with no market.

42

Right. Consider a municipality that has only a few residents. There are a few towns and whatnot out in Flyover Country that have, like, seven residents and mayoral elections are more or less a quick neighborhood meeting thing.

So maybe the local economic situation gets so bad (soil has gone so bad that nothing grows anymore, no big companies want facilities there anymore, weather is terrible, not on any bus or train route, etc.) that all but one of the residents pack up and leave. Now you have a municipality in which the voting constituency is exactly one person. This person, you might argue, now controls the town. However, mayoral elections aren’t until November and Mayor Hubertus J. R. St. James McSmelly (who actually lives in Bakersville nowadays, there being no requirement that the mayor live in town, living in the state being sufficient according to the Truth in Local Politics Act of 1956), is still in power, and he damn well insists on continuing to enforce the No Parking in the Red Zone policy and issue citations pursuant to Mayoral Authority under the Town Parking Enforcement Code.

So our one resident doesn’t actually control the town in the sense of being able to wag his finger and do anything he wants. He is still subject to the town rules as to when and how the “owners” (i.e. voters) get to change the rules and day-to-day leadership.

43

Regardless of whether the judgment is upheld the directors can’t distribute the company’s assets to frustrate the judgment.

44

A corporation is not a municipality. The articles of incorporation will allow the shareholders to call a shareholders’ meeting whenever they like, provided a majority (or more likely a supermajority) join in the call. So Mr. Only Shareholder can dump the board whenever he likes - and with all the voting power, he can even get rid of their staggered terms so he can do it all at once.

45

I think that’s what would apply if a corporation heavily in debt attempted using it’s meager assets to buy back stock. But the original question was, can a corporation buy back all of it’s stock leaving no shareholders? I think you answered that before by pointing out the absurdity of the sole shareholder buying his shares from himself. It’s probably disallowed by corporate law. I think that covers even more absurd ideas like the sole owner willing his shares to the corporation. His estate probably just ends up owning the assets of the corporation anyway, if there are any.

It was a fun question though.

46

That’s a valid point.

That’s actually why I changed the situation a bit to have 100 shares versus one, so that there’s still some trading. But even if there’s one share, it’s simply incorrect to assert that there’s no market for anything that’s not a publically traded security. What you do to establish market value in this type of situation is to market it around, e.g. via broker.

I don’t understand what this means.

Correct, more or less. See above.

The market value of a company is obviously never going to go below zero. Since there’s always a non-zero chance that the judgment will be overturned, or that some deal can be reached, it will typically have some positive value. (Even shares of companies in BK have some small value.) I picked $100M, but the specific number is not important, only that it be less than the assets that the company has on hand.

47

It’s also worth noting that much of this discussion around what the creditors can ban the corporation from doing with their assets seems to presume that the debts are currently due. A lot of corporations have long term debt and I don’t know that the holder of debt due 10 years from now can bar a company from buying back stock now. (Certainly it’s pretty common for companies in this situation to engage in buybacks.) But the long term debt will definitely impact the company’s current market value.

48

It could be considered an anticipatory breach if the buyback is resulting in dissolution or privatization. I suppose it could happen, but who would lend a corporation money with a 10 year due date and no payments of principle or interest along the way?

49

Of course it does. If the management, board, shareholders are armed with the knowledge that their book equity is -$49B and are actively attempting to defraud the party they owe $50B to then I’d say it’s highly relevant.

You mean he might rationally want to commit fraud. Sure, he might, but that doesn’t mean he’ll get away with it.

The transaction doesn’t happen in the first place.

50

Fraud is based on the price relative to the market value of companies, not based on a comparison to bookeeping entries like book equity.

By this logic few transactions would ever take place.

Different people can have different assessments of the value of a company, and can also have different utility values for their money. With a judgment hanging over the head of the company, one person can think it’s better to take cash in hand and forgo the chance of overturning the verdict or making a favorable settlement, while another might think it’s worth taking a shot. Neither is doing anything irrational or committing fraud. If in the end the verdict is reversed, then the seller will have sold at a discount, but that doesn’t mean the initial decision to sell was wrong.

51

You could never in a million years get by with using anything but the book equity in a situation like this. You brought to the stand, are you prepared to say, we have book assets of $1 billion, book liabilities of $50 billion, and a fair market value in an arm’s length transaction of $100 million.

Any situation that has a company capable of liquidating a portion of the assets to buy 100% of the equity has either sold for less than the liquidation value (breached fiduciary duty) or defrauded creditors. Market value of assets minus market value of liabilities equals market value of equity. How can you make this equation work by paying off all liabilities and having the equity be greater than the assets?

52

I disagree with this, as above.

As above, there can be differences of opinion as to the value of a company and other reasons to want to avoid outright liquidation, so no breach of fiduciary duty, and I would assume if the judgment is overturned there are no creditors so retroactively no fraud (in addition to the long-term debt possibility noted above).

53

What you have described is clear, unambiguous fraudulent conveyance. They are trying to take the money out before their creditors can get their hands on it. That’s not allowed.

What is the upside to the person selling? The transaction gets reversed if the verdict is upheld. They have sold at a discount if the verdict is reversed. They have likely violated credit agreements and corporate bylaws in the meantime. How does any of that make any sense?

54

OK, let’s say we have a company that has $50M in cash on the books, no other meaningful business and no goodwill with 1M shares outstanding. The company, for some reason, enters into a deal where, a year from now, a coin will be flipped and if it’s heads, the company has to make a payment of $150M and if tails, they have to make a payment of $1. To a rational investor, this company now has negative expected value.

The company makes a tender offer to buy back it’s shares at $1 a piece. Unexpectedly, every single shareholder accepts the tender offer (without knowledge that every other investor agreed to the same). The company spends $1M buying it’s shares back and has $49M sitting in the bank still.

A year from now, the coin is flipped and it lands tails. Now the question is, who owns that $49M?

55

That’s not how tender offers work. They’re invariably restricted to the first X number of shareholders to accept (and generally effective only upon a minimum number of acceptances, too.)

56

Look, a company with huge debts but some current cash in an account can’t just spend all the cash before the debt comes due, and then announce that there’s no more money to pay the debt, so sorry, we’re bankrupt!

In actual bankruptcy what happens is that a judge oversees the company, and this sort of shenanigans is called bankruptcy fraud. You can’t sell off the company assets at a discount to the shareholders and then declare bankruptcy. That’s fraud. It’s illegal. The guys who bought the discounted assets would have those assets seized, and the seized assets would be liquidated and distributed to the creditors.

I think people get confused about corporate bankruptcy because you hear about a company going bankrupt because it owes all this money, and then the company keeps going. In some cases bankruptcy is just begging a judge to allow the company a little more time to pay off the creditors because they’re anticipating more money coming in. But other times the company is liquidated and the creditors get a discounted share of the corporate assets, while the original shareholders lose the entire value of their investment.

The original company company is gone. But the old company assets might be worth more as a unit than if they were sold off piece by piece. And so when Kmart goes bankrupt what might happen is that the Kmart signs are taken down, and the stores are sold off to various other retailers. But what might happen is the Kmart sign stays up, only now Kmart is owned by the former creditors and the former shareholders have no connection to the new Kmart. After all the Kmart brand probably has some value, although it may not, nobody is running a company called “Enron” anymore.

The reason a company can’t buy every last share it owns and be run by the board of directors with no owners is that our legal system doesn’t allow it. It would be fraud for the company executives to buy out the remaining shareholders for less than the value of the company. If they tried that, they’d go to jail for defrauding the shareholders. And this would be easy to prove, because the corporation still has a positive net worth after buying the last share, and therefore it is mathematically provable that the last shareholder was defrauded. A for-profit corporation requires owners, a corporation with no owners is not a corporation. Corporations exist because our laws say they can exist. Once the last share is gone the corporation does not exist any more, since the last share represents ownership of the entire corporation.

Corporations stop existing all the time, they only exist as legal fictions because it is useful for human beings to pretend they exist, because they facilitate certain kinds of economic activity. If a company with a billion dollars of assets buys out all the shareholders for $500 million, leaving the company with no owners and $500 million in assets, then the corporate executives who orchestrated the buyout have axiomatically defrauded the shareholders to the tune of $500 million.

57

But even though the company has negative expected value, the share price of the company isn’t negative, as long as the company is a limited liability corporation. That means that the shareholders aren’t obliged to pay the company debt out of their own pocketbooks, the shareholder’s liability is limited to the value of the corporation.

So selling your share for $1 is irrational, even though the company has a negative expected value. To the shareholder, there would be three outcomes. One, sell your share now for $1, which is to take a $49 loss on your investment. Two, wait for the coin flip. If the company loses the coin flip, it is worth -$100 million, and the share price is zero–the company is liquidated and all assets go to the creditors–and the shareholder takes a $50 loss. If the company wins the coin flip, the company retains its value and the shareholder keeps the $50 investment.

So from the shareholder viewpoint, before the coin flip the company actually has a $25 per share expected value, not a negative expected value. It would be irrational to sell for $1, since you’d be losing $24 of expected value. Or to put it another way, suppose I offer you a game. You pay $1, and we flip a coin. If the coin is heads, I keep your $1. If the coin is tails, I pay you $50. Would you play this game? Of course you would. And even if you don’t–suppose you need the one dollar right now to pay for grandma’s kidney operation–in a liquid market you could easily find someone willing to pay you a bit under $25 right now to buy the game from you, which is a lot better than $1.

58

Even at a $25 share price, the company could buy back all it’s shares at $25M and still have $25M leftover.

59

An inefficient market. Some equity holders (i.e. stockholders) may be willing to sell their shares below book value per share (the value of (all corporate assets minus all corporate liabilities) divided by the number of stock shares outstanding, multiplied by the number of shares owned by the seller in question) for some reason. Maybe they have been spooked by market trends and want out now now now before a feared (in their mind) crash. Maybe they need a heart transplant, like, yesterday and they need money real quick to pay the doctor. Or maybe they are just ordinary, irrational people who get their investing advice from unregulated web forums and don’t understand the difference between book value and market value.

60

Except as the company buys back each share the value of the remaining shares increases. If they buy back 500,000 shares at $25 per share, that costs the company $12.5M. Now the company has $37.5M in the bank, and there are .5M shares existing, which means the value of each share if there were no judgement pending would be $75 per share. With the pending 50-50 judgement that will either ruin the company or leave it intact, that means the expected value of each share is now $37.50, so you’d be an idiot to sell for $25. They couldn’t buy back every last share for $25, that’s just the cost for the first share, and that cost increases for each share they buy. If they somehow bought 999,999 shares for $25 each in one mega-transaction, the last share would be worth an expected value of $12,500,000. Would you sell that share for $25? And if the company executives tricked you into selling that last share for $25, they’ve defrauded you, and they go to jail. As each share is retired, the remaining shares measured against the expected future value of the company goes up, and therefore would require a higher and higher price to buy back.

And that doesn’t even touch what LonghornDave is talking about, fraudulent conveyance. If the company potentially faces a judgement of greater than the value of the company, and starts buying out shareholders in order to potentially leave the creditors with nothing, that’s fraud. It’s against the law.

Or to create another scenario, suppose that the company is facing that 50-50 coin flip a year from now. They have $50M in the bank. Why not just liquidate the company today, and pay off all the shareholders $50 per share? Instead of each shareholder getting a paltry $1, or $25 per share, they now get the full value of the company, and the potential creditors get nothing.

Buying back shares is equivalent to a partial liquidation of the company. One the one hand you could completely liquidate the company and get your full investment back. On the other hand, you could partially liquidate the company by buying back shares, trading company assets for stock. Why would the stockholders allow company executives to liquidate the company for less than the value (to them) of the company?

All of these potential schemes require the corporate executives to defraud the shareholders, because they require the corporate executives to buy the stock for less than the value of the stock. You might argue that stockholders can sell stocks any time to third parties for any price, and shareholders are frequently wrong about the value of the stock. That’s true. But the third party doesn’t have a fiduciary responsibility to the shareholders like the corporate executives do. If you sell your million dollar Picasso to the neighbor kid down the street for $1.00, that’s on you. But if you’re a financial trustee for a guy who owns that Picasso and you sell it to the neighbor kid for $1, you’re going to jail.

Edited to add: Or they could be defrauding the creditors, or a mix of both the shareholders and creditors.