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

Factual Questions
61

Specifically to protect minority shareholders, when a company makes an offer to take over another company, they must publicly issue an offer to buy all shares at $X. If they get 51% they can then force a buy of all remaining shares for $X (or fair market value, whichever is greater.)

When a company commences a buyback program for its own shares, it also must publicly declare the program, the quantity being bought, etc. I cannot imagine any scenario where buying back ALL the shares makes sense in real terms or for the benefit of shareholders. After all, AFAIK, they CANNOT force the remaining shareholders to sell. The holdouts benefit greatly. “Treasury shares” cannot be voted. If the company buys 80% of the shares, the holdouts now have 20% of the shares but they have the value of 100% of the company. They can also vote to not re-issue/re-sell the shares, locking in their gain.

The usual reason for buyback is the share price is too low, so create scarcity and perk up demand. (and get the stock churning…) So buying back more than, say, 20% or 50% of the shares makes no sense in this regard. (There’s a whole market psychology on whether you want a share price-point to be $10, $40, $100, etc. Different prices attract different types of investors, which was more relevant when anything other than an round-number block of shares cost a much larger commission.)

62

Simple. Maybe the last stockholder desperately needs money to pay (medical bills, credit card bills, whatever) and they are willing to knowingly sell their $12,500,000 share for $12,150,000 back to the company (and take a $350 hit) because the Board of Directors is willing to cut a check today, rather than take a risk in the market hoping to find someone with a spare $12,500,000 who wants to buy, and it might take days, weeks, or even months to find a rich enough buyer with over 12 mil available. In the meantime, the stockholder is being assessed thousands per day in credit card late fees for his unpaid $5,345,544 credit card bills, so taking a hit of “only” $350 is better to him than paying another day of $7,332 in daily late fees.

Contrived, yes, and fairly unlikely, but possible.

After all, some people spend months looking for someone to buy their house, even at “market” value. There just didn’t happen to be someone interested in that specific house. Some even sell for less than market value just to be rid of the thing and get some money in their hands. So Conglom-O might actually be worth $12,500,000, but nobody (but the Board of Directors) is really interested in buying right now. The market buzz is really with CompuGlobalHyperMegaNet and shares in that are so hot now.

This isn’t that hard, people.

63

Except of course that my one share example was a reductio ad absurdum. You’re not going to get from 1M shares to 1 share overnight, you’re not going to be able to buy back 999,999 shares for $25 in one transaction. Each share you buy increases the value of the remaining shares. You couldn’t by the 999,998th share for $25 for instance, because that share would have an expected value of $6,250,000, even if you bought the other 999,997 shares for $25.

The point is, every share you buy increases the value of the remaining shares to the point where you’d have to liquidate the entire company to buy the remaining shares.

And even if there were a remaining shareholder with one share, who needed the money today, he can just call up the corporate execs and tell them to give him the money he needs. The company can’t buy the share from him, because he owns the assets that would be needed to buy it from him. The corporate execs have a fiduciary responsibility not to defraud the owner of the company they manage, if they defraud him they go to jail. And buying the company from him using corporate assets but leaving corporate assets left over is axiomatically fraudulent. If the corporation has the liquid funds to buy out the shareholder today, they can just give the owner the funds today. He owns the company, he can take the money out of the company if he wants.

Except in the case of the pending judgement he probably can’t, because that would mean defrauding his potential creditors. If the shareholders liquidate the company to avoid facing the pending judgement, the creditors can likely claw back all that money from the shareholders. At that point they might be personally on the hook for the full amount of the judgement, rather than just the amount of their investment. The debt doesn’t just magically go poof, it requires a gimlet-eyed bankruptcy judge to order it to go poof. And when he sees the shareholders trying to avoid the judgement by liquidating the company he’s not going to be pleased. That’s fraud, we have laws against that sort of thing.

64

OK, fine. Assume the company only has a single shareholder left who holds one share and the company enters into an agreement where there’s a 99% chance they have to pay $50M and a 1% chance they have to pay $0. The board of directors approves making a tender offer of $1M for the share. The shareholder rationally values his share at $500K so he sells to make a $500K profit.

A year later, they roll the 100 sided die and they win. Who now owns the $49M pile of cash?

65

I love this scenario.

And thanks especially for escheat.

[…]
But the swimmer’s soul is a thing possessed,
His soul is naked as his breast,
Remembers not its east and west,
And ponders this way, I have guessed:

I no home in the cruel heat
On alien soil that blisters feet.
This water is my native seat,
And more than ever cool and sweet,
So long by forfeiture escheat.
[…]
–John Crowe Ransom, The Swimmer

Ransom bio.

66

This is not true. The market value of a company’s shares is determined by whatever price the shares trade at on equity markets. Of course there are investors who perform a fundamental analysis, trying to derive a “fair” value of a company’s shares by assessing the market value of its liabilities and assets. But these investors are not necessarily the ones who set the going price on the markets. It’s not unheard of for shares to trade at a price below what the liquidation value of the assets would justify; this is the basis of the business model of corporate raiders.

67

It sounds to me like this whole thing is a little like a division by zero or passing through a black hole. It should never happen, and if it ever did, possibly the best answer is “Nobody, the corporation must dissolve and a court will rule on what happens to any remaining corporate assets.”

Which means that there’s very little reason for a board of Directors to approve that last sale unless just maybe, they were going to dissolve the corporation anyway and wanted to do it this way as a stunt.

68

Longtime lurker but first time poster. Usually I see the answers converge on rightness after a few posts, but it seemed like you could use some help here.

The answer to the OP’s question depends on the state of incorporation. At least in Delaware, a corporation can’t directly do what the OP proposes. I’m guessing it’s similar everywhere else since Delaware is effectively a model for most other states’ corporation laws.

A typical corporation that you are familiar with is a “stock corporation,” i.e., one whose ownership is evidenced by issuing stock to equity owners. There is such a thing as a “nonstock corporation,” which has ownership that is not evidenced by stock (most commonly, these are non-profit organizations).

The OP is effectively asking, can the owner of 100% of the shares of a stock corporation convert it to a nonstock corporation with no equity owners by selling or giving his or her stock corporation shares back to the corporation? The answer is no under Delaware law. This is true even if the transaction wasn’t fraudulent in any way, even if the sole shareholder really wanted to do it, and even if the corporation wouldn’t be insolvent or bankrupt after the transaction. Those are all separate issues.

When a corporation forms, it must declare on its articles of incorporation (filed with the state) whether it is a stock corporation or a nonstock corporation. The articles of incorporation actually define all the powers that the corporation has and will ever have. The corporation can’t do anything that its articles of incorporation won’t allow it to do. Importantly, the articles of incorporation define whether the corporation can act as a stock corporation (with one set of requirements for showing ownership and effecting control over the corporation) or a nonstock corporation (with an entirely different set of requirements for showing ownership and effecting control). See http://delcode.delaware.gov/title8/c001/sc01/index.shtml

The OP’s shareholder can’t convert the stock corporation to a nonstock corporation because the resulting corporation would be acting outside the powers given to it under state law and its articles of incorporation by attempting to operate as a nonstock corporation. (Acts outside a corporation’s powers are referred to as “ultra vires.”) A stock corporation’s articles of incorporation and bylaws govern the way that boards of directors are elected, dividends are distributed, corporate decisions are made, etc. There is no way for it to act legally under these provisions if it suddenly becomes a nonstock corporation.

The owner of 100% of the shares of a stock corporation could accomplish the goal of converting it to a nonstock corporation by other means. What he or she would do is establish a nonstock corporation with appropriate articles of incorporation, bylaws, and membership requirements under state law. Then he or she would give or sell all the shares in the stock corporation to the nonstock corporation. The nonstock corporation could then pay off the stock corporation’s creditors (if any), dissolve the corporation, and retain all the remaining assets that used to belong to stock corporation.

69

Tired & Cranky,

Perhaps you can address my other question from earlier in the thread.

Suppose two corporations each buy a majority of the shares of each other, which one owns which one?

70

There are two options here. Is the corporation under a legal obligation to stay solvent so as to not defraud creditors? If so, then they can’t give away corporate assets to the shareholders ahead of the creditors.

If not, then the shareholders control the entire assets of the corporation. Why would the shareholder sell his interest in the company for $500K when the company has assets of $50M? If the company can transfer corporate assets to the shareholders, I think I would insist on getting the full $50M instead of the paltry $0.5M. I own the company, yes? The company has $50M in the bank, yes? I’m liquidating the company, yes? I want that $50M.

If your argument is that we can’t liquidate the company until after the coin flip, then any sort of stock buyback is an attempt to defraud the creditors. If the argument is that the company can legally buy back stock, then the stockholders should get the full value of the company. The scenario you are describing is either fraud against the creditors or against the stockholders. No other options.

If you want the purest example of what happens when a solvent corporation has no legal owners, consider the case where the sole stockholder dies, but has no relatives, no will, no next of kin can be found even after searching. What happens then? The government gets the stock, exactly how depends on the exact state law. But in no case is the corporation now self-owned, if the stockholder tried to will the stock to the corporation the will would be void.

The gist of the answer is that no government has an interest in recognizing the legal fiction that corporate persons exist unless it serves some sort of social purpose. Self-owned for-profit corporations make no sense, and laws don’t allow it to happen, because it makes no sense. Like, nobody owns shares in the corporation, so now the board of directors controls the company? How is the board chosen? By the stockholders. There are no stockholders, therefore the board of directors cannot legally authorize activity in the name of the stockholders. The board of directors has no authority over the assets of the corporation in the absence of an owner, any more than a random guy on the street would. With no owner the assets of the corporation escheats to the government.

Exactly how and when the corporate assets get seized by the state depends on the exact legal code of the state or states where this takes place. But there is in every state provision for the state to take assets where the owners cannot be found.

71

A company which purchases its own shares on the stock market at the price at which they currently trade can hardly be said to defraud anybody. It doesn’t defraud the shareholder from which it buys the shares, who voluntarily parts with his stock at this price; it doesn’t defraud its creditors, who have an in personam claim against the company for payment of whatever money is owed to them, and this claim is not affected by the share buyback. It doesn’t act ultra vires either, since companies are allowed to conduct share purchases. The only argument under which the transaction could be illegal that I can think of is insider trading. The reasoning could run along these lines: If the company has sufficient assets to buy back the last of its shares, then the management of the company has inside information that the stock is undervalued. Buying the shares at undervalued prices is therefore acting on privileged information. The argument would not work, however, if the assets are correctly reported in the company’s publicly available financial reports. Of course, in such a scenario a perfect market would not undervalue the company in the first place, but deviations from the perfect market scenario are perfectly possible in the real world.

72

That’s a great question. I wish I had a good answer for you. As far as I know, nothing prohibits a corporation from owning more than 50% of the shares of a corporation that, in turn, owns 50% of the other. It’s actually a structure that I believe was used from time to time in the late 1800s to set up interlocking directorates where companies would appear to be separate but were in fact operated as a single entity. This was a way of setting up monopolies that started out as multiple competing companies. A trust was another means to accomplish the same goal. The Sherman Antitrust Act prohibited this type of monopoly building through business combinations but I don’t think the Sherman Antitrust Act prohibited interlocking directorships and mutual share ownership if they weren’t going to create monopolies. So I think the structure is legal and can occur. But why would anyone want it to happen?

And more importantly, what would be the result for the companies? If these are public companies in the U.S., they both have to comply with generally accepted accounting principles (GAAP) when preparing their financial statements. GAAP requires consolidating on your financial statements subsidiaries when you own more than 50% of the subsidiary (and lesser amounts in some cases). That means, subject to accounting rules I know little about, the two companies’ financial statements would effectively be merged for accounting purposes. But I don’t know enough about accounting standards to know what those financial statements would look like. I also don’t know how, under your hypothetical, you’d figure out which one was the parent and which one was the subsidiary. Perhaps an accountant could explain it to both of us. I have no idea what would happen for corporate governance matters like electing directors or declaring dividends. If I had concrete facts maybe I could noodle out an answer but it might take me a while.

73

No idea why anyone would want it. But it could come about via two companies simultaneously attempting hostile takeovers of each other.

74

It might not defraud anybody in your view, but in the U.S., a public company which tries to buy every last share of itself on the public market is eventually going to have lots of problems before it finishes the job. First, the company will be delisted from the stock exchange when it no longer meets the exchange’s listing standards. For example, to be on the New York Stock Exchange, you must have at least 400 shareholders and at least 500,000 publicly available shares of stock. If you drop below either of those numbers, you can’t list on the NYSE. Other exchanges have similar listing standards.

You would likely also violate Securities Exchange Act Section 9(a)(6) which prohibits the company from entering a series of transactions designed for “pegging, fixing, or stabilizing the price” of securities. This prevents a company from constantly buying its shares on the public market to keep driving up its price. Exchange Act Rule 10b-18 sets up a safe harbor for public corporations to buy back their own stock on the public markets, but it also imposes limits. One limit is that the company can’t purchase more than 25% of its stock’s average daily trading volume. There are other requirements too. The company can’t just jump in the market and buy whatever it wants.

The company could do a tender offer for its shares, but these are subject to complex disclosure rules and the company must give the same price to everyone. The company couldn’t hide the fact that it was trying to buy all of itself and eliminate every shareholder. Every rational shareholder would come to understand that the company can only do this if it is paying less per share than the intrinsic value of the shares, so no rational shareholder would tender his shares in the offer. The tender offer would likely fail.

75

Now that you mention that, something similar happened in Germany a few years ago. Porsche was a strong healthy company making a ton of money on its cars, but it was a guppy compared to Volkswagen. Porsche didn’t want to be eaten by the Volkswagen whale in a rumored takeover. I believe different sides of the same family (with connections to Ferdinand Porsche) controlled the corporations with no love lost among the sides. Porsche preemptively tried to eat Volkswagen instead. I believe Volkswagen may have fought back, or possibly Porsche underestimated what it needed to do to fully succeed. If I remember correctly, Porsche used derivatives (options and swaps?) to attempt to get a controlling interest in Volkswagen rather than direct share purchases. I think Porsche actually had derivatives contracts that if fully exercised would have given it a controlling stake in Volkswagen, but it didn’t have enough money to fully exercise the contracts and they expired in the money but unexercised and therefore worthless. I think Porsche lost millions or billions on the contracts. It was so financially weakened, Volkswagen was able to jump in and buy a controlling stake in Porsche. Unfortunately, the issue here was that Porsche never had more than 50% of Volkswagen’s stock, least of all when Volkswagen finally acquired a controlling interest in Porsche. Your particular situation never came to pass. I’m not sure as a practical matter it ever really could. It takes time to acquire a 50% stake in a company through public market transactions. Once one company in a hostile takeover gets over 50% of its target, it effectively controls the target and could make the target stop acquiring shares of its new parent.

That’s the problem – I can’t see how often two companies would fight mutual hostile takeovers this way. First, generally, a hostile takeover is a stronger company buying a weaker one. In practice then, only one company is ever going to have enough money to buy 50% of the other. Also, companies fighting hostile takeovers use other methods to make themselves tougher targets. They might use their own cash to do share buybacks (making the remaining shares more expensive) rather than trying to buy out the other company preemptively. If a smaller company wanted to preemptively buy the bigger company, it wouldn’t necessarily use direct stock purchases, it might use options and swaps to gain effective control at a lower cost instead.

Both companies are also likely to adopt poison pill defenses (wherein they promise existing shareholders the option to buy more shares at a discount if a hostile buyer acquires, let’s say, 10% or more of the company). If the poison pill is enacted, the hostile buyer now has to buy even more shares, making the deal much more expensive. These tactics usually force the hostile buyer to negotiate with the board of the target company. If the two companies are going to have to negotiate anyway, there is no need to try to preemptively corner the market in the other’s shares through these weird mutual share purchases.

76

The poison pill I recall (don’t recall the company) was that if one shareholder attempts to / actually acquires 10% (or was it 20%?) then every other shareholder got double shares (effectively making the 20% into about 10% - 20 out of 180 shares). This was legal because the shareholders would vote on it; also note that it expired after X months, so it was not a permanent feature, it was aimed at any hostile takeover of the moment.

When one company acquires more than 5%(? 10%?) and is seeking to acquire more of another company, they must declare their intentions. You cannot “secretly” buy 51% of a publicly traded company. You cannot offer sweetheart deals to one big shareholder to screw the other shareholders.

If some company announced they were buying (essentially, retiring) more than half their shares, common sense would dictate the shareholders hold out and they would then have more valuable shares.

A company that seeks to buy the last few of its shares, offering the same market price as the shares were going for when there were hundreds or thousands of them - is trading with insider information and not offering a fair price, none of which is ethical or legal.

77

No what you have written is entirely incorrect. Under the common law of the UK none of this is true. The actual rules are found here: Company Law Club | The most extensive free online UK company law information service currently available. Under all the company laws, the common and the civil, the Boards of diretors are representatives of the owners and of course often are the owners.

78

If someone (or some company) did acquire more than the threshold at which they were required to declare their intentions, but for some reason did not, and managed to get away with acquiring 51% of the shares (e.g. through offshore nominees, convoluted trusts, etc. across multiple jurisdictions) until they were finally caught, what happens to those shares? Do they go to jail but get to keep the shares? Do the shares go to the government (essentially making the corporation a government-owned corporation)? Do the shares go back to their previous owner (e.g. someone logs into their Scottrade account one day to see that their order to sell 100 shares of IBM from last May has been reversed, they have the shares back, and a nasty note to please deposit the price you got for them immediately or else!)?