Why can’t a company who issues stock set a limit how much one can purchase and/or hold at any one time? This whole business of hostile take-overs is just ridiculous. Why doesn’t work that a company can’t be taken over unless it’s really on the market seeking a buyer?
Maybe I’m just naive… I’m not anal, I’m “naivel” (sic)!
I cannot provide a definitive answer, but I would posit that your proposal would fail to provide all the equity to shareholders that it could.
The number one mandate of most publicly traded companies appears to be to enrich shareholders as much as possible.
To the extent that a policy doesn’t do that it tends to screw the owners of the company. Remember… ultimately the shareholders either run the game or appoint the people who do.
Why would the shareholders object to a hostile takeover which involved paying them a lot of money for their shares?
There are various ways to avoid this if the company wishes.
I knew of one that issued two classes of stock: Class A, which was only sold to the owners and which made up 80% of the voting stock, and Class B, which was sold to the general public. Thus, even if someone bought up all the Class B stock, they still had no chance of taking over the company.
I’m sure this kind of structure has drawbacks, however.
More generally, many companies just figure the amount of the stock available makes it not worth someone’s while to buy it up. In addition, many started floating stock long before this was an issue, and switching things would be difficult.
If you own more than 5 percent of a company’s stock you have to file a 13G with the SEC so they can keep an eye on you.
Jinx, the managers of a company, including its CEO, are EMPLOYEES. They have no legal or moral right to prevent the owners of the company – their employers – from selling their share in the comany to anyone they please.
It does. Non-voting (or minority-voting) share classes are simply not as valuable, because fewer people will be persuaded to buy them in large numbers. Thus it is more difficult to raise capital by selling such shares.
Hostile takeovers are only possible when the shares are undervalued enough to make it profitable to buy them. Generally that reflects something wrong with the current management or productivity of the company. If the company wants to be takeover proof, all it has to do is make its shareholders enough money to make them want to keep the stock. Failing to do so is pretty well proof that replacing current managers is a good idea.
Debt structure is the failing most likely to make a company a candidate for hostile takeover. When you issue more shares than you really should, the price per share is going to go down. If you issue non voting shares, they represent much less value, and will sell at a much lower price, unless they are guaranteed preferred status for payment of dividends, or recovery in the event of bankruptcy. That will drive down the price of your common stock, though. Big debts will make folks less interested in your company. The combination of too much stock in the market, and too much debt in the company coffers will drive the value down even further. Now it becomes interesting to someone looking to pick up a corporate bargain. Since the current managers are obviously not doing a good job, it gets even easier when you make an offer to the general stockholders. They get their cash back, and the folks who lost them their money get fired.
Of course if the raider is just raiding, then the employees are screwed. If, on the other hand they are actually interested in the company itself, replacing incompetent management can turn a company around. A new company can sometimes regain the market, and productivity that made the old one attractive in the first place. The ideal is one thing, the reality may be quite a different thing. In some places the real estate and the subsidiaries are worth more sold off in pieces than the company as a whole. Since selling them is easier, and quicker than the risky process of rehabilitating a poorly run business, that option is a lot more common.
The best defense against take over is limiting the number of shares available to the general public. Senior finance partners should retain at least a third of all the stock, with another sixth held by the corporation treasury. Now you control half the votes. You sell the remaining half to the public at large. As long as senior finance doesn’t piss off the entire public ownership, takeover is impossible for even one of the senior stockholders. Keeping your total debt low enough to avoid the need to pledge treasury shares as collateral is, of course essential. You use capital to buy your own stock when market forces drive it down, and then sell those shares when it rises. That keeps your price stable, and discourages speculation in your shares, and if you keep your cash options open, it can even make you some money. If you have the right debt structure, you can profit from an attempt to take you over, and cripple the raider as a bonus.
Tris
I think I’ll go with the answer that a company could set such limits on its IPO stock offering, with the understanding that those limits on the stock ownership transfer from owner to owner with the stock themselves (maybe.) I’m not 100% sure on the legalities involved.
However, if such a thing was possible, not many buyers would likely be interested in an arrangement like that. Stock ownership is ownership of a fraction of the company, as people have said, so an IPO like that is “yes, you can buy a proportion of this company, but no more than 1/xth of a percent, so that no-one can own enough to really boss us around effectively.” Seems like a pretty clear case of trying to have their cake and eat it to. (And, as a minor point, who would they get to sit on the board of directors??)
Even stock owners who only want to own a tiny share will want to keep open the option of selling to someone who’s trying to acquire controlling interest… if the price is right. And then there’s the question of fund owners, who probably can’t buy more than a tiny bit of your company because legally they’re a corporation, a single person in the eyes of stock law. So you’re missing out on a large source of possible ownership there.
I’m not sure that this would entirely negate the possibility of a hostile takeover either. It would just require that the party doing the takeover manage to find enough people to own stocks as proxies for it… a bit of a logistic nightmare, and a possibility for management to win back control by convincing these proxies to switch sides, but it would be do-able if the stakes were high enough.
Why exactly are hostile takeovers ridiculous?? They seem a fairly straightforward extension of public equity ownership to me. The corporation has offered itself up for sale to the public, and as a publicly traded commodity. Sometimes ownership is going to fall into the hands of people who don’t like the way the existing management is doing things.
Don’t make and keep too much money: zero debt and a large cash balance make you too attractive a target for a leveraged buyout.
There’s a real simple way to avoid a take-over - don’t trade shares publicly on the market. If you keep your company as a purely privately held company, you can’t be taken over.
The drawback to that is that you don’t have access to the equity markets and the money that people may be willing to invest in your company. So you may decide to sell shares publicly. But, that means that the shares are now a public commodity. It’s a trade-off.
Yeah, I think I missed that. A company that is publicly traded is ALWAYS on the market… maybe not actively seeking a buyer (or at least, generally only a few of the people owning shares are seeking a buyer) but all the owners are ‘listed’ so that a would-by buyer can contact the owners and initiate negotiations.
And, just to hammer the point home one more time, a corporation, or the management of it cannot really be ‘seeking a buyer’ unless it is making its IPO or issuing new shares (presumably with the consent of existing shareholders.) The shareholders are the ones who own it, and thing probably get really bad before they get together to try to find someone else to sell to ‘en masse’.