Timeline for What happens if a large shareholder of a company goes bankrupt?
Current License: CC BY-SA 4.0
20 events
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| May 21, 2021 at 8:13 | comment | added | eggyal | @nick012000: “corporate raiders” are something that existed 30 years ago, mostly in the United States. Today, and certainly in the UK, activity like you describe is extremely difficult if not outright illegal. | |
| May 21, 2021 at 8:06 | comment | added | nick012000 | @eggyal Corporate raiders are a thing that exists - and if the trustee decides to use their voting power to go full corporate raider on the partially-owned subsidiaries of the bankrupt company to fully liquidate said partially-owned subsidiaries, would the directors really be able to stop them? | |
| May 21, 2021 at 7:58 | comment | added | eggyal | @nick012000: that is a decision the directors would need take, with regard for what is in the best interests of the whole company not simply the interests of the majority shareholder. | |
| May 21, 2021 at 7:57 | comment | added | nick012000 | @eggyal "controlling such a stake in the company would at best enable the shareholder to install directors of their choosing" Or to propose a course of action like "lay off all employees and sell off all buildings, vehicles, and other assets owned by the company", then force it through a shareholder vote with their majority vote. | |
| May 21, 2021 at 7:54 | comment | added | eggyal | @nick012000: controlling such a stake in the company would at best enable the shareholder to install directors of their choosing; those directors would owe the same duties to treat all shareholders equally and not favour the majority holder. Other protections exist for minority interests and indeed the company’s creditors. Besides which, acquiring such a stake would likely trigger a mandatory offer for the entire company, which our “bankrupt” shareholder is unlikely to be able to make. | |
| May 21, 2021 at 6:36 | comment | added | nick012000 | @eggyal I think that with 49.9% ownership of a company, they probably could extract assets from it to pay off their bills- especially if they can acquire another .2% of stock to become the majority shareholder and perform a hostile takeover, and then cannibalize its assets to pay their debts. If the trustee decides to do so, they might not even have a choice in the matter. | |
| May 20, 2021 at 23:09 | comment | added | reirab | @Kevin Buybacks are not illegal. Buybacks that would knowingly harm the company's investors overall to the benefit of a particular investor, however, would be illegal (per the breach of fiduciary duty mentioned earlier.) Buybacks normally don't harm the company's investors, otherwise they wouldn't do them. | |
| May 20, 2021 at 20:22 | comment | added | Kevin | @eggyal: Boards and CEOs do dubious buybacks literally all the time, and lawsuits are quite rare. Maybe it's illegal in theory, but not in practice. | |
| May 20, 2021 at 20:07 | comment | added | reirab | @ceejayoz Yeah. What this answer describes is really not what bankruptcy means, in law or otherwise. If you have a marketable security that you could sell to use to pay off your liabilities, then you are not bankrupt (in law, finance, or otherwise.) You might have a cash flow problem, but you aren't bankrupt. Bankruptcy exists to protect the interests of creditors in the event of insolvency. What's asked about in the question is real bankruptcy: the shareholder is (allegedly) being placed in receivership. | |
| May 20, 2021 at 12:19 | comment | added | ceejayoz | "If someone has 5 million in the bank, owns 49.9% of a 100 million company, and gets a 10 million tax bill, they are bankrupt for the purpose of this question." Realistically, they'd be easily able to get a loan with the shares as collateral. | |
| May 20, 2021 at 8:56 | history | edited | gnasher729 | CC BY-SA 4.0 |
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| May 20, 2021 at 7:19 | comment | added | eggyal | @Kevin: What you’re describing is a clear conflict of interest and dereliction of fiduciary duty. I’m not saying that sort of thing doesn’t or wouldn’t happen, but it’s unlawful and places the directors at risk of being personally sued. | |
| May 20, 2021 at 6:43 | comment | added | Kevin | @eggyal: The CEO (probably) gets paid on the basis of the stock price, and they care more about their take-home pay than the actual solvency of the company. So they go to the board and say "we should do a buyback" and the board rubber stamps it because hey, buybacks are good for shareholders, right? Besides, the price is low and will probably rise in the future, so the company may as well get a bargain, right? So the buyback happens, the bankruptcy is forestalled, and all the people who sold low now feel really silly. | |
| May 19, 2021 at 14:20 | comment | added | eggyal | @MSalters: why would a shareholder selling shares be of concern to the directors? A briefly depressed share price due to oversupply in the secondary market in no way impacts the company’s solvency, liquidity or trading prospects. | |
| May 19, 2021 at 14:16 | comment | added | MSalters | @eggyal: Correct. But if your largest shareholders points out that it must sell shares unless it receives a sufficiently high dividend, then the directors of the company have to choose between two bad options. | |
| May 19, 2021 at 14:05 | comment | added | eggyal | Ah, okay… that’s definitely different to the situation I had in mind. But nevertheless, shareholders typically can only approve/reject dividends proposed by directors, who have a duty to ensure any proposed dividend is in the best interests of the company as a whole not just a single shareholder. | |
| May 19, 2021 at 14:01 | comment | added | Justin Cave | @eggyal - Since the original question said that the shareholder might go bankrupt, my assumption is that gnasher729 meant to say "If this shareholder is going bankrupt". As in they might try to stave off bankruptcy by, for example, voting to have the company issue a large dividend that would help with their personal cash flow but might strip the company of needed capital. | |
| May 19, 2021 at 10:25 | comment | added | eggyal | I think this answer fundamentally misunderstands how bankruptcy works. When a bankruptcy order is made, all assets that belonged to the subject individual (including any shares) instantaneously transfer to their trustee in bankruptcy, to realise for the satisfaction of their creditors. The bankrupt absolutely cannot deal with their shares in any way, and certainly cannot use them to “try to extract money from the company in some way” (which would likely be illegal even if not bankrupt). At worst, the trustee will sell the shares which may have the depressive effect mentioned by @TripeHound. | |
| May 19, 2021 at 9:57 | comment | added | Stefan Falk | That's a very good point. I didn't quite think about that. It might be worth mentioning that this stock is listed on the alternative investment market (AIM) - rules there are probably a bit different but we can probably assume that your argument still holds (if not even more in this particular case). | |
| May 19, 2021 at 9:03 | history | answered | gnasher729 | CC BY-SA 4.0 |