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Suppose there are 100,000 shares outstanding. I own 90,000 shares. I allow my shares to be lent to short sellers. Short sellers borrow 30,000 shares from me and they sell those shares on the market. I buy the 30,000 shares from them on the market. Now, I have 120,000 shares, which is greater than the number of shares outstanding. Is this situation possible? Did my voting power and ownership stake increase from 90.0% (90,000 / 100,000 = 0.900) to 92.3% (120,000 / 130,000 = 0.923)?

I have read Why can the institutional ownership of shares be larger than 100%?, which deals with institutional ownership. The answer there explains the cause (somewhat similar to my hypothetical scenario above), but not the effect of >100% ownership. It claims that >100% institutional ownership is caused by "discrepancies in institutional reporting", without elaborating further on the effect of such "discrepancies".

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The owner of the shares (A) is the holder of record. When these shares are loaned out for shorting by (B), the original owner has book entry ownership but he is no longer the holder of record and he loses his voting rights to (C), the buyer of the shorted shares.

In this process, there is no increase in the number of physical shares outstanding because (A) no longer holds them because they have been loaned out for shorting and are now held by (C).

However, when shares are shorted, it creates synthetic long shares. In your example of 100,000 shares outstanding, if 30,000 shares are shorted, it now becomes 100,000 physical shares, 30,000 synthetic long shares and -30,000 short shares which still adds up to 100,000 actual shares with voting rights.

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Something like this happened in 2008 with Volkswagen and in the process caused that company for one day to become the most valuable in the world as all the short sellers, upon discovering their predicament scrambled to try to cover their positions.

At the time Porsche was known to have been buying shares and had acquired a 35% stake in Volkswagen, the state of Lower Saxony was another major shareholder, owning 20%. Once Porsche reached 30% ownership it was required to make an offer for the whole company but that offer had been rejected by the other shareholders.

Short sellers looked at the shares and found that preference shares in Volkswagen that had no voting rights were worth much less than ordinary shares that had voting rights. A number decided to try to take advantage of that price gap since ultimately preference shares conferred the same ownership rights over the company and its dividends. The gap had been caused by Porsche buying only ordinary shares as they had needed the votes when they bid to takeover the company.

The short sellers managed to short 12% of Volkswagen. At this point Porsche disclosed that they had increased their holding of Volkswagen to 42.6% and in addition had also bought options on 31.5% of the remaining shares. This meant that between them Porsche and the state of Lower Saxony owned (or would own when the options settled) 94.1% of Volkswagen. The problem for the short sellers was immediately apparent as they needed to buy back 12% of Volkswagen in order to unwind the shorts when only 5.9% was available. The share price increased fivefold as the shorters scrambled to buy that 5.9%.

Eventually Porsche sold around 5% of the company so the short sellers were able to settle albeit only after racking up $20 billion in losses. Porsche on the other hand had a huge option bill to settle, which nearly bankrupted it.

So although Porsche never owned more than 100% of Volkswagen they and the short sellers did sum to more than 100% in a sense.

This was covered by many news sources if you want to read more about it

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  • Note: The link leads to a paywall (you pay with your personal information, not with cash, but still) – Aganju Nov 16 '20 at 6:58
  • It didn't when I linked it. Perhaps they paywall the pages when they become popular. I'll add some alternative links. – Robert Longson Nov 16 '20 at 7:15
  • @RobertLongson Some sites also make it free at first then paywall everything after some period of time has passed. – Loren Pechtel Nov 16 '20 at 22:07
  • Great example! One point not clear to me is why did Porsche end up with an options bill? – curious_cat Feb 3 at 17:49
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When you have a short position but only borrowed shares, and I buy your shares, I don't actually shares but I get your promise to deliver the shares to me. That delivery is guaranteed by your broker, which is why your broker wants to see that you have cash before he allows you to short shares.

So in principle, I could have 90% of the shares, plus promises of various short sellers to deliver another 30% of the shares to me, which may cause those short sellers serious trouble once I ask them to deliver.

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