19

One of my positions continues to get beaten down by bad news. The latest is that one of its largest stakeholders might go bankrupt.

My question here is what actually happens if a large stakeholder, in this case one that holds for example 49.9% of a company, goes bankrupt and would have to sell its shares.

On one hand, one might say that the shares would go down but, on the other hand, one might say that it would not as long as there are people or institutions who scoop up the shares, right?

The current share price of Simec Atlantis (SAE) is dropping, very likely because of their latest press release, but is this actually a reason for concern? The inherent risk that is carried by this business set aside for a moment, of course. I am just talking about a major shareholder going bankrupt. In my point of view, this should not really affect the share price (at least not from a rational standpoint).

Update:

Just as a side note: A few days later this article was published where the director of the company explained that everything was "business as usual" and that the shares will be transferred to another company or institution. Since it is part of a larger group of business this seems to by a possibility and something I didn't think about at first.

0
36

I am just talking about a major shareholder going bancrupt. In my point of view this should not really affect the share price (at least not from rational standpoint of view).

A large shareholder going bankrupt – in and of itself – probably shouldn't affect the price of the shares, however, if that bankruptcy forces the sale of a large tranche of shares, then in most cases that is likely to lead to the price falling, in the same way as selling any large tranche of shares would.

16
  • 9
    news.morningstar.com/classroom2/… "The father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company." An investor dumping shares is a short-run effect. May 19 at 5:10
  • 1
    This makes sense to me. I was just surprised to see that the price dropped even further even though the matter should not affect the company at all - at least not as far as I can tell. Maybe the news just made some investors nervous and they decided (probably understandably) to jump off after the recent decline of the stock over the past few months. May 19 at 5:41
  • 3
    Not quite true, shareholders in this % range usually are pretty intimate with the running of the company, management selection, philosophy etc. Bankruptcy tells you a fair amount of info about the likely health of the company due to this influence. If they can't run their own money well it's unlikely then can influence a company well.
    – Philip
    May 19 at 9:00
  • 8
    @StefanFalk There are usually people offering to buy stock at a variety of prices; the stock price reflects the last sale, which would take place at the highest outstanding bid. When a large number of shares get sold at once, the lower bidders are able to buy shares before more people can submit higher bids. So a falling price isn't necessarily an indication of panic selling, but rather saturation of existing demand that would have otherwise gone unsatisfied.
    – chepner
    May 19 at 13:36
  • 2
    @eggyal OK, but the UK has corporate bankruptcy, they just (as usual) give it a different name: insolvency.
    – Barmar
    May 19 at 14:39
6

A 49.9% shareholder has a lot of power. Basically he or she would win any shareholder vote even if 99.7% of the other shareholders voted against them.

If this shareholder goes bankrupt, they could try to extract money from the company in some way, which could affect the shareprice badly.

Or they could start selling their shares. Someone selling say 10% of the shares, when only 50.1% were freely traded, that might be enough to drive the shareprice down. With 40% of the shares, that shareholder would then have much less power, which might be good or bad for the shareprice.

PS. This is not law.stackexchange. Here “bankrupt” means “can’t pay his bills”. 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.

PS. If someone doing something illegal affects your personal finances, then it is entirely appropriate to put it in an answer here. Plenty of “is this a scam” questions are answered here. If we could have given good advice to Enron shareholders years ago, that would have been very useful advice.

18
  • 10
    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.
    – eggyal
    May 19 at 10:25
  • 3
    @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 at 14:01
  • 3
    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.
    – eggyal
    May 19 at 14:05
  • 5
    @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.
    – MSalters
    May 19 at 14:16
  • 4
    @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.
    – eggyal
    May 19 at 14:20
4

In theory, the value of an asset depends on a few factors.

First and foremost, what expected future profit can be extracted from it.

But just behind that, how hard it is to determine what that expected future profit will be.

Assets that are hard to determine what they are worth are rationally worth less; it takes work to determine if they are worth buying. That work has a cost, and economically that cost must be paid.

When business A is entangled with another business B that is experiencing a financial collapse like bankruptcy, determining if there will be an effect is work. That work has a cost, either in actually doing it or the uncertainty or both, and that cost should depress the price of business A.

There are many ways how such a relationship could mess up business A or indicate a problem. B could be helping A in a myriad of ways, and that help might be interrupted. A could actually be in a worse position than it appears, and that discovery triggered the problem in B, but is not public knowledge yet. A joint venture could be in trouble, either triggering the bankruptcy, or as a result of the bankruptcy.

A 49.9% ownership share tells us that the two businesses are probably entangled, and being entangled with someone undergoing bankruptcy increases uncertainty.

It is also possible that the ownership stake was holding business A down, and the sale will free it to be more efficient. Maybe it was engaged in sub-optimal partnerships with B that B's 49.9% ownership was somehow encouraging, and the bankruptcy frees A from those obligations.

But the point is that the increased uncertainty can and should have an impact on the share price.

1
  • You could add that a company in trouble might borrow money from the subsidiaries or other controlled companies and the lending company might keep the credits on the books as safe credits until the very last moment.
    – FluidCode
    May 19 at 16:10

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.