Submitted by hellothere564738 t3_yffqbu in explainlikeimfive
So supposedly this is done by simply buying all of the shares. But imagine someone wants to make google private, and I own a few shares. What happens when someone just refuses to sell their shares? And keep them? How can it then become private? After all the shares are theirs.
Part of the contract you made when you bought your shares is something called "drag along". This means that a small minority of shareholders who don't want to sell, can be forced to sell. There are specific, well defined cases where this applies. A total buyout is such a case.
Most small shareholders of public companies are not even aware of the details of shareholder rights ,voting, board control, acquisition, etc, because it almost never matters to them. But your rights have various standard limitations, and in a buyout, merger, bankruptcy, etc. those limitations are important.
"Drag along" rights are a thing, but that's no what's going on in a public company going private transaction. These transactions are completed by merger, which does not require consent of all the parties.
Correct. I just quick-posted without thinking about the difference between seed investment and public.
That's why if I ever have a company, I'll make sure I always own 50.1% of the shares.
Yeah that happened many years ago when Dell went private. I owned a few shares of stock, but they just ended up selling it for me.
So others have control over your property? Damn
If they have a majority of shares in the company, yes. Companies have various internal rules (called bylaws) that dictate how decisions by the company are made. Generally speaking, those say if you have a majority, you can make binding decisions. If a minority could hold out, it'd make governing the company kind of impossible (also, it'd mean the minority had control over the majority's property)
There are exceptions/protections (you can't just vote to zero out those minority shares and not pay, for instance), but if you're in the minority of shares you're kind of along for the ride
Also bylaws for many companies specify at least a 2/3 or more majority to approve things like buyouts, or changes to bylaws (which could then reduce the votes needed for a buyout), but leave routine stuff to an ordinary majority. But they'll always leave some room so that a couple percent can't halt an overwhelming majority.
The company isn't "your property". You own a very very small share in that company. Decisions about the company are taken by the majority owners, not by you, personally.
And if the company decides that "all shareholders will get a chunk of money, and their shares will cease to exist" then that is what is going to happen.
Wait til you hear about zoning laws.
Or eminent domain. Or asset forfeiture. Or condo boards. Or HOAs.
The company isn't "your property" and by buying shares you agree to the terms attached to them, which include provisions which allow the majority to decide things like this. The alternative would be tyranny of 1, ANY single person could ruin the business by refusing to allow something to happen. No sane company would issue shares under those circumstances.
Consider another scenario - I buy one share of Ford Motor Company. That doesn’t give me the right to demand a free car or force them to release a new version of my favorite model. Owning stock doesn’t give you full control over the company. It does give you some say in how the company is run, often through voting on the members for the board of directors.
Electing boards of directors who hire the CEO is arguably just as consequential to your investment. Shares aren’t like land or a car, where there is are myriad ways to extract value. The only point in buying a minority stake of shares in a company is to make money on dividends or value appreciation, and if the majority of shareholders think a private sale is the best way to make money, then it’s appropriate that everybody is included.
When these transactions occur, it goes through a process with the shareholders.
The first step is agreeing to the sale price. This is put to a vote, if this passes a majority vote of the shareholders, well.. kinda thats it. The company is going to be sold. The shareholders have no more say, you can't "refuse to sell", the decision has already been made, you had your option already to vote against the sale, but the other side won. The owners of the company (shareholders) have made a majority decision and it goes, your shares will be sold whether you like it or not. There are some outlier exceptions, but not important enough to get into.
tl;dr: You can't refuse to sell once the sale is approved by the shareholders.
How does a sale price get agreed on in a fair way if the person buying the shares is the majority share holder?
Whoever is buying the company makes an offer, it can get negotiated by the company/board. Once the negotiations are complete, they can put it up to a vote. Don't overthink this too hard, its not as strange a transaction as you may think.
There are some outlier situations where a certain large shareholder may not get to vote if they have a conflict, but not always. Even as the majority holder, well, in many cases, of course being the majority holder means you can make the decisions, even to sell.
That's not the case here, but in cases where it is there are a few different steps that are put in place: the Board of the target company appoints a special committee that is comprised of people who are not affiliated with the majority owner, the special committee hires an investment bank to evaluate what price would be fair to the shareholders and give a "fairness opinion" that the committee can rely on, the special committee (with help from investment bank and lawyers), and then once a transaction is agreed on its approve "majority of the minority" (i.e. by vote of the shareholders other than the majority shareholder/buyer). Then there are inevitably lawsuits claiming that the transaction was unfair.
Had to word it weird because apparently saying “what if someone” is illegal
Probably because the bot considers it a common phrase in hypothetical questions, which are not allowed.
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It’s not done by buying all of the shares. It’s done via a merger. In a merger, your share goes poof and you get cash, if that’s what most of you want. You don’t actually get to sell your shares to anybody.
And public/private is like an on/off switch. The owner can easily turn the switch off (turning the company private).
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Minority shareholders are minority in effect, you don't get to decide if you're to sell.
By means of Voluntary Delisting or Buyouts, shareholders planning to take the company private will first have to obtain enough votes or voting rights to make the decision to go private.
That usually happens by announcing to acquire a certain fixed percentage of shares at or above market rates, and only that fixed percentage will be bought at that rate.
After obtaining enough voting rights, the major shareholder then could announce privatisation by shares buy-back at specific rates usually far below the previous buy-out rate.
So most shareholders being afraid to loss values to their shares would sell it out at the first proposal, by then privatisation is almost a done deal already.
Of course in actual world, there would be much more complications, shareholders bounded by terms, percentage of acquisition, forced acquisition, but the basic flow are somewhat similar.
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