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As far as I know, it shouldn't happen, a company shouldn't have that much cash to be able buy all of its shares, because the share price should indicate that the company has that much cash in the first place - but let's suppose it happens (e.g. the company takes out a huge enough loan to buy back all of its shares or the share price is exceptionally low due to some perceived risk). What would happen in this case, who would own the company?

user2414208
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    Note the huge difference between the CEO or some other person or group within the company buying all shares, or the company itself buying them all. Several answers missed that difference. – Aganju Jul 17 '19 at 21:27
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    @Aganju - Good point. I thought immediately of how Michael Dell boughtout the public stockholders. The company still exists, but is now back to being private. – BruceWayne Jul 17 '19 at 21:30
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    I still don't understand: If a company buys all its shares and there is capital left, who owns that capital? – J Fabian Meier Jul 18 '19 at 09:29
  • A slight correction. Occasionally a company can have assets or cash that exceeds its market capitalization, HTC was a recent big name example. – Lan Jul 18 '19 at 11:34
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    This question has invoked a lot of opinions and guesses of how company ownership actually operates. This question might be better suited for law.stackexchange to inquire about how company share ownership works as a legal groundwork. – Shorlan Jul 18 '19 at 22:39
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    How can this happen, why would the entity with the last share, owning the whole company and with a complete controlling interest in the company sell that share or, even instruct the company to do that? – Jodrell Jul 19 '19 at 07:51
  • They can get that much cash if there is suddenly a tax cut for the very rich. – RedSonja Jul 19 '19 at 10:54
  • @Jodrell that assumes that they know... in a fast moving market, perhaps all the shares got bought up before anybody realized what was happening. –  Apr 05 '21 at 04:29

9 Answers9

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This is a great question. The correct answer is that a buyback of all shares is a liquidation. If there are zero shares, this can only mean the company no longer exists. Note that in normal (partial) buybacks, the company shrinks in value. The natural extreme of this is that the company disappears.

If the company is undervalued on the market compared to what it can liquidate its net assets for, the shareholders might pursue liquidation. However, there is unlikely to be a big profit in liquidation because other investors would have bid up the shares on the market based on the same idea.

On the other hand, if the company's net assets are insufficient to buy back all shares, the suggestion of borrowing money won't help, because all company debts have to be paid off as part of liquidation. There are laws against a company distributing assets to shareholders, retaining debts, and leaving the company insolvent (an abuse of its limited liability status).

Generally, healthy companies have a market value well above their liquidation value due to their future potential. This is the market telling them it would be irrational to liquidate. They may still want to pursue partial buybacks when they have some excess assets that aren't contributing strongly to profits and are better distributed to shareholders.

Ben Voigt had an interesting comment:

Mathematics forbids it. The sum of all shares must add to 100%. That 100% can be split fewer ways, but it cannot be split zero ways. When you get down to one share outstanding, that share represents ownership of the entire company. There is nothing the company can offer that final shareholder in exchange for his share, because anything it could offer, he already owns. Share buybacks are like reverse splits -- they result in concentration of ownership, not elimination of it.

This sounds compelling but gives a misleading impression. Reverse splits increase the value of each share and do not shrink the company. Buybacks do shrink the company as money flows out of the treasury. If the liquidation value is $50 per share, then at the point when that last share is notionally being bought out, the company has just $50 left. The company provides 100% of its assets (the whole $50) to redeem that last share, and in the process it ceases to exist.

nanoman
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  • Reverse splits do not issue fractional new shares, paying cash 'in lieu'. (The same for stock dividends, spinoffs, and stock or part-stock acquisitions with non-integer ratios, which are common.) E.g. in 1-for-10, someone who held 5 old shares is eliminated as a holder, and someone who held 25 old shares has their 'slice' reduced maybe 25/1000 to 2/100. Typically this shrinkage is small, but I've heard of rather extreme reverses done to get the share roster down under a regulatory threshold like 100 or 500 holders. – dave_thompson_085 Jul 17 '19 at 19:29
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    I don't see any conflict between your example and my statement "There is nothing the company can offer that final shareholder in exchange for his share, because anything it could offer, he already owns." The company ceases to exist when it is disincorporated. If it is still incorporated, then it means nothing to "redeem that last share (certificate)" because the shareholder owned 100% of the company before, and 100% after. No transaction happened. – Ben Voigt Jul 17 '19 at 20:41
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    Couldn't a company buy the last shares without the last shareholders knowing what the value of their last share is? I.e. the company is worth 2000$ but the last shareholder thinks it is only worth 50$, so he sells it for that price? – Thomas Weller Jul 17 '19 at 21:35
  • @ThomasWeller You're thinking of a case where the company leadership defrauds the shareholders, by offering them cash valued less than what the leadership can liquidate the physical assets for? – Cort Ammon Jul 17 '19 at 22:29
  • So if I understand right : if the company has a capital of 100$, each share is worth 1$. At the point where the company bought 99% of its share, knowing it had to pay 1$ to the previous owners each time, the company is only worth 1$. It then makes no sense to offer 1$ to the last share holder because he already own fully the company and its 1$ of capital. – Jemox Jul 17 '19 at 22:38
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    @nanoman Why do you assume a liquidation is necessary for a total buyback? Otherwise, why is all the talk about liquidation relevant in a theoretical sense? – jpaugh Jul 18 '19 at 00:39
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    @BenVoigt (also Echox) Ben's comment is in some ways correct, but the notional last shareholder (who owns the whole company) owns the remaining assets of the company indirectly, whereas after the liquidation completes, that person owns the assets directly and the company owns nothing. That is why it's a meaningful transaction, and someone might well prefer to just have the money in their pocket rather than have the headache of managing a corporation. In practice, the liquidation would proceed uniformly on agreed terms and no one would care if they were the "last" shareholder or not. – nanoman Jul 18 '19 at 02:27
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    @jpaugh A corporation, by definition, is owned by one or more parties (shareholders) and has at least one share of stock outstanding as the mechanism for this ownership. So the only way all outstanding shares could disappear is as part of a process in which the corporation itself disappears. – nanoman Jul 18 '19 at 02:40
  • @BenVoigt A company has a legal personality, and directors. So even though he owns the company, he doesn't own the property the company owns. A sole shareholder is usually also the sole director, so it may seem a distinction without a difference, but he needn't be (e.g. he might be a minor, disqualfied person or legally incompetent). Consider also if the asset were not cash but real propertty or a car or something for which title must be registered. In order to liquidate the company the title must change registration. – Ben Jul 18 '19 at 09:30
  • @Ben: But what you describe is dissolution of the corporation, not "sale of the last share". If the company isn't incorporated, then the company assets are actually owned by the partners. – Ben Voigt Jul 18 '19 at 13:49
  • Why do you think that a company that has bought all its shares has no shares? There's a big difference between treasury stock and no share. – UKMonkey Jul 18 '19 at 14:46
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    @BenVoigt Good point. Turns out that in most juristictions there is a legal minimum number of shareholders (usually 1 or 2) so sale of the final share would not be legal. https://www.dlapiperintelligence.com/goingglobal/corporate/index.html?t=27-minimum-maximum-number-of-directors-shareholders – Ben Jul 18 '19 at 14:56
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    So what would happen if all shares are bought back? This is certainly possible because the sellers can sell at a very low price. What legal consequences does this have? What if management does not liquidate (to keep getting paid)? Who gets the liquidation proceeds? – usr Jul 19 '19 at 11:08
  • In the UK at least, "a company in liquidation" is still a legal entity, and it that is not the same thing as "the company no longer exists." – alephzero Jul 19 '19 at 11:10
  • @usr If the company's articles of association say there must be shareholders and issued shares, it would be operating illegally. The legal consequences of that depend on what jurisdiction it is in, but most likely the first practical consequence would be that no other company or individual would knowingly enter into any new business transactions with it while it was in that situation. – alephzero Jul 19 '19 at 11:13
  • … and a company in liquidation is usually run by an independent administrator, not by its former management team, with the main objective of paying off its creditors and re-financing it for the future - often by selling the entire company to a new owner, sometimes for a nominal sum like £1 if the new owner agrees to take responsibility for the company's existing debts (which are the real "cost" of acquiring it, of course). – alephzero Jul 19 '19 at 11:25
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    What if the articles of association do not specify that there must be shareholders? Can we expose a bug in the law system that way? Also, not all companies are run by a 3rd party during liquidation. – usr Jul 19 '19 at 11:51
  • @UKMonkey What would be the practical difference between a company that held "treasury stock" accounting for 100% ownership, and that stock not existing? – IMSoP Jul 19 '19 at 12:12
  • @IMSoP as the other answers say - one is legal (the stock not existing; this is a company that is not in liquidation; but one that has been liquidated) the other is not. – UKMonkey Jul 19 '19 at 12:51
  • @UKMonkey I can't see where any of the answers say that; they variously say "it never happens because of regulations", "it's a logical impossibility", and "it would be liquidation", but none of them say "...unless it's classed as treasury stock". The way I see it, if one entity owns 100% of shares, it doesn't matter if there's 1000 shares, or 2, or 1; so if we say "the company has one share, and it's held as treasury stock", what is the practical difference between that and "the company has no shares"? – IMSoP Jul 19 '19 at 13:00
  • @IMSoP "I can't see where any of the answers say that" - then read what I said, and what they said more carefully; because you've misinterpreted one of them – UKMonkey Jul 19 '19 at 13:19
  • @UKMonkey Which answer are you claiming mentions treasury stock? Or if that's not what you're saying, how does what you're saying answer my question about treasury stock? – IMSoP Jul 19 '19 at 13:25
  • "The correct answer is that a buyback of all shares is a liquidation." Not to be confused with other forms of liquidation. – Mast Jul 19 '19 at 16:05
  • Can the company buyback shares if some shareholders don't wish to sell them? Is this forceable or what? – AbraCadaver Jul 19 '19 at 17:50
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I found the answer in Wikipedia: if a company buys back its own share, it's called treasury stock and "Total treasury stock can not exceed the maximum proportion of total capitalization specified by law in the relevant country", so it's an actual law that forbids companies buying back all of their shares. Also treasury stock do not have voting rights, so management cannot wrestle control from ownership by buying back shares.

user2414208
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    Actually, management can take control by buying back shares - if the actual managers buy them rather than the company itself. Facebook is a good example: its CEO owns personally more than 50% of voting rights - but there are other shares outstanding. – Aleks G Jul 18 '19 at 10:59
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    Facebook is a bad example: it's not the Facebook company, but a person called Zuckerberg that owns 50+% voting rights. He is actually the CEO too (he's got controlling ownership, so can appoint anyone (including himself) as CEO), but he's controlling the company because he owns (most of) it. A CEO can buy the company he's managing (from his own money, and from company funds), but it's not a buyback. – user2414208 Jul 18 '19 at 11:21
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    That's exactly the distinction I am making: buyout by the company vs buyout by the management. – Aleks G Jul 18 '19 at 11:30
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    @AleksG But that's still not buyout by the management - just buyout by a private owner, who also happens to be a manager. If an IBM manager buys a sandwich, was the sandwich bought by "IBM Management"? To say it was bought by the management, it would need to be bought in their capacity as managers (e.g. provisions for a meeting), rather than as private investment (e.g. I was hungry, and bought a sandwich). The manager cannot use the company's money/assets to wrestle control from the owners. What he does with his own private capital is a different matter entirely. – Luaan Jul 19 '19 at 12:52
  • This is the correct answer: it is just not allowed. I can incorporate a company and own the only share. I can then inject $50 cash in it. Equity is then $50 (my share), assets are $50 (the cash). I could in theory sell that share to the company treasury for $5. Sure it's a less-than-arm's length transaction, but who cares? No law of mathematics "forbids" it. But country laws do. If it were allowed, the company would simply become a non-profit with $45 in assets. The company would have to reinvest all of its profits (if any) into whatever it does since it won't have anyone to pay dividends to. – Pertinax Nov 13 '21 at 01:44
4

Ignoring regulation, how would this actually happen?

Imagine a company had a market cap of $100 million. Obviously, that market cap includes any cash on hand, so no company could afford to buy its own stock with its own money.

But let's say the company first borrowed $100 million. Now it has $100 million in cash on hand and a debt of $100 million, so the value of the company is unchanged (disregarding any change in value caused by its new liquidity or its new debt ratio).

So now it could buy back, and effectively extinguish all its outstanding stock. Which raises two questions:

  1. Why would any bank or financier lend a company an amount equal (or even remotely close to) its market cap?
  2. But assuming we could locate such a zestfully incautious lender, what would this company be now?

It's now, in some sense, a non-profit: if the company had any money left over after business operations (and of course, as Acccumulation points out in the comments, after paying back its fortunate lender), it would have no one to distribute to. But unlike real non-profits, it wouldn't have a board of directors or any way to have stockholder referenda.

This seems like the business equivalent of a black hole, collapsing into a singularity, and no normal rules apply. Which is probably somewhere way down on the list of reasons that regulations forbid it.

Michael Lorton
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  • It doesn't seem that impossible in theory to me. Imagine a company that is almost useless, so it is valued at assets + X for some fairly insignificant X. Then it only has to find someone careless enough to lend it X, rather than the whole value. – rlms Jul 18 '19 at 17:06
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    "It's now, in some sense, a non-profit: if the company had any money left over after business operations, it would have no one to distribute to." Yes it would: the bondholders. The company still has to pay back the bonds, and if it fails to do so, then it goes bankrupt, and the bondholders can claim ownership. – Acccumulation Jul 18 '19 at 17:11
  • @Acccumulation -- payments to bondholders are not considered profits. They are part of EBITDA (as amortization and interest), but not net income. – Michael Lorton Jul 19 '19 at 02:48
  • @rlms -- no, you would need assets + X from the lender, because you cannot buy stock with "assets" (except cash assets). – Michael Lorton Jul 19 '19 at 02:50
  • You can sell assets for cash. – rlms Jul 20 '19 at 15:25
2

A company doesn't manage itself, its shareholder do. Therefore a company cannot buy its own shares. Think of a car: what happens when a car pays its loan to the bank?

What can happen instead is one shareholder buying out all the shares and becoming a single owner. This is not unheard of.

Dmitry Grigoryev
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  • But, as opposed to a car, a company is a legal entity capable of committing to contracts and owning things in its own right. And it is not managed by its shareholders, but by managers appointed (or otherwise authorized) by shareholders. – I'm with Monica Jul 26 '19 at 12:42
  • @AlexanderKosubek A car is also not driven by the owner but by the driver, and the driver has no business paying the car loan unless they are also the owner. I know that no comparison is perfect. – Dmitry Grigoryev Jul 26 '19 at 12:58
2

Realistically, that isn't what would happen, quite.

To start, there will be insiders who hold a significant number of shares.

As such, they elect a fraction of Board members. They will encourage the Board to instruct management to do stock buy-backs. These insiders do not cooperate: they do not sell their shares.

As a result, with fewer total shares in circulation, the insiders now have a larger fraction of total shares.

When their fraction of ownership becomes >50%, they control the Board. They can press on with the stock buybacks even if it injures the company to do so. They can make decisions that poison the company for other investors, (e.g. do something horrible so the "green" mutual funds all drop them). The only thing that might stop them is a lawsuit from a minority shareholder saying they are damaging the company.

The endgame here is that this "club" of insider shareholders, as well as possibly a determined dissident or two, are the only shareholders remaining. This ends public trading. Now it is a privately owned company.

If everyone sells out to one stockholder, then we have arrived at your destination.

Let's go further. They decide they want no shareholders at all. The shareholders vote to change their mission to one compatible with a

  • cooperative (co-op, like a condo association or power cooperative)
  • trade association (like NEMA, NFPA, API, NRA etc.)
  • charitable organization (like a for-profit makerspace converting to nonprofit because for-profit was the wrong business model looking at you TechShop, or a commercially defunct industry converting into a museum of itself (say, East Broad Top Railroad or the British canal system).

Then they simply get shareholders to agree, buy out dissenters, and file the requisite paperwork. They are now "owned" by Kathy Jennings, in her capacity as the Attorney General of Delaware, since they surely incorporated there.

In that case, they answer to her, and Board members are elected either by a) other board members, or b) Members (one member one vote), or c) Shareholders (one share one vote). Membership or shares are allocated on some fair basis, e.g. in a condo association based on assessed value.

Harper - Reinstate Monica
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I think there would be regulations that prohibit such things. Plus even if it's isn't the case, practically it's not possible.

One can create a trust that may be similar... Essentially one needs to think how board of directors are appointed or removed. I.e the role that share holders play... This includes salaries to director etc,

A trust can be established in similar manner with trustee... Long lasting trusts put generic trems as to who all will be trusties... Say local elected congressman or municipal commissioner etc

Dheer
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When a corporation is formed, a shareholder agreement is established with a structure for how shares are divvied up for ownership. A portion of these shares are jointly company-owned and can be used to raise capital in exchange for partial ownership in the company itself.

When a corporation buys back its own shares, it is simply removing them from general circulation in the stock market, and taking back ownership of them. Even with all of its public shares bought back, the company still exists, the shareholder agreement is still intact, the company has simply become private and will be delisted from the exchange, as no one can trade it on the open market. The company is still owned, and operated as normal, except now there are no general shareholders sharing ownership in the company.

Even after going private, shares can still be traded, exchanged, and restructured by the owners as needed; but a company will never have no shares at all, until a company is dissolved at the final stage of liquidation.

Shorlan
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    If I understand you right, the key point here is that the last public share can be bought back only if there are also private shares outstanding, because the private company must be owned by someone. – IMSoP Jul 19 '19 at 12:16
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The company doesn't buy back all the shares. A person or group of people buy all the shares. It is also possible that another company buys all the shares, thus company X now owns company Y.

In all cases somebody owns the shares. If the number of investors is small then the company is considered as a private company.

mhoran_psprep
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    If the number of investors is small then the company is considered as a private company - I've always wondered about that, but I'd assumed the difference between "private" and public was whether or not the shares were traded on an exchange the public could access. Is it more typically based on the number of investors? – dwizum Jul 17 '19 at 13:16
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    "The company doesn't buy back all the shares." My question is about what happens if it does? I understand that it's highly unlikely - or is a law that forbids it? – user2414208 Jul 17 '19 at 14:24
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    @user2414208: Mathematics forbids it. The sum of all shares must add to 100%. That 100% can be split fewer ways, but it cannot be split zero ways. When you get down to one share outstanding, that share represents ownership of the entire company. There is nothing the company can offer that final shareholder in exchange for his share, because anything it could offer, he already owns. Share buybacks are like reverse splits -- they result in concentration of ownership, not elimination of it. – Ben Voigt Jul 17 '19 at 14:40
  • @BenVoigt If that's really the case, then that might be a localized (legislation specific!) view! But shares that are bought back don't automatically vanish. Buying half the shares back doesn't give the other half a higher voting share. - EDIT: But you're probably right. Even when total shares are not reduced, a company probably won't be allowed to buy ALL their shares back in this way. – I'm with Monica Jul 17 '19 at 14:57
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    @AlexanderKosubek said "Buying half the shares back doesn't give the other half a higher voting share" but it does. If there are half as many shares outstanding, half as many shares are required to carry any particular proposal during shareholder votes. From investopedia: "...repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced. When this happens, the relative ownership stake of each investor increases because there are fewer shares, or claims, on the earnings of the company." – Ben Voigt Jul 17 '19 at 15:11
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    @BenVoigt I don't claim you're wrong, but what explicit rule or regulation makes a company incapable of being its own shareholder? - The source you quote goes on to say that "Once a company purchases its shares, it often cancels them [...] and reduces the number of shares outstanding, in the process." Often does not mean always. What rule makes it impossible for the CEO (or legislation specific equivalent) to vote on behalf of all the share the company holds, effectively making the company its own shareholder? – I'm with Monica Jul 17 '19 at 15:20
  • @AlexanderKosubek: The company is just a legal layer; it can't take action on its own. Consider the case when company A owns 50% of company B. In reality, the owners of company A own those shares of B, albeit indirectly. And shareholders of A can determine how to vote that (controlling interest) in B. If you make A and B the same company, then you would still see that voting authority is concentrating in the external shareholders, because internally held assets (including shares) are under the ultimate control of the shareholders. – Ben Voigt Jul 17 '19 at 15:26
  • @RupertMorrish: Share prices are based on the market's estimate of net asset value, which includes a lot of soft assets (value of a brand name, future sales, products still in the research pipeline, legal liabilities if the company has harmed anyone). The price is almost always at a premium to tangible assets... if you had shares selling at a discount that's a sign the company is in huge trouble, because the market valuation of all intangible assets is negative. – Ben Voigt Jul 17 '19 at 20:33
  • I suspect you meant to talk about fraction of ownership, not assets. However, if some of the ownership is privately held, the equivalent number of share certificates can be calculated. I would argue that different share classes create more complexity than some fraction (share) of ownership being held in a form other than certificates. It's a mathematical law that the entirety of ownership -- share certificates and shares in other forms -- must add to 100%. Otherwise it would not be the entirely of ownership. – Ben Voigt Jul 17 '19 at 20:36
  • @AlexanderKosubek IIRC, in New Zealand (where I live) there is a law that says companies can't own their own shares, except temporarily (up to a certain percentage, and only for a short time). Apart from that exception, companies buying their own shares has the effect of cancelling them. – user253751 Jul 17 '19 at 22:23
  • @AlexanderKosubek regarding often doesn't always mean always. The difference between whether or not the company cancels the bought-back shares is just a matter of accounting. In one case there would be a line item on the balance sheet indicating the value of the shares being held, the other just changes the number of shares outstanding. Either way voting changes. A company isn't sentient, people manage the company. – quid Jul 18 '19 at 00:07
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    @AlexanderKosubek: Math doesn't say the company is incapable of being its own shareholder, it says it cannot be the only one. If there are 100 shares, and company owns 20, A owns 30, and B 50, then A owns 37.5% of company (30 certificates in his own name, and 37.5% of the 20 internally held shares, which is 7.5) and B owns 62.5% (50 certificates in his own name, and 62.5% of the 20 internally held shares which is 12.5). Internally held certificates might as well not exist as far as determining ownership is concerned. They are only a vehicle for raising money by selling to external entities. – Ben Voigt Jul 18 '19 at 02:42
  • @BenVoigt isn't a share buyback a reverse share issue rather than a reverse share split?

    Share splits don't cause dilution of ownership. If I own 1/1000 shares, after a 2:1 split I own 2/2000 which is the same %.

     – JBGreen Jul 18 '19 at 15:38
  • @BenVoigt That's an argument for why it would be irrational for the last shareholder to sell, but it doesn't establish that it would be impossible. And what if there is no "last shareholder"? What if the company buys back all the shares simultaneously? – Acccumulation Jul 18 '19 at 17:13
  • @Acccumulation: There is nothing that the company can offer its collective shareholders that they do not already own. In a buyback, some of the shareholders (the ones continuing to hold certificates) buy out the ownership share of the other shareholders (the ones who are cashing in). You cannot have this transaction occur without both parties. If everyone is in the group "we'd like to cash out" and no one would like to increase their ownership, then the price offered in buyback must decrease until someone decides to hold their shares. – Ben Voigt Jul 18 '19 at 18:01
  • Now what about X owning all shares of Y and Y all shares of X? – Hagen von Eitzen Jul 19 '19 at 11:29
  • @AlexanderKosubek Shares owned by the company (see treasury stock) do not have voting rights. They also don't pay out dividends (obviously). The only reason for a company buyback is to concentrate the voting power and payouts in the hands of the remaining shareholders - it doesn't change anything for the company management (in their capacity as managers, rather than their own possible private share ownership, of course). – Luaan Jul 19 '19 at 13:00
-3

It does happen:

Outback goes private. A private equity firm bought the company, paid all the shareholders, and took it private. A few years later they IPO'd it for an enormous profit. However, they didn't have to; they could have kept it private.

yoozer8
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Pete B.
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  • Is it still an IPO (initial public offering) if the company was previously already public? – yoozer8 Jul 17 '19 at 12:14
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    Yes it was, as it was a new company. – Pete B. Jul 17 '19 at 12:27
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    Pete, in this case a private equity firm bought Outback, but OP is asking about how Outback could have bought itself. – RonJohn Jul 17 '19 at 12:32
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    The OP is talking about the company itself buying back all the shares. In your example, the private equity firm (not he company itself) bought the shares. – Lawrence Jul 17 '19 at 12:32
  • Whether it's an IPO or something else is really a separate question, independent of the company buying back all its shares in the first place. – chepner Jul 17 '19 at 13:14
  • Dell did the same thing: https://www.forbes.com/sites/connieguglielmo/2013/10/30/you-wont-have-michael-dell-to-kick-around-anymore/#296d31d82a9b – JohnFx Jul 18 '19 at 16:14