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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.

Stefan Falk
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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.

TripeHound
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    https://news.morningstar.com/classroom2/course.asp?docId=142901&page=7 "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. – Orange Coast- reinstate Monica May 19 '21 at 05:10
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    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. – Stefan Falk May 19 '21 at 05:41
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    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 '21 at 09:00
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    @Philip To be fair, the company that might go bankrupt here is doing to because their primary lender (Greensill) is going bankrupt. So it's primary not their fault. Since there are 35.000 jobs depending on the GFG Alliance it's unlikely (imo) that they won't be saved somehow in the end. But that's another story. – Stefan Falk May 19 '21 at 09:49
  • @StefanFalk: Companies don’t go bankrupt, individuals do. The closest thing for a company is the appointment of administrators. – eggyal May 19 '21 at 10:39
  • @Stefan Selection of primary lender (and even the use of significant debt based funding) is a huge choice and risk for a company to take on so this is intimately tied into the owners/management philosophy and risk appetite. – Philip May 19 '21 at 12:42
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    @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 '21 at 13:36
  • “the stock price reflects the last sale” — that depends on the market, the volatility, and on who's reporting the price.  A single ‘stock price’ is a convenient fiction.  The market may have a last trade price (which may or may not reflect all types of trade); the mid point between the best bid and best offer prices on the order book; ditto the quote book; official open and/or close prices; and/or several other data points.  And different pricing providers have different ways of synthesising a single ‘stock price’ from them. – gidds May 19 '21 at 14:02
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    @eggyal Companies file for bankruptcy all the time. Chapter 7 means liquidation, Chapter 11 means reorganization. – Barmar May 19 '21 at 14:34
  • @Barmar: that’s US. I had understood we were talking UK. I should have been more explicit in my comment. – eggyal May 19 '21 at 14:35
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    @eggyal OK, but the UK has corporate bankruptcy, they just (as usual) give it a different name: insolvency. – Barmar May 19 '21 at 14:39
  • @Barmar: insolvency is a general term that describes when an entity (be it a company, individual or indeed anything else) is unable to pay its debts. Consequences of being insolvent in the UK include an individual being made bankrupt, or a company entering administration. – eggyal May 19 '21 at 14:43
  • @eggyal Isn't "entering administration" roughly like the US reorganization and/or liquidation? I admit that I only scanned the first paragraph of the wikipedia article? – Barmar May 19 '21 at 14:46
  • @Barmar: yes, definitely similar. I’m not saying that there isn’t something similar to “bankruptcy” for UK companies, just that the terminology is incorrect. Which I only mentioned because when I first scanned this question and commented on gnasher’s answer, I had thought we were talking about an individual shareholder. That comment isn’t entirely correct for company administration, though the broad principles are indeed similar. – eggyal May 19 '21 at 14:48
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    @StefanFalk There is only one reason why stock prices move. They rise if there are more buyers that sellers, and they fall if there are more sellers than buyers. Everything else is just fairy dust sprinkled by so-called "investment analysts," mostly with the benefit of hindsight. The bottom line is that one organization is being compelled to sell a large number of shares (because of insolvency) but nobody else is compelled to buy them. When the price falls far enough, somebody eventually will buy them, because they think they are getting a bargain at that price. – alephzero May 19 '21 at 16:13
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    @alephzero I would think that the goal of the administrators is to extract as much value as possible out of the assets (to repay creditors), and would thus probably not sell all the shares at once (which would indeed cause a big drop), but rather spread out over time. This does not however preclude other reasons for the share price to go down. – jcaron May 20 '21 at 10:40
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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.

gnasher729
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  • 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). – Stefan Falk May 19 '21 at 09:57
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    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 '21 at 10:25
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    @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. – Justin Cave May 19 '21 at 14:01
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    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 '21 at 14:05
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    @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 '21 at 14:16
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    @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 '21 at 14:20
  • @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. – Kevin May 20 '21 at 06:43
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    @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. – eggyal May 20 '21 at 07:19
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    "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. – ceejayoz May 20 '21 at 12:19
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    @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. – reirab May 20 '21 at 20:07
  • @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. – Kevin May 20 '21 at 20:22
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    @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. – reirab May 20 '21 at 23:09
  • @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. – nick012000 May 21 '21 at 06:36
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    @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. – eggyal May 21 '21 at 07:54
  • @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. – nick012000 May 21 '21 at 07:57
  • @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. – eggyal May 21 '21 at 07:58
  • @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? – nick012000 May 21 '21 at 08:06
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    @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. – eggyal May 21 '21 at 08:13
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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.

Yakk
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  • 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 '21 at 16:10