1

Let's say company A has 100 equal shareholders (company worth $100 million).

B is a competitor.

B wants to buy A for $60 million

A (obviously) refuses.

B buys 51 shares of A for $51 million.

B appoints it's CEO as CEO.

A's other 49 shareholders protest.

B's shareholders insist on a vote.

B wins 51 to 49.

A's new CEO signs away all the company property to B (for a great low price of $9 million).

A's 49 shareholders protest

B insist on a vote and wins.

A is worthless.

Even if such a blatant plot seems unethical, one can implement this in a more stealth manner (proxy companies, B's CEO making "strategic" sales).

Are there any legal protections for A's shareholders?

phoog
  • 37,212
  • 5
  • 79
  • 127
business
  • 11
  • 2

4 Answers4

2

The situation you described is called a hostile takeover. Happens all the time. Companies usually put special clauses in their executive officers contracts to prevent such takeovers. Typically such clauses give the executive officers very nice severance deals if the companies board of directors changes.

The only thing the majority can't do is intentionally accept a low price per share. I am not an expert but I believe the resulting price per share has to be at or above market price.

Viktor
  • 3,578
  • 1
  • 17
  • 32
2

Looking at your example, the very fact that B now owns 51% of A means that it doesn't have to force a sale of the remaining 49% - it can effectively direct A to do what it wants. Any further ownership is meaningless unless A is seriously under capitalized and B knows it.

Now, there are only certain conditions in which that majority could force the remaining stock holders to sell their stock. The first is if there is a Buyout Agreement in place - which is more common to see in small companies and isn't something you can normally retroactively apply.

The second is if there is a Bring Along provision. Basically a provision in the shareholder agreement where if a certain percentage of the stock holders agree to sell, then the rest must sell. However this normally lays out a price floor and is generally only used in tax free mergers and acquisitions because it can create a tax problem for the shareholders. Again, this is something that isn't applied retroactively.

Some mergers in certain locations (such as Delaware and Texas) can force shareholders to sell. But those are a very particular set of circumstances.

Bear in mind that in any of these situations the shareholders could sue over the price paid per share. If the forced sell is for under market value then company A's shareholders would likely win big.

All of this to say: Yes, your proposal could happen in a number of locations.

That said, your statements that B wins and A is worthless is incorrect. If company A really was only worth about $9m then company B paid about 51m too much and their own shareholders would be screaming about it. If company A is worth far more than that, then company A's shareholders would prevail in a lawsuit to either stop the sale or force B to pay market value.

NotMe
  • 171
  • 4
  • What about monopoly law? If A and B are big enough, wouldn't they have to deal with that before B would succeed in this plot? – DonielF Aug 09 '17 at 23:46
1

The CEO is responsible to all the shareholders, not just the majority. There are obviously situations where there can be disagreement what's the best for the shareholders, but in this situation it is so obvious that the sale will be invalidated and the CEO will go to jail.

gnasher729
  • 34,028
  • 2
  • 46
  • 88
  • so the board of directors (controlled by B) can't force the CEO to sell? –  Jan 24 '16 at 23:16
  • Go to jail? For what crime? In practice I've typically seen this play out through a shareholder action and the court, after some litigation, might invalidate the "inside deal" or "malfeasance," but AFAIK those rarely rise to the level of a crime. – feetwet Jan 25 '16 at 03:05
  • This ordinarily would result in a shareholder oppression action and suit for breach of fiduciary duty, it would be very unusual to have it treated like a crime. – Tom Jan 25 '16 at 14:25
1

No

The members (shareholders) of a company have a right to appoint the board of directors in accordance with the law and the company's constitution; they do not have a right to vote on buying and selling the assets of the company or the general operations of it. Just like voters don't vote on legislation; they elect people to do it for them. The board of directors have a legal obligation to run the company in accordance with the law and the best interest of the shareholders - all the shareholders. If they do not do so they can be sued by the shareholders (as can the company) and potentially go to jail.

In addition, there are laws that vary by jurisdiction about buying and selling shares. For example, in Australia, for a listed company, an unlisted company with more than 50 members and unlisted managed investment schemes takeovers are restricted under Chapter 6 of the Corporations Act 2001. In summary; a member cannot increase their voting power from below 20% to above 20% or to increase it at all if their current position is between 20% and 90% without launching a formal takeover bid - that is a binding offer to buy all the shares in the company. If the board of the target company recommends that shareholders accept the offer this is a friendly takeover, if not it is hostile.

Dale M
  • 208,266
  • 17
  • 237
  • 460