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Shareholders are not legal owners of a corporation


opihiman2
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I have been reading some material for a paper I am writing, and I have come across something that has challenged my view, and the views of folks on this board, that shareholders are part owners of a corporation.  In fact, legally, we're not even entitled to the assets or income of the corporation.  It also seems to change the accounting paradigm that views shareholders as owners of the assets of the corporation.  There are some materials in the Harvard Business Review that explain this more fully; however, I have found this paper to be very thorough and easily accessible:

 

http://www.profbailey.com/acct7320/Readings/Myth%20of%20shareholder%20ownership.pdf

 

 

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After spending about 2 seconds looking at this paper, it seems to me to be crazy talk.  Using basic 1st year property law 9 incidents of ownership to determine that shareholders are not the owners of a corporation strikes me as law professors with way too much time on their hands.  Have they forgotten that property rights can be dictated by law and by contract?  Sure, if you are a shareholder of McDonald's it does not mean you can walk into one of the restaurants and start kicking over tables and chairs because they're "yours".  It is obviously a different kind of ownership.  Property law and contract alter ownership terms all the time.  The fact that there are limitations does not change ownership.  If you own your home, it does not mean you can have 150 tenants living it along with 50 cats and dogs.  If you own a condo, you may be restricted on who you can sell to or rent to.  

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Agree with Kraven on this.  One counterpoint would be to think about what his analysis would do if a parcel of real property were owned by 1,000,000 different people, who then delegated management of the parcel to a board of managers.  Under his analysis, he'd get the same diluted ownership results -- that is, the ownership itself is diluted, but the ultimate incidents of ownership still adhere to the 1,000,000 owners.  They've just opted to delegate certain of those rights in order to make the thing work. 

 

So, is he really suggesting that no one owns anything?  If I time share my car with 20 other folks, do we no longer own it because we lose certain exclusive rights to administer a numerous ownership structure?  This professor is pretty obviously bending concepts to meet his preconceived agenda.  There is a name for that -- bad scholarship. 

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bookie71

Further to

"Them that can, do, those who can't, teach"

Them that can't teach, administrate,

Then that can't teach or administrate, go in to politics.

I sometimes think there is more than a little truth in that.

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.

You have to remember that the American Accounting Association is a group of professors writing to impress other professors in the era of publish or parish.  In the 1960's when I was in college they seldom made sense and obviously haven't changed.  BUT if you are writing a paper for a member who is gung ho, you can get some great grades by quoting some of their articles (even if they defy common sense).  ;D

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There is another longer treatise on the subject in the Modern Law Review called the Company Law and the Myth of Shareholder Ownership as well as articles in the Harvard Business Review.  I've just started reading the legal review paper and it's very interesting.

 

And, no, Kraven, it's not.  That is clearly in our Constitution. 

 

Bookie71, these articles and paper appear in other sources too.  One, a 60+ page paper in a LEGAL review, precedes this by almost 10 years in the UK.  It's not there just to impress other accounting professors.

 

 

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Oh lord.  Legal reviews are the worst.  Law professors have way too much time on their hands and many of them have such wacky ideas it would be amusing if it wasn't what they were teaching their students.  Most (not all) law professors are law firm refugees who couldn't wait to get out of practice and into the protective cover of academia.

 

There are DIFFERENT types of ownership.  The article you attached makes that clear, but doesn't then doesn't take that further and analyze the point it's trying to make.  Rather, they focus on the 9 incidents of ownership that is taught in 1st year law school property to determine that shareholders do not actually own the company.  No one is saying that shareholders have all 9 of those incidents of ownership.  But ownership takes different forms.  Would you disagree that if you own all the shares of McDonalds you own the corporation?  Who else other than you would get the rights to the cash flow, the properties, etc. (ignoring any contractual obligations)?  And if you did own it, why different if 100 people own shares or a million or 10 million?  Do you own your home (assuming you do)?  If so, how come you can't do whatever you want with it?  Because there are limitations on ownership, both by contract and by law.

 

 

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 Would you disagree that if you own all the shares of McDonalds you own the corporation?

 

That is a good point.  I will have to read and think about that.  Although, enlighten me: what are the full extent of the powers of a majority shareholder?  They have complete control of the proxy vote?  Can elect themselves on the Board of Directors to whatever position, correct?  Have the power to take the corporation private?  I'm not being facetious here.  I would like to really know.  This paper goes against the grain of common knowledge.  It's cognitive dissonance to us, since it is very counter-intuitive.  However, that does not make it wrong.  I was pretty floored to also learn, recently, that the police force has no legal or ethical obligation to protect and serve the public--regardless of what is painted on the side of that patrol car.  Anyways, I would like to really understand this.  

 

So, that's a good point.  That's how corporations buy each other out.  But, I feel that I'm missing part of the picture.  When someone, say another corporation, buys up all the shares of another corporation, how does the ownership transfer work?  Based on the papers I've read and posted (well, one of), there seems to be another part of the process of the takeover that is required for complete ownership to occur.  Don't both corporations need to file regulatory paperwork for review and approval before the transfer occurs?  I thought that there needs to be some sort of agreement between the board of directors on both sides of the corporations for this to occur.  I mean, if I had the money to buy all of McDonalds shares, does that by default make me the legal owner of it?  Or do I need to do a lot of legal work before this occurs.

 

 

 

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A corporation has a legal life of its own, continuing to exist at the pleasure of the state that allowed it to be formed, managed by responsible officers, serving at the pleasure of its board of directors.  The ownership interests of shareholders are subordinate to many other potential claims that have priority in liquidation or bankruptcy. ;)

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Shareholders have a right to vote at board level, especially with respect to the directors that sit on the boards.

The directors in turn make decisions that determine the company's future.

 

Executive director-Managers sit with boards to make operational decisions.

 

This particularly applies to debt.

 

Think about a mortgage on home ....

 

When companies take on debt, they permit a charge to be granted and registered over the company's assets. If it is a 'charge' on property then it is called a mortgage.

 

When a company goes into default or breaches covenants set by the mortgagor or lender, then these charges activate and crystallize.

 

Therein the lender's rights take precedence over common shareholders.

 

The same sorts of principles apply to preferreds.

 

Doesn't take a PhD to explain all this. Nor does it take 9 pages in a journal by an academic either. I wouldn't waste too much time on it. Superficially speaking, looks like a silly research paper if you ask me that just takes a little common sense to figure out.

 

If shareholders don't want to be subordinated then they shouldn't permit management to take on debt. And if they don't like the managers in place then they should vote at annual meetings to determine who sits on the board.

 

Shareholders are legal owners of a business, however you are powerless if you're a minority shareholder and the majority shareholders decide against you. Just don't vote in directors and in turn managers who have opposing views to you if you feel that your rights are being subordinate.

You think Buffett doesn't have any control over Berkshire? Or Mark Zuckerberg doesn't have any control at Facebook? Or Rupert Murdoch at News Corp?

 

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Opihiman2, it's been a long time since I've thought about these issues in any detail.  The answer to whether more needs to be done when one corporation buys another is it depends.  If one or both of the companies is subject to regulatory oversight, then that is going to be part of the process.  But in and of itself, that does not determine ownership.  It just may mean that the "transfer" won't be allowed to occur.  So the "ownership" aspect doesn't come into play.  In terms of a majority shareholder, there are legal restrictions on what they can and can't do in terms of screwing minority holders. 

 

Just to cut to the chase, my honest opinion is don't spend too much time on this subject unless it's something you are really interested in as an intellectual exercise.  If you are looking into this because you are going to be buying or selling a company, you are wasting your time.  Just my 2 cents.  You'd be better off worrying about the end of days tomorrow.

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