Common Stock Ownership Structure

[bmichaud]

Curious what the board-wide thinking is with regard to what a common stockholder truly "owns". The discussion originated from the MSFT thread when Palantir stated that (paraphrasing) MSFT shareholders do not technically "own" the cash on MSFT's balance sheet because it is owned by the legal entity, the "firm" Microsoft Corporation, thus MSFT can do whatever it wants with the cash, irrespective of shareholder interests. In other words, even though common stockholders have a percentage ownership in the legal entity the "firm", the property rightfully owned by the "firm" is not transitive to the firm's owners.

 

Oddball and wellmont weighed in and appear to believe common stockholders do in fact "own" said company's assets (net of liabilities of course). Curious what everyone thinks!

[watsa_is_a_randian_hero]

The way the question is worded, I answered "no," but I wasn't exactly sure what you were getting at.

 

A 1% Common stock holder of a construction company with 100 bulldozers is not entitled to go remove his proportionally owned 1 bulldozer from the firm's parking lot...all assets are owned by the firm, unless and until you can control the firm or persuade a majority block of shareholders to vote with you.

[bmichaud]

The way the question is worded, I answered "no," but I wasn't exactly sure what you were getting at.

 

A 1% Common stock holder of a construction company with 100 bulldozers is not entitled to go remove his proportionally owned 1 bulldozer from the firm's parking lot...all assets are owned by the firm, unless and until you can control the firm or persuade a majority block of shareholders to vote with you.

 

Mechanically no he cannot remove the bulldozer - but does that 1% owner have a 1% ownership stake in that bulldozer via his/her 1% ownership stake in the firm? Or does he/she not have ownership until the firm (if and when it decided to) distributed the 100 bulldozers proportionately to the stockholders?

 

Bottom line - the collective MSFT shareholder base "owns" the cash on MSFT's balance sheet, thus MSFT mgmt should have the shareholder in mind when it spends the cash. MSFT mgmt behaves as if they/the Company owns the cash and can do whatever it pleases.

[LC]

The way the question is worded, I answered "no," but I wasn't exactly sure what you were getting at.

 

A 1% Common stock holder of a construction company with 100 bulldozers is not entitled to go remove his proportionally owned 1 bulldozer from the firm's parking lot...all assets are owned by the firm, unless and until you can control the firm or persuade a majority block of shareholders to vote with you.

To flip it, can a 99% shareholder instruct the firm to sell 99 bulldozers?

[watsa_is_a_randian_hero]

The way the question is worded, I answered "no," but I wasn't exactly sure what you were getting at.

 

A 1% Common stock holder of a construction company with 100 bulldozers is not entitled to go remove his proportionally owned 1 bulldozer from the firm's parking lot...all assets are owned by the firm, unless and until you can control the firm or persuade a majority block of shareholders to vote with you.

 

Mechanically no he cannot remove the bulldozer - but does that 1% owner have a 1% ownership stake in that bulldozer via his/her 1% ownership stake in the firm? Or does he/she not have ownership until the firm (if and when it decided to) distributed the 100 bulldozers proportionately to the stockholders?

 

Bottom line - the collective MSFT shareholder base "owns" the cash on MSFT's balance sheet, thus MSFT mgmt should have the shareholder in mind when it spends the cash. MSFT mgmt behaves as if they/the Company owns the cash and can do whatever it pleases.

 

I would say it is dangerous to think a 1% shareholders "owns" 1% of the cash and add this cash directly to a valuation of the shares (with no discount).

 

A 1% shareholder owners 1% of the firm.  The firm owns the cash.  Unless the 1% shareholder can persuade others to join in a proxy battle, control of the cash lies with management (for better or worse).  Therefore, if management has a history of letting cash idle, poor investment choices, poor acquisitions, or anything of the like, then that cash may be worth less to the shareholder then its stated value on the balance sheet.  On the flip side, if management can be trusted, then I believe the cash is worth its full stated value to the shareholder. 

 

Either way though, the cash does not proportionally belong to shareholders...all of the cash belongs to the firm, and the firm proportionally belongs to shareholders.

[bmichaud]

Ackman IPOs a shell company for future investments . initially Pershing owns 100% after injecting $500, then the IPO for another $500MM brings pershing's ownership down to 50%....

 

Now that that shell company has say 100 new public shareholders, does Pershing no longer "own" $500MM (50% of a $1B public shell company)?

[bmichaud]

LC - Icahn owns 80% of CVR Energy and has forced the distribution of two massive special dividends out of CVI's cash hoard. Not dissimilar to your inversion.

 

Jut because a 1% shareholder doesn't have enough control to force management to do something doesn't mean that shareholder's "ownership" of the underlying assets is any different than Icahn's 80% controlling "ownership" of CVI's cash hoard.

[Kraven]

A corporation is an entity separate and distinct from its shareholders.  Property owned by the corporation is NOT owned by the shareholders.  A company is created by statute or in certain limited cases by common law (not usually in today's world).  Once formed it is a "person" under the law.  Person A forms a corporation and is the sole owner of equity.  Person A causes the corporation to buy a building.  Person A does not own the building, the corporation does.  Subject to applicable law Person A may be able to unwind the company and distribute the assets to himself, but it is subject to any superseding interests which include anything from creditors, to government agencies, etc. 

[constructive]

I certainly believe shareholders deserve to participate in control of the company and to realize value in proportion to their ownership.

 

But as to whether they legally own the assets, transitively through ownership of the corporation - no.

[Kraven]

People are confusing the Graham/Buffett pronouncements to "act like an owner" as meaning that one is the owner.  They are not technically or legally so.  As to why this is "fair", one receives certain benefits from the corporate structure such as limited liability and so forth.  In return one gives up certain rights with respect to the assets or property.

[oddballstocks]

A company can distribute their bulldozers in-kind to shareholders if they wish.  If someone doesn't own a full bulldozer they could distribute the treads or whatever they felt like that would satisfy an ownership interest.

 

As Kraven points out a company owns the bulldozers not the shareholder.

 

Here's the caveat, to the law someone who's a shareholder is a legal owner.  This means you can legally go on the property, examine books and records etc.  It's like trying to trespass in your own home, you can't, you own it, same with a company.  Clearly some companies will try to fight this, but if your pockets are deep enough you can fight back and court precedent is that shareholders are owners and are allowed on the premise and are able to examine anything that is relevant to their investment.

[bmichaud]

The board has spoken Palantir - you win. Congrats. Shareholders own nothing but the right to some dividend payments and the proceeds from a liquidation.

 

Ballmer - carry on as is  8)

[TwoCitiesCapital]

LC - Icahn owns 80% of CVR Energy and has forced the distribution of two massive special dividends out of CVI's cash hoard. Not dissimilar to your inversion.

 

Jut because a 1% shareholder doesn't have enough control to force management to do something doesn't mean that shareholder's "ownership" of the underlying assets is any different than Icahn's 80% controlling "ownership" of CVI's cash hoard.

 

I think you're very wrong here and that is the difference between minority ownership and a majority stake. Taking a majority stake means the cash is yours because you get to decide what to do with it. With a minority stake, there should be a discount for a lack of control since the executives could squander it with or without your input.

[Kraven]

The board has spoken Palantir - you win. Congrats. Shareholders own nothing but the right to some dividend payments and the proceeds from a liquidation.

 

Ballmer - carry on as is  8)

 

I know you're being sarcastic, but that's not accurate either.  The question was who owns a corporation's assets.  Technically it is the corporation.  However, shareholders as owners of the corporation itself have their own bundle of property rights and expect that the value of the equity will be increased.  They own a lot more than dividend payments and proceeds from a liquidation.  Shareholders have collectively hired the officers and directors to run the company.  They are required to do so using "reasonable" judgment (there are different standards depending on the situation).  Obviously an argument can be made that in any kind of acquisition, etc it was the "best" use of capital.  One may argue and disagree, but from a legal standpoint it is tough to say that they "destroyed" capital by doing something like this. 

 

In my view acting like an owner means treating "hiring" decisions with the utmost level of care since those are the people delegated to run "your" company.  You may not have technical legal ownership to the underlying assets, but you have ownership in the equity of the "person" who does. 

[bmichaud]

The board has spoken Palantir - you win. Congrats. Shareholders own nothing but the right to some dividend payments and the proceeds from a liquidation.

 

Ballmer - carry on as is  8)

 

I know you're being sarcastic, but that's not accurate either.  The question was who owns a corporation's assets.  Technically it is the corporation.  However, shareholders as owners of the corporation itself have their own bundle of property rights and expect that the value of the equity will be increased.  They own a lot more than dividend payments and proceeds from a liquidation.  Shareholders have collectively hired the officers and directors to run the company.  They are required to do so using "reasonable" judgment (there are different standards depending on the situation).  Obviously an argument can be made that in any kind of acquisition, etc it was the "best" use of capital.  One may argue and disagree, but from a legal standpoint it is tough to say that they "destroyed" capital by doing something like this. 

 

In my view acting like an owner means treating "hiring" decisions with the utmost level of care since those are the people delegated to run "your" company.  You may not have technical legal ownership to the underlying assets, but you have ownership in the equity of the "person" who does.

 

Kraven your responses have been phenomenal, as usual especially with regard to legal issues. Let me ask you this - in one of his posts on the MSFT thread, Oddball stated that "a corporation cannot exist without shareholders" - intuitively this makes sense (as does believing a common stock holder is the "owner"), but based on the conclusion that a corporation is its own separate legal "person", a corporation must be able to exist as a stand-alone, shareholder-less entity, correct? Not being sarcastic here whatsoever - just trying to follow the legal logic.

[Kraven]

The board has spoken Palantir - you win. Congrats. Shareholders own nothing but the right to some dividend payments and the proceeds from a liquidation.

 

Ballmer - carry on as is  8)

 

I know you're being sarcastic, but that's not accurate either.  The question was who owns a corporation's assets.  Technically it is the corporation.  However, shareholders as owners of the corporation itself have their own bundle of property rights and expect that the value of the equity will be increased.  They own a lot more than dividend payments and proceeds from a liquidation.  Shareholders have collectively hired the officers and directors to run the company.  They are required to do so using "reasonable" judgment (there are different standards depending on the situation).  Obviously an argument can be made that in any kind of acquisition, etc it was the "best" use of capital.  One may argue and disagree, but from a legal standpoint it is tough to say that they "destroyed" capital by doing something like this. 

 

In my view acting like an owner means treating "hiring" decisions with the utmost level of care since those are the people delegated to run "your" company.  You may not have technical legal ownership to the underlying assets, but you have ownership in the equity of the "person" who does.

 

Kraven your responses have been phenomenal, as usual especially with regard to legal issues. Let me ask you this - in one of his posts on the MSFT thread, Oddball stated that "a corporation cannot exist without shareholders" - intuitively this makes sense (as does believing a common stock holder is the "owner"), but based on the conclusion that a corporation is its own separate legal "person", a corporation must be able to exist as a stand-alone, shareholder-less entity, correct? Not being sarcastic here whatsoever - just trying to follow the legal logic.

 

Ha ha, I try (sometimes).  Oddball is correct.  A corporation can't exist without at least one shareholder.  Someone (whether a natural person or not) must own the corporation.  Corporations survive indefinitely unless their organizational documents provide otherwise (rare these days).  Ownership of the company can obviously transfer from one person to another, but it doesn't change the nature of that company.

 

I want to try and clear up what is perhaps a confusing issue.  Given that shareholders own the company that owns the assets, it is perfectly fine to think of the assets as one's own in the sense of considering how to maximize value of the equity.  While it doesn't mean that if a company owns 100 bulldozers and you own 1% of the company that you can go in and drive "your" bulldozer away, it does mean that you have an interest in ensuring that those 100 bulldozers are maintained properly and their value utilized properly to the extent that it affects the value of your shares.

 

What gets difficult and why there is so much debate about value maximization, is that there is no clearcut way to maximize value.  If there is excess cash is it better to buyback stock, pay a dividend or make an acquisition?  These things aren't always clear in real life and often are viewed through the lens of results, not process.  But rational people may differ on what is best and that is why absent negligence or a failure to live up to the applicable standard of care, that management will do what it sees fit to do. 

[bmichaud]

What gets difficult and why there is so much debate about value maximization, is that there is no clearcut way to maximize value.

 

 

Exactly. Perhaps this whole debate is just semantics then, and ancillary products such as phones, gaming systems, tablets, online search and Skype are Ballmer's way of treating cash as if it were owned by the shareholder.

[Kraven]

What gets difficult and why there is so much debate about value maximization, is that there is no clearcut way to maximize value.

 

 

Exactly. Perhaps this whole debate is just semantics then, and ancillary products such as phones, gaming systems, tablets, online search and Skype are Ballmer's way of treating cash as if it were owned by the shareholder.

 

First, I have no comment on the MSFT debate.  I don't follow it and have no clue whether it's good or bad.  In terms of whether this debate is just semantics, I don't think so.  Remember that the value of the equity is at stake, so a shareholder has a vested interest in how the corporation acts and performs. 

 

At the end of the day though, reasonable minds can differ on how best to get the promised land.  MSFT has a lot of cash.  Many would argue that such cash should be returned directly to shareholders somehow whether via buyback or dividend, whichever makes the most sense.  However, someone like a Ballmer might see that pile of cash and argue that if he returns a dollar, all anyone has is a dollar (in general terms), but if he invests it "wisely" that dollar can dance on the ceiling.  Forget whether that's been true in the past, many successful business people look forward only and remain optimistic about their abilities.  So long as they dotted the "I"s and cross the "t"s the only real recourse is to "fire" them.

 

Just to be clear, I personally generally prefer said buybacks and dividends, as applicable, as I think most managers aren't that capable.  I'm speaking strictly from the general standpoint of property ownership, etc that was the subject of this thread.

[Myth465]

I think this is all semantics.

 

Theoretically we own a prorata portion, realistically at .0000001% of holding we own a piece of paper or zeros and ones in a database.

 

There is a difference between own and control. Ownership doesnt amount to much if someone you doesnt trust has control .