Midway through my Corporations Law classes, I am finding legal support for my initial hypothesis that “investments” in the stockmarket by people who do not have the complete picture regarding their rights and obligations bear the burden of risks that transcend that of gambling in a casino.
Simply put, shareholders do not “own a piece of the company”. They possess a set of rights enforceable against the company, subject to the contractual agreement by which they acquired those rights. These rights might SEEM like one owns a part of the company, but in actual fact, one only owns the rights enforceable against the company, not a piece of the company itself.
I know this distinction might seem semantically nit-picky, but believe me, this makes complete sense when you realise how the courts deal with corporations cases. For example, in the event that a corporation is wound up (operations terminated and assets liquidated), if the company is insolvent, it is the creditors who get whatever assets are available (priority given to secured creditors), while the shareholders lose everything.
Bottomline: when you play blackjack or poker, the odds are clear because you know that there are 4 suites and 13 cards in each suite and the rules of the game creates finite outcomes. When you play in the stockmarket, you are essentially placing yourself at the mercy of the madness of the masses.
I can state categorically that people who oppose the casino in Singapore have no idea what they are talking about.
16 Comments
but property/ownership in itself is a set of rights enforceable by the owner against others, or the right to dictate what u can do to the object… etc etc… a bundle of hodfeld’s rights. It is never absolute but always relative.
Same way for shares, you have rights enforceable against others (albeit indirectly, as you aren’t the only owner), and rights tt allow to dictate what the company does (shareholder meetings, once again indirectly as there are other owners).
Where creditors come in during insolvency, once again it’s due to the relative nature of rights. By law, (due to economic considerations) creditors are higher in priority. Same case for property like homes. When you’re insolvent, you might not be able to sell your house and pocket the proceeds if a creditor has an interest in it (ie mortgage), proceeds go to the creditor (who has an interest in the house) first then if any proceeds are left they go to you (and thus the other creditors you owe $$ to).
In short, you do own a piece of the company. But what ppl are unaware of is the very nature of ownership, that it’s never absolute but relative and the law esp in term of corporate law, leaves shareholders very disadvantaged (esp if you consider, for public listed companies, issued shares are ordinary shares. If any $$ are left after paying creditors, they often go to preferential/special shares holders first then ordinary shares holders- normally directors/founders of the company).
oops.. typo… hohfeld’s rights, not hodfeld
pt to clarify.. just adding on to your argument…
i entirely agree that ppl don’t know what they are getting into… the risks are almost equal, maybe worse than gambling.
Basically it comes down to limited liability and separate legal personality.
Limited liability: shareholders will not be responsible for a coroporation’s debts, and are only liable insofar as their investment in the company.
Separate legal personality: any property belonging to the company belongs to the company (not the shareholders, even if he owns 100% of shares), and as a general rule only the company has the right to bring an action for a wrong done to itself.
Shareholder’s rights boil down to:
1. voting rights
2. right to dividends (depending on articles)
3. right to have the articles observed (very complicated in practice, usually they will not be able to sue save for exceptional cases)
As an ordinary minority shareholder in a big company, you really are not entitled to anything other than voting and dividends, and if the company goes bust, say goodbye to your investment!
Hm, I was going to say ownership is exactly a set of rights, but Ivan beat me to it.
Ivan and Jol:
I agree with the point that the concept of property ownership ultimately involves a ’set of rights’. Under Australian law (I only dare speak about what I know), shares are classified as personal property anyway.
But I guess I was trying to argue that at least with regards to property such as land, or houses, or just tangible things, there is a certainty with regards to what that ownership consists of. With regards to shares, there is no certainty of what the value in that share is, or whether it has any value at all, no certainty with regards to the return on the value of the investment, and no certainty with regards as to when that return would be if there is any at all (payment of dividends in Australian jurisdiction is left to the discretion of the Board).
The only concrete description that is left of what the ownership entails, is merely a set of ‘control rights’, which are dependent on the issues of the shares, and on the Australian Corporations Act. That generally means a right to vote on certain matters, and the right to select directors.
To the vast majority of people putting their money into companies on the stock exchange, they have absolutely no idea as to their possession of these rights, and nor would they bother to enforce those rights even if they had knowledge of it (I’m speaking mainly about our Singaporean context). The only few shareholders who are actually ‘in the know’ are either the original owners before the the listing, a few educated investors, or institutional investors who have the actual ability to analyse and understand the performance of the companies.
The question is, if someone posseses ‘rights’ which they don’t know that they have, or have no idea how to use or enforce those rights, are they still considered rights?
well, they are rights in as much as they exist and are enforceable. whether or not they are aware of the rights, or know how to enforce those rights, are irrelevant to the presence of rights.
if the shareholder is at all interested in enforcing his rights as a shareholder, then i’m sure he or she will take it upon him/herself to find out how to - there’s legislation, books, and there’s google.
I’m not sure there is that much greater certainty as to the subject matter of property rights even in the case of so-called tangible property. This is why nuisance cases, adverse possession cases, etc. continue to exist: because there is reasonable controversy about just what it means to own something.
Simply because there is no certainty as to the exact value of the equity ownership shareholders doesn’t make the scope of their rights any more certain. The fact that they rank last in terms of priority in insolvency doesn’t mean they own nothing. They still own the right to whatever’s left after creditors are paid off. The exact value of equity ownership in a house is uncertain as well.
The question of what to make of rights about which those in possession of them know nothing is a nice one, but I’m not sure it’s any more relevant to shareholders than it is to any other kind of property owner. Or any other kind of holder of any kind of right.
ok, I guess I haven’t been expressing myself very well, and probably over-reached in some places.
I am not disputing that shareholders own something, and that ’something’ is property. Jol is certainly right in saying that value cannot be certain… the economist in me is thinking that since value is subjective, the numerical value can only be established at the point of sale.
I find it very hard however, to describe that ’something’ as a ‘piece’ of a company without feeling that it is overbroad. The feeling I get is that its more like some kind of member’s club where you can buy in to get certain rights, where you get to be paid dividends and be allowed to attend meetings and vote and etc, but you can exit that membership any time you want by selling your membership off.
In fact, in Australia, shareholders are usually called ‘members’ rather than owners of a company…
hmmm… bridging the gap between jol’s, han’s and my argument, how’s this for a middle ground.
If you see shares a ownership of tangible property, ie. ownership of share certificate. you can achieve a sort of middle ground. It’s the ownership of the share cert that confers rights upon u, enforceable against other including the company, so you do not own the company directly, but indirectly through the concept of ‘membership’.
But then this approach is flawed in the sense that when explaining liquidation and its consequences, a direct ownership analysis seems to be a tad more convincing.. to me at least. food for thought?
one more thing that I would like to point out.
in a trust, or where the legal and equitable interests vests in different persons, the trustee must still exercise the ownership for the beneficiary.
in the instance of a corporation, the director or board of directors (which although does not possess legal ownership, does possess complete executive control over the company) exercise their duties for the benefit of the corporation, and not the shareholders.
while it is true that the shareholders get to choose their directors (usually only some, and not all of them), this still does not change the fact that this difference in duties surely suggest that there is also at least some difference in the quality or degree of ownership?
That’s why shareholders get to vote with their feet if they aren’t happy, and get sell-out rights if they happen to be a private company in a minority position.
Han, I think you first need to get back to basic. What -is- property? I think Ivan and Jol have pretty much hit the nail on the head when they say that property rights are pretty much legal rights. Where there is a tangible object involved, the rights tend to relate to the tangible object. Where there isn’t, the rights tend to lean towards compensation, control and other fuzzy concepts like that.
Corporations are not alone in their “intangibility”. Think about what cash is. I certainly won’t sell my car for mere coloured pieces of paper. Other interesting bits of personal property include negotiable instruments, debts (in some jurisdictions) and some of the funkier securities instruments we get here in the states.
Speaking of funkier securities, you may want to look into the concept of a redeemable preference share. A share with redemption value literally allows you to present the share to the company and receive your capital back (or more likely, capital plus some pre-determined interest rate). Also, a preference share MAY allow you to take priority in the event of an insolvency (I’ve rarely seen this work out in practice). So it’s not necessarily true that ALL shares deprive a person of direct ownership in assets of the company.
Shares -started- out as a means of denoting ownership of a company, but in reality, it has grown into a loose classification of rights that just somehow connected to a company. I think a lot of the difficulty you will face in the future is finding what characteristics shares…er…share with each other.
Anthony:
I humbly bow to thy wisdom.
But seriously, I you are right, I should get back to basics. The thing is, these thoughts of mine aren’t based on any legal authority or research… its more like, gut feeling?
lol
Anthony:
Are redeemable preference share widely issued? In theory they are great help in convincing investment in a dodgy company, ie. relatively secured returns. But in practice do they work out? No textbook will ever teach this haha.
All:
It’s interesting we are talking about shares here in terms of floated/public company shares. Life is, i suspect, slightly different when talking non-public corporations. Comments?
Han:
The difference in duties are significant only in terms of the target of the duties (beneficiaries v company), that being shareholders are once removed from this equation.
However, the standard of fiduciary duty they owe is (to my memory) similar, that is actions must be taken in good faith, and i must say it’s quite a generous one to the duty holder.
In both cases where this duty of good faith is breached, both the beneficiary and shareholders may act against the trustee/directors.
Han, Ivan
I think that the concept you are uncomfortable with is the lack of control shareholders have in relation to a company. I can say with -some- certainty that this really depends from company to company, and shareholder “governance” isn’t limited to public-listed companies.
For example, the company I used to work for had all kinds of rights embedded in the shares of their company. Buy-out rights. Put options. Rights to appoint directors in proportion to their shareholdings (a very important power). These rights turned out to be a very important factor in a resultant corporate power struggle.
On redeemable preference shares…
These tend to be the capitalization instruments of choice for VC’s. I’ve seen a number issued in my time. As public shares, there are pretty rarely seen. The reason they aren’t so commonly seen in public corporations is that it’s one of the situations you WANT your shares to be exactly the same as everyone elses’. Differences destroy fungibility. In some jurisdictions, ONLY common stock can be listed. In others (like the US), it is possible for a certain type of security to be listed without another class of security being listed. In short, you can list common stock without necessarily listing preference stock. Without being listed, preference stock remains illiquid. That is why MOST redeemable preference shares I’ve dealt with ends up being -convertible- redeemable preference shares - in the event that the company goes public, the investors convert their preference shares into common shares and get themselves listed.
-whew-
Actually, if you guys are interested in this stuff, Corporations law isn’t the place to learn it. Corp law is foundational stuff, much like Contracts eventually tiers up to things like Sale of Goods, and International Business Transactions etc etc. Do a course on Corp Finance if you can.
Ach,
I just realised I missed out a fundamental point that Ivan asked me about.
The problem with the redeeming shares is that the shares, for the purposes of an investment vehicle, really act like debt. The ability to pull out an investment can act as a safeguard, but most of the time, it also acts as destablising factor in the investment. Subsequent investors, for example, are leery of dropping redemption rights if earlier investors also have them.
My thoughts on redeemable shares is that while it is a tool that -seems- to allow investors to have it both ways (i.e the ability to pull out their investment if things turn sour, the ability to participate in company growth if things go well), where in reality, a company’s growth is rarely consistent. In the event of a crisis, the very fact that management has to deal with both investors threatening to pull out as well as dealing with the crisis itself can precipitate or exacerbate the crisis.
In short, redeemability is an escape clause. Inserting an escape clause can help save your investment, but more often, it just turns the failure of the investment into a self-fulfilling prophecy. It’s a great instrument if you are ACTUALLY a VC investor that can discern a genuinely bad investment from a “normal” company crisis. It’s a bad thing to have if your investors tend to be “kiasu” - like my experience with a number of Singapore self-styled VC investors.
As usual, your mileage may vary. A lot depends on the mindset of your investors.
Anthony:
cheers for the insight
helped alot.
Done a course on corp finance last year. fairly interesting, but it’s all theoretical, ie. i know the rights involved, insolvency rankings, the dependency of rights on AoA etc etc, but how does it translate into the real world? At least now with your help, i know that redeemable shares are normally used by VCs, whereas i’ve always wondered in the past if it was actually an effective method of raising capital, (me being a low risk taker).
I think for me, it’s not the lack of control that a shareholder has over the company that irks me , for control varies, and if you wanted control you’d buy shares in a company with would grant you such rights. What irks me is that buzz that the stock market creates, and this in turn is sold to the people, of which i believe a good 50% don’t know what they are getting into. While, on a technical level i believe the share ownership is Ownership; to the lay person, this ‘ownership’ take on a different meaning.
i like the, your milage may vary, statement.