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.

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.

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.

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.

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

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.

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?

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?

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…

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.