What Happens To Shares When A Company Is Sold?

Companies are their own legal entity, but can be owned by many people. Shared ownership is what makes companies quite complex. The number of shareholders can often depend on the size of the company. Or inversely, the size of the company depends on the number of shareholders. It can be to do with the influence, financial status, and commercial sprawl of a company as to exactly how many shareholders this might be. For example, it could be a larger corporation, publicly traded company, or smaller proprietary limited company. Even though a company is collectively owned, they can nonetheless be sold. You may wonder what happens to shares when a company is sold. It is important to ask two questions. Firstly, where do they go? And secondly, do they change in value? In this article we’ll discuss what happens to shares when a company is sold.

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The composition of a company

When you register a company, you will have to allot shares to owners. There will generally be a majority shareholder, despite multiple owners. The majority shareholder is essentially the controlling owner, albeit still subject to votes and decision making influenced by other shareholders. Therefore, in order for a company to be sold, the majority shares need to be transferred. When majority shares are transferred from one entity to another, any remaining shares are still owned by minority shareholders.

Minority shareholders do not need to part with their shares. However, a compulsory acquisition can occur. This means the majority shareholder must buyout the minority shares prior to selling their majority stock to its new owner. Alternatively, when majority shares transfer to a new owner, some shares can remain with minority holders. It all depends on the makeup of the company. Accordingly, if you are a minority shareholder in a company and the majority share is bought, your shares will remain. However, for these minority shareholders, the value of the shares can change, and you may be impacted.

Mergers & takeovers

Mergers, acquisitions, and takeovers occur when an interested investor, sometimes a rival company, will offer to buy enough outstanding shares of a company stock to gain control of the company. For shareholders, mergers can occur two ways. Firstly, with cash sales, the controlling company will buy the shares at the proposed price, and the shares will disappear from the owner’s portfolio, replaced with a monetary equivalent in cash. Alternatively, companies can trade stock for stock or shares for shares. In some instances, forced takeovers can occur. As such, hostile trading can have consequences for the share prices.

Impact on share prices

What gives a share its character is ultimately its monetary value and voting power in a company. Do they exist if they are not worth anything? The answer is yes. A share that is not worth anything is still a share that could be worth something. Therein lies their value. For publicly traded companies, it is not uncommon for share prices to fluctuate. This may be an increase in value, or a plunge. For mergers and takeovers, the broader public market perception can impact upon share prices.

So, let us assume that the majority shares are transferred from one owner to another, effecting a company sale. In this example, the shares still exist, albeit under a new owner. However, the market might deem the shares to be worth more or less in light of the new circumstances. Accordingly, the shares remain in existence, but you could argue that their precise composition may be subject to change. Knowing the exact impact when a company is sold is difficult to say. However, it is valuable to be aware of the impact on share prices.

Number of shareholders

What happens to shares can also depend on the number of shareholders. For example, if there is just one main shareholder, all shares would be sold. For example, a director and majority owner of a construction company wants to sell their company. At that point, their shares are simply transferred to the new owners of those shares. The more shares there are, or owned by more people, there is simply a greater possibility for any number of different sales of those shares to occur. The precise outcome differs a lot from case to case. It is best practice to look at your own situation on its merit. No two situations are identical. If you are thinking of selling your company, it may be worth talking to a business lawyer.

Business sale versus selling a company

Whilst a business and a company sound like the same thing, they are not. Ergo, how the sale of each differs. When you sell a business, you are in effect selling the business assets and the good will, but no shares. Conversely, when you sell a company, you are selling the share ownership. This may or may include any businesses trading under the company. In any event, the more shares you own in a company, the more proprietary interest you have in any business assets operating within that company anyway.

Companies are a beast unto themselves, and as many jurists and scholars alike have pointed out, have a mind of their own. Knowing the precise outcome of what happens to all shares on the sale of a company is difficult to know. It can depend on the nature of the beast, and the size of that company. Ultimately, each situation is different, and unique unto itself. Knowing the specific needs of you and your company is always contextual. However, consulting a company lawyer may help you better understand your situation.

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