John Kay has a refreshing, and controversial article in the FT this morning in which he asks the question:
So who does own a company?
To which he responds:
The answer is that no one does, any more than anyone owns the river Thames, the National Gallery, the streets of London, or the air we breathe.
I would stress, he is clearly thinking of the PLC here, and not the single person consulting entity. But the confusion between the two is, as he points out, part of the problem. In a PLC the right of the shareholder exists, but is only to own the share, not the company itself, and they're very different things.
The rest of the problem, he says, is the argument that:
Shareholders own the corporation, and the duty of the directors to maximise shareholder value follows from that. I have lost count of the number of times I have been told “that is the law”.
But that, as he rightly argues, is not true.
It's time we moved on from that claim whose survival has, I suggest, been because of the supposed justification it provides for tax abuse.
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Well canoeists do not have access to all our waterways , think it is 4% , may be wrong on this. So landowners think they own all the riparian areas, Mr Kay. May be not the air we breathe, bet they are working on it. Scandinavia and Canada give access to their population quite generously. Sorry to sidetrack from truly monetarist subject Mr Murphy. No this 75 yr old does not canoe up the river but I know a man who does.
“In a PLC the right of the shareholder exists, but is only to own the share, not the company itself, and they’re very different things.”
That comment makes no sense.
A shareholder owning shares in a PLC has exactly the same rights as a shareholder in a private limited company.
If you own 99% of the shares of a PLC you own just as much of the company as you would if you own 99% of the shares in private company. Owning 51% of the shares of a PLC would give you just the same control over that company as would owning 51% of a private company.
No, you own a private company that happens to be incorporated as a plc
So not a public company at all
“No, you own a private company that happens to be incorporated as a plc
So not a public company at all”
Sorry, that’s just wrong.
If a company is incorporated as a PLC then that is what is. It isn’t a ‘private company’. It’s a legal status.
Have you confused the legal term ‘PLC’ with a stock market listing?
Even there your assertion is plainly wrong since many companies are listed with the majority of shares held ‘off-market’ in the hands of (for example) the original owners and only a minority of shares available ‘on-market’.
If the original owners own 80% of the issued shares are you really trying to say they don’t own 80% of the company? They only own the shares? That’s nonsensical.
The basic point is that if you own 1 share in a company, whether private, public, listed or not, your rights would be exactly the same.
It’s a very basic concept in company law.
A concept decided in company law to clearly confiorm that what John Kay, and I, say is right
And where you are deliverately confusing substance and form and PLC and privately owned to create a crass argument
And yes, 80% ownership of shares is not 80% of the company, at all, for the elimination of doubt.
“And yes, 80% ownership of shares is not 80% of the company, at all, for the elimination of doubt.”
So are you saying that if you own 100% of the shares in a company, listed, PLC or otherwise, you DON’T own 100% of the company?
Actually I am saying that because the company has claims on it that are not on you
And you cannot take its assets without consequence
Or use them for personal gain likewise
So no, 100% ownership of the shares is not 100% ownership of the company per se, at all
“And yes, 80% ownership of shares is not 80% of the company, at all, for the elimination of doubt.”
Really? So if a company was worth £100m and I owned 80% of the shares, how much would I get if the company as put into MVL? Allowing for fees of course. But how much of the net? I say 80%. What do you say?
You are confusing John Kay’s arguments. He points out that a shareholder doesn’t automatically have the right to use the company’s assets or services. Fair enough. They may not have the right to use them but they do own them. (although Kay claims a shareholder might be turned away from a company premises. Possibly, but an 80% shareholder? No way.)
But he is wrong on dividends since members can vote dividends. Indeed unless the articles of a company specifically allow directors to vote dividends than they can ONLY be voted by members. I’m surprised you don’t know that. Or maybe I’m not. And members can vote directors in or out of office. And do. So they can control the actions of a company. And Kay claims that shareholders ‘as a rule’ don’t get much back in liquidations which is possibly true when a company goes bust but when a company gets taken over shareholders can and do benefit from the full financial worth of the business.
Quite simply John Kay isn’t saying what you say he is and he is, in any case, wrong on a number of points, as are you.
If you own 1% of the shares, you own 1% of the company. That’s a fact.
You are utterly wrong
John Kay is right
The law agrees with John Kay and myself
You own a right to 1% of the dividends paid by the company if it chooses to pay any – plus 1% of capital on winding up if it is would up
And that is it
And dividends are NEVER voted by members: they are always proposed by directors, and members at best note them
That is not an ownership right to the company at all and it is utter, legal, factual and economic nonsense to claim it is
And because you are so obviously very ill informed I think your time here is coming to an end because drivel bores me and that is what you write: not just drivel, but wrong drivel
So if I own 100% of the shares of the company, but don’t then own 100% of the company itself, who does own it?
As a tax and legal expert would you be willing to give a written opinion to state that I don’t actually wholly own the companies I have a 100% shareholding in so I can hand it over to HMRC when the come looking for tax from me, with respect to these companies?
First, the debate was not on 100% owned companies
But even if you do own 100% of the company you do not own its assets
It does
And as others have pointed out the obligation of the company is not in that case solely to you
And nor can you just have or use the assets without consequence
So you are wholly missing the point that the entity is separate and distinct from you and you therefore own shares in it, but not the entity itself
My auditor and accountant had a good laugh at this.
If I own 100% of the company I own it all – assets, liabilities, balance sheet, the lot.
The company might have some obligations and contingent liabilities. After these are settled I can do with the company what I want – as these rank above any claim I might have as the owner.
After these are all settled, any remaining assets or equity is mine to do with as I see fit. I can sell the company or individual assets, liquidate it etc. Obviously most choose not to as companies tend to be worth more in the long term as going concerns, and more often than not there can be tax liabilities if I use company assets solely for my personal use – but that doesn’t mean I don’t own those assets.
If I only own a smaller percentage of a company the directors are there to try and manage the company in the best interest of *ALL* shareholders. Nothing else changes though in legal terms – I own a share of the total value of the company. If it is worth 100m and I own 30% of it, my equity stake is worth exactly 30m.
Company and financial law surrounding shareholder equity is well founded and described, and doesn’t ever suggest that the total shareholding of the company is ever worth less than it’s equity capital. Simply, you and John Kay are wrong – because you are trying to add any liabilities of the company back into it’s equity capital – when of course equity is calculated as the remainder of assets less liabilities.
I know many an accountant and auditor who have remarkably little awareness of or respect for the law
Pot calling kettle here?
You are busy saying that shareholders in effect don’t own the company they are shareholders of!
They won the shares in that company
That’s not the same thing
Legally the company is quite distinct from its members – a fact continually upheld in UK law
Of course the company is legally distinct from the shareholders. What point are you trying to make? You’ve had a nightmare with this one.
Nightmare?
You have agreed with me
“Legally the company is quite distinct from its members — a fact continually upheld in UK law”
Yes. This is the whole point of a plc or Ltd. But you are setting up a straw man here. Just because the company is legally distinct from its shareholders DOES NOT mean that the shareholders don’t own 100% of the company.
Shareholder equity = company assets – company liabilities.
Shareholders own 100% of equity.
Shareholders rank last in insolvency (i.e. behind liabilities) but those liabilities, be they debt, owed salaries to staff or money owed to other creditors confer NO ownership rights on the company itself, or indeed any voting rights in board or shareholder meetings.
The shareholders own 100% of the company.
This is pretty clearly laid out in the companies act 2006.
I’ve made clear exactly why I disagree
As have others
Not least because shareholders are not liable for assets – liabilities if the result is negative
But please feel free to continue to believe your fantasy
“Not least because shareholders are not liable for assets — liabilities if the result is negative”
Rather the whole point of a limited company. Doesn’t affect ownership rights of the company via it’s shareholders in the slightest though. A third party isn’t forced to do business with a company in any way – and should it choose to it accepts the risks in doing so (i.e. the 3rd party might not get repaid if the company goes bust).
“But please feel free to continue to believe your fantasy”
Clearly my fantasy is entitled “Companies Act 2006” then.
Apart from anything else, if the shareholders don’t own 100% of the company, who does? You seem unable to answer this question.
The shareholders are distinct from the company
There are numerous other claims on the company
None of you seem able to read John Kay either
“The shareholders are distinct from the company”
Yes.
“There are numerous other claims on the company”
Yes.
Both true, but you then make the wholly illogical and incorrect leap that this means that shareholders don’t own 100% of the company.
Which of course, they do. The Companies act (law, for your guide) tells us that.
I have dealt with all such issues
Please do not waste my time by repeating simplistic extractions from the complex reality of life
You will really begin to look like a neoliberal
And they are not welcome here
Looks to me like you are making simplistic extractions and denying the realities of life.
I really do hope you aren’t considering teaching any of this – your point of view being factually and legally incorrect – to any of your students in your role as part time lecturer. They’ll get a bit of a shock when it turns out the real world doesn’t work the way you say it does.
I would be very happy to teach this
Shattering the myth that companies are ‘owned’ as simplistic neoliberal dogma suggests is vital
As is understanding that companies are not, in any way, the incorporated agents for their members which is also nonsense commonly stated
So I would very happily share John Kay’s views with students
Although it is unlikely I will cover this issue
Shareholders don’t own the company, because they are not personally responsible for its liabilities. They have a specially defined legal relationship with the company which resembles ownership in many respects. The thing in your bath may look like a duck and quack like a duck but….
Dear me, Michael, you ought to see a doctor about the “Thing in your Bath” – and I’ve never heard it called that before!
How much of a PLC’s share capital must be widely held for you to consider it “public”?
Even so, don’t the shareholders own the company collectively? Ownership may be widely spread, so shareholders cannot exercise their rights effectively, like a shareholder with a large stake in a private company would.
The duty to maximise shareholder value comes from the common law and now the Companies Act 2006 – strictly speaking, it is now a duty to promote the success of the company for the benefit of its members (i.e. shareholders) as a whole, with due regard to the interests of employees, business relationships with suppliers and customers, the community and the environment, and the company’s reputation – see section 172 Companies Act 2006 – but that is congruent with acting to increase long term or “enlightened” shareholder value.
Just go and read John Kay, who has got this right
And no, shareholders do not own collectively. Although that is an interestingly socialist idea
Maybe it is worth looking at it the other way round. If I own a dog and it harms someone, I am personally liable. But the shareholders of Billiton do not have personal liability for the Brazilian villagers the company killed. If you don’t have full liability, you don’t have full ownership in the normal sense.
Not a bad way of looking at it
Shareholders are always at least one stage removed
Thanks to e-biking and punting my body’s in pretty good shape. Boasting aside, according to the rules of this and previous governments it isn’t ‘mine’ in the sense of ownership. I can’t legally sell a kidney, even with consent from all parties, and my donor card doesn’t give me the absolute right to give my organs away for free – as relatives can still over-rule on this.
The word ‘ownership’ is a legal minefield. For practical purposes you don’t even completely own your own body. And with shares there’s even more complications. When will there ever be a government that liberates its subjects?
Never I hope
Such liberty is always open to abuse
That is why we do not do absolutes
I suppose that that’s right. My credit card will get paid in full tomorrow so is it reasonable to say that my liabilities will reduce and I consequently own more of myself?
A body corporate is distinct from its shareholders, whether a private company or a listed PLC… IN LAW!
Once you have a body corporate -and we hereby understand it as being with limited liability- it becomes distinct from its shareholders, even if this a furniture shop with a turnover of say 3m GBP.
What I am surprised about is that no one hereabove has introduced the concept of stakeholders.
In my imaginary furniture shop I have 15 employees (shop. warehouse, admin, van driver etc); I am buying stuff on credit terms with my Italian suppliers and I have banks (let’s dream) helping a bit. I have customers who have paid deposits… Etc.
Once in that situation, as a 100% shareholder, I am not allowed anymore to act as a tyrant. I have, as a director to act for my shareholder (which may happen to be myself) but also considering the other stakeholders.
What is the difference with a listed company? There may be one in scale, but not in essence.
And if I own 35% of a PLC, I may very well be in a position to influence a lot of decisions, almost as much as in the furniture shop. See Bill Ackman and Valiant!
So yes, shareholders own shares and only the shares. Not the assets, as they are not responsible for the liabilities in most cases.
Richard
You seem to have a remarkable ability to raise arguments that lead absolutely nowhere in any serious debate.
I have read through the Kay article, your – in my view – utter misunderstanding and misrepresentation of it, and the comments below your blog, and I am still none the wiser as to the point you are trying to make.
I think John Kay and I agree entirely
My point is a simple one: shareholders are distinct form the company and are not the only people for whom the company is run and do not own its assets
As Kay says
And unambiguously true
The problem is all yours
“And dividends are NEVER voted by members: they are always proposed by directors, and members at best note them”
You should tell Companies House about this. They have model Articles available which at paragraph 30 state:
“30.–(1) The company may by ordinary resolution declare dividends…”
Ordinary resolutions are, of course, passed by members.
You’re just plain wrong.
So, although that is not accustomed practice (and negates the director’s fiduciary duty in law), it still requires a majority to act
So no shareholder can enforce unless they have a majority
And John Kay was clearly not writing about that scenario
So I am not wrong
Did it pass over your head that Kay quoted the relevant legal and historical precedents to support his argument? In your many comments you have yet to address this, focusing instead on your personal/moral conception of ownership.
People like Eileen really do not let facts get in the way of dogma
I bet there”s not a single decent law professor who would agree with her
“focusing instead on your personal/moral conception of ownership.”
No, I was focusing on the legal fact that shareholders can vote dividends when Richard first said (in block capitals) that members can “NEVER” vote dividends then admitted that they can but claimed he was still right because a majority was needed.
Richard’s original claim was that only directors can declare dividends. He now accepts he was wrong in that claim but oddly he doesn’t address the that the same point that applies to members applies to directors. You would need a majority of directors just as you would a majority of members. Would anyone claim directors can NEVER vote dividends because you need a majority of directors to vote them?
I was also focussing on the legal fact that members can vote to direct a companies actions, are entitled to dividends and entitled to a distribution on a winding up.
If getting (say) 20% of the worth of a company on winding up because I own 20% of the shares doesn’t show that I won the company, I wonder what does?!
Read this
http://www.accountingweb.co.uk/topic/tax/dividends-checklist-get-details-right/470525
I think you will find that the shareholders only approve what the director’s suggest
You may say that’s semantic in a 1 shareholder company
And there is nothing that says a shareholder can direct a company’s actions
If they do the shareholders are directors, and that’s very different
I think you are wrong
It’s not for anyone with less than 50%
The shareholders can quite clearly direct the company’s actions.
1) The shareholders tell the directors they want a dividend of £X
2) The directors say they won’t propose one
3) The shareholders sack the directors and appoint new ones who have been clearly told that a dividend of £X is desired
4) The directors then ignore the shareholders and… oh, wait – no, they don’t.
The shareholders as a body control the company. To say that any individual non-majority shareholder has no ownership of the company is as absurd as saying that because my wife has an equal share of our house, I don’t own that either.
The shareholders can do that
BUT note the directors do it
Because the shareholders do not manage the company
And the directors have a duty to a much wider range of group than shareholders, as defined by the Companies Act
So in micro companies you can get the impression that they’re one and the same
John Kay was writing about the macro economy of PLCs, and there it can be seen the micro view is wrong
Oh, and divorce: then see who owns the house
Ed note:
It is becoming increasingly clear that you are only here to waste time, repeatedly and have nothing to offer to debate bar nitpicking and abuse
Your time here is over
But we’re not talking about management, we’re talking about ownership, and then about control.
Saying that dividends are under the directors’ ultimate control is like saying that payment of my gas bill is under my bank’s control. Yes, the bank actually arrange the payment, but only because I’ve told them to – and I’ll replace them if they don’t do what I want. The analogy here even extends to the bank having responsibility to all sorts of stakeholders other than me – the FCA, all sorts of industry bodies, money laundering rules.
Now in a plc situation it may be rare for the shareholders to actually get together in a body and dictate to the directors, but the fact that a power is rarely exercised does not mean that it doesn’t exist.
Divorce, by the way, completely confirms my contention about ownership. The court, if asked, would ascribe half the value to each of us because we each own half of it. If my ex-wife were to own it *after* the divorce – because I transferred my half to her as part of the divorce settlement – that demonstrates conclusively that I owned it before the transfer. Thank you for clarifying that excellent point 🙂
Except the company is not under the shareholder’s control
It is under the director’s control
The directors can be changed
But the shareholders never get control: it’s not theirs to have
So my bank account is not under my control, because the bank does everything and all I can do is ask them to make transfers?
The local branch of Sainsbury’s is not under the control of J Sainsbury Plc, because although the directors of the Plc can ask the area manager to replace the branch manager, it is the branch manager that makes all the decisions on the spot?
Control can be exercised at a distance.
Actually your bank account is not at all under your control
You have lent the money to the bank and if they lose it you lose out
Weren’t you aware of that?
Quite emphatically money in a bank account is not yours. You only own a loan to the bank – which is not the same as money itself
But Sainsbury’s do own the branch. You see, no boundary was crossed in that case – and like most people you have real problems understanding what that means
I own the cash in that account. If the bank loses it, then (barring the FSCS) I lose it, because they will have deprived me of it. If that means I do not own it, then neither do I own the trousers which the dry cleaner is looking after for me, as the dry cleaner may burn down, or be robbed, or fall into the hands of receivers, or the proprietor may flee to Barbados with a bundle of stolen clothes.
Your version of “control” would render the term completely meaningless.
With Sainsbury’s, you are confusing your own concepts of control and ownership. The directors of J Sainsbury Plc do not own any branch of Sainsbury’s, but they do control them in that they can, by acting at a distance, procure that direct control is exercised by a local manager of whom they approve.
They do this across ownership boundaries – J Sainsbury Plc does not directly own any stores, they are all in subsidiary companies – as well as management boundaries. By the definition you give J Sainsbury Plc does not own any branches (it merely has an interest in companies which do), but in practice you recognise that they do. You are Johnson to your own Berkeley 🙂
It’s really sad to note a supposed professional in denial of something so basic about banking
Re Sainsbury – a company called that runs the stores
But if you are not aware of the separate entity principle in tax I am also deeply worried
Denial? If I have £10k in a bank account, and the bank goes bust, I get £10k back. If I tell them to move money hither and yon, it goes there. In what sense do I not have complete ownership and control?
As for: “if you are not aware of the separate entity principle in tax I am also deeply worried”:
1) We are not talking about tax, we are talking about ownership of companies.
2) You are the one who promotes unitary tax on the basis that you consider that corporate groups are single entities despite the legal form, and thereby deny the separate entity principle.
3) You are also the one who asserts that there is “no boundary” between the directors of the plc and the managers of the stores.
4) My entire point was that there *are* separate entities (in a legal sense, not merely a tax one) – J Sainsbury Plc is not Sainsbury’s Supermarkets Limited, for starters. As I said, the one merely has an interest in the other.
How am I supposed to reconcile your invocation of the separate entities prnciple with your “no boundaries” comment?
Every comment I have made is right, logical, legally correct and so the problem is all yours
And as for unitary tax – this knowingly crosses the boundary. It does not deny it
Andrew,
The deposit in tour bank account is property of the bank. You in turn get a demand-IOU, but you do not own the money.
Precisely
Richard are you aware that it is possible to pierce the veil of incorporation in certain situations, which suggests that the difference between owning share and owning a company is not in reality very big.
http://www.ehow.com/about_4727895_what-veil-incorporation.html
Of course I am aware of that
But in a plc which is the major issue of concern? No way!
Do you mean a PLC or a listed company? A plc with share capital of £50,000 is obviously capable of being owned by a handful of people and capable of being run as a personal vehicle in an attempt to claim limited liability.
The boundary between company and shareholder always exists
It is just more obvious in a larger Plc
It’s just that many here are organising the many relationships one person can have with a company
“Did it pass over your head that Kay quoted the relevant legal and historical precedents to support his argument?”
Did he? Can you name the relevant cases? Can you explain what the facts and the arguments were? My reading of the article is that Kay claims that there are cases that support his article but he doesn’t mention the cases. So it’s impossible to say whether they actually do.
Then you didn’t read the article. It’s right there in dark print and everything.
For once I agree with what you said.
If I own a few thousand shares in x plc. That’s say Rolls Royce, I cnat just turn up at their office or factory. They don’t know who I am although they will know my name somewhere deep on a register.
There are fund managers who own 5% or more or less. THey get chats discussions and a little involvement in knowing the direction of the company. They can suggest that the company pays more dividends or buy backs or investment. But if RR says no then that’s okay.
I appreciate that some people are confusing smaller companies and proper PLC companies. I can see how a medium company owned by a few people might control the company in a bigger way than owning a few thousand shares in RR.
If you as I am sure have noticed with bigger PLCs on the UK market. They aren’t paying dividends on the level they should. Most shares only return about 1 – 2%. In a way this has made investments in property which has a better return than a company more attractive. As a result property prices have gone up.
Really the article is saying the Directors aren’t controlled by the Shareholders. This is obvious as they aren’t helping them in any way. No real investment, no real dividends. The Directors aren’t helping society either.