Posted on 01/18/2008 12:16:56 PM PST by pabianice
In this time of nervous financial markets perhaps some Freeper can help explain the following.
Company A is formed to sell a service using proprietary technology. This private business makes the appropriate public filings. Shares are ofered at a low price to investors against the eventual initial public offering. The business opens in multiple locations and revenues flow in.
A year later an investor calls her broker to learn when the public offering is likely to occur. The investor is told that Company A's assets and technology have been sold to Company B, which will offer the same services. The investor is also told that her investment is gone -- taken by Company B without the investor's knowledge or approval. The investor asks what has happened to the value of the 30,000 shares she bought.She is told that the shares "still have value" because Company A had received approval from the SEC to make the IPO, even though Company A no longer has assets, all those having been absorbed by Company B. Rather, the investor is told, her shares still have value since Company A is looking for another product/service to buy and then sell through its corporate shell.
I have not heard of such a thing before and do not know what to tell my friend, the investor. We never studied this in B-School. What are my friend's options here? Is this kosher? Is fraud involved? Thanks for any input from those in the know.
Are you saying that Company A is free to divest itself of its assets without compensating shareholders?
You need to scrutinize all documents associated with the initial investment to get a clear understanding of just what kind of authority the management of Company A has under its agreements with the shareholders. You might be surprised at what they are able to do without first getting approval from any of the other investors.
If company B acquired Company A, they would only be able to do that by buying the stock, whether it was publicly traded or privately held. If Company A made some side deal to sell out to Company B and just kept the proceeds rather than distributing to the shareholders then it sounds like some sort of embezzlement may have gone on.
what you seem to be saying is that Company A sold its trade secrets to company B. So Company A should have cash as a result of the sale. The shareholders have the value of the trade secrets sold to company B, right? Am I missing something?
Company A sold its assets to Company B. A was not acquired by B. Company A still exists as an entity. A’s assets would consist of whatever good and valuable consideration it received for the sale of its assets to Company B. Presumably, as a shareholder of A, the investor owns a share of those assets. If Company A divested itself of whatever assets it received for the sale without compensating the investor, then the investor bought something different than what she understood it to be, or there has been some malfeasance.
Unless the cash from sale to company B was used to pay off creditors (not investors) of company A. Creditors have legal precedence over investors. The investor SHOULD receive some sort of accoutning at the end of the fiscal year, though.
Comapny A is free to divest istelf of any and all assets without informing the investor. If the compnay were to dissolve, then the investor would be an unsecured creditor.
Your investor friend got hosed by not paying close attention to what their investment was doing.
Certainly Company A has an obligation to its investors as it were but they can sell their assets in their entirety. They may very well have sold off their previous business as they deemed it a good move to generate capital to explore another opportunity.
If it were me, I would be scheduling a meeting with the CEO of Company A to discuss their plans for the future and how my investment was going to be repaid and how I as an investor would share in the proceeds from the sale of the assets to Company B. I would attent this meeting with competent legal counsel.
That shouldn’t matter because of the sale, though. The company should still have the same amount of assets before and after the sale, assuming that it correctly valued its trade secrets.
It's not nefarious on it's face. But it could be.
That’s an interesting argument. It may be that the corporate by-laws permit such a practice if it is legal in the state where the company is chartered. It sounds like what Company A sold was intellectual property rights but does not intend to cease operations. If it was done with the intention of fleecing the investors the investors may have some legal recourse, but if the proceeds from sale are being held or used for another legit purpose, the investors may have to wait and hope.
My understanding of what happened is this: Company A developed a medically-related procedure using proprietary machines designed for its own use. Company A opened a number of retail offices for people to come in and take the treatment for a fee. Company B then somehow became the owners of all machines, offices, and other assets, leaving Company A with no assets and a set of very unhappy investors who lost their investments. I am having a lot of trouble finding this reasonable, or even lawful (I am not a lawyer).
True enough, but the amount of assets before and after the sale could be zero. In other words, if you have operating debts of $100k and a capital asset worth $100k, your net assets are zero. If you sell the capital asset for $100k and use that to pay off your operating debts you are still at zero.
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