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Burying Your Company's Stock
Burying Your Company's Stock By William Cate July 2004 [http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
The reason that you must bury your public company's shares is to reduce your company's float. The lower your public company's float, the lower your investor relations cost. [See my article The Proper Use of Shares.] The buried shares are deducted from your float and the balance is called the effective float. Your goal is to reduce the effective float to as near zero as possible. If your effective float is zero, you need not find buyers for your float because there are no shareholders selling their stock in your company. This, of course, is the ideal situation. I suggest that if you want your public company to succeed in all aspects, you may want to structure your company's float like this.
Speculators, Not Investors
American stock buyers, on the whole, are speculators, not investors [http://www.iht.com/articles/529443.htm]. They buy stock with the hope of quickly selling it at a profit. Even the U.S. Government realizes that speculation doesn't lead to economic growth. Taxes for stock buyers willing to hold their shares for at least one year are less than for those who speculate in the Market and quickly sell their stock. The American Government's tax incentive hasn't altered the speculative nature of the U.S. Market, because long term investors are consistent money losers. I've often wondered why these long-term investors continue to buy and hold shares in such a manner?
Avoiding Having Your Shares In the Market
My over 20 years involvement in North American stock markets have proven to me that Market professionals make more money selling stocks short (betting that the price of the shares will go down and the company will go bankrupt) than they do by buying shares. The textbooks only list one of over two dozen of ways that professionals use to sell short stocks. (I have written a short selling article that lists twenty-four ways to short shares.) The only effective defense to short selling is to ensure that the Depository Trust Company (DTC) in New York doesn't have any of your company's shares in their possession.
When most people buy shares, they leave them "in street name" rather than taking possession of the share certificates. "In street name" simply means they are all turned over to the DTC for safekeeping. Short sellers "borrow" or otherwise rely on the existence of street stock to sell nonexistent shares into the company's market. Public short sellers expect to pay the "borrowed" shares back at the much lower cost when the stock collapses. Professional short sellers never expect to buyback the nonexistent shares and legally avoid U.S. taxes on their profits in doing so. If the shares are not there to be borrowed, your company can't be sold short.
If your company can keep your shares away from the DTC, by having all your shareholders demand physical delivery of their share certificates, your company is said to have a Cash Market in its stock. Few companies bother or understand the dangers they run from short sellers. Brokerage firms and the DTC work very hard to make it extremely difficult to create a Cash Market in any stock.
Burying Insider Shares
The insiders must "bury" their share certificates. To do so requires that all the insiders agree to a Pooling and Vaulting Agreement. All the insider share certificates, by far the largest percentage of stock in your company, are placed in a bank safe deposit box or other repository. At least two designated insiders must be present to open that safe deposit box. The result is these shares can't be sold and, since they aren't held by the DTC,
short sellers can't use them. When you make acquisitions with your shares, or further issued shares, those shares must also be added to your safe deposit box or other repository. This policy ensures that your float can't increase. Nor can anyone use those shares to sell short your stock. You are guaranteeing what few companies ever achieve, total control of your stock issue.
Keeping Your Float Private
Stopping the American public shareholders from selling their shares (the float) in your public company is more difficult. I believe it can be done. You must eliminate your shareholders potential for loss. You must pay them to keep their shares. And, you must educate them to the fact that their greatest profit will be realized when the insiders sell their shares at the time of the company sale or merger with a larger company. If they know that the insiders have agreed not to sell, they're far more likely to go along with the program, too.
Your public shareholders can avoid loss by selling half of their position when the public company's share price doubles over what they paid for their shares. The shareholder has his risk capital returned and now has a cost-free investment in your public company. His original risk capital is now available for another investment. If the initial buyers of a stock do it, you have reduced the float by 50% and the Effective Float is half of the float. If the second group of buyers follow this practice, the Effective Float is 25% of the float. Your company has cut its Investor Relations costs by 75%. Those funds are, instead, available for further company expansion.
What Do You Offer Them?
Convincing your public shareholders to hold their shares requires that you pay them to do so. The cash dividends paid by major public companies are investor relations' costs to achieve this goal. Your smaller public company can't afford to do it since your profits need to be used to build your company. The solution is to pay your shareholders in tax-free benefits that meet their living needs. The VCP plan is to offer your registered shareholders a package of annual benefits worth about US$2,000. Thus your public shareholders are paid to keep their remaining shares in your company out of the hands of the DTC and to hold them until your insiders exit your company.
What's Your and Your Shareholder's Payoff?
M&A (Mergers and Acquisitions) announcement drive any public company's share price up. It's a fact recognized by anyone with any knowledge of the Market. The benefit of the M&A share price appreciation ensures that your insiders receive the highest possible price for their shares. It ensures that your public shareholders maximize their profits by also getting the highest possible price, too. Everyone wins when you bury your company's stock and build your company's balance sheet.
The combination of no downside risk, tax-free benefits and maximum potential profits are the keys to burying any company's shares. Applying them to your public company means that you can have a strong and sustainable share price with reasonable Investor Relations costs. And you can hold your share price firm as long as it may take to achieve your exit strategy.
To contact the author: Visit the Beowulf Investments website: [http://home.earthlink.net/~beowulfinvestments/] Or, visit the Global Village Investment Club Website: [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
About the Author
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
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