Comparison of public and private companies
1. Introduction
There are numerous differences between private and public companies, some derived from statute while others are derived from practice. The general rule is that any company which is not a public company is a private company.
Very broadly stated the most important difference between a public company and a private company is that a public company is intended as a vehicle not only for a business but also for public investment in that business, whereas a private company is the private concern of the persons engaged in the business incorporated in it.
The only substantial advantage of a public company is that if the public company satisfies the conditions for listing, its shares can be listed or dealt with on a recognised Stock Exchange, thus enabling the company to raise equity capital by offering shares to the public, and also permitting shareholders to buy and sell their shares very easily. In return for this benefit, and to protect public investors, public companies are subject to considerably more stringent controls than private companies. Many UK “public limited companies” (“PLCs”) are, however, not, listed on a Stock Exchange, so the owners should carefully consider whether they are happy to comply with these extra burdens, or whether they should consider re-registering as a private company.
The following paragraphs contain some of the most important distinctions in law between public and private companies. Please note that this list is not exhaustive.
Unless otherwise stated, none of the provisions contained in Paragraphs 2 to 13 below apply to private companies. Further, as appears in Paragraphs 14 to 22 below, private companies may also do a number of things which public companies may not do.
2. Minimum share capital for public companies
In the case of a public company the nominal value of its allotted share capital must not be less than the authorised minimum, at present £50,000, (the Euro equivalent is currently about €59,000).
3. Allotment of shares
A public company may not allot shares unless at least one-quarter of their nominal value and the whole of any premium has been paid up.
4. Registrar’s certificate for public company doing business
A public company may not do business or exercise any borrowing powers unless the registrar of companies has issued a certificate under the Companies Act 2006 or the company is re-registered as a private company. Before issuing a certificate, the registrar must be satisfied that the nominal value of the company’s allotted share capital is not less than the authorised minimum, and the company must deliver a statutory declaration complying with the Companies Act 2006. Accordingly, no public company may do business until it has shareholder funds of a value equal to at least one-quarter of the authorised minimum.
5. Non-cash consideration for shares
A public company may not allot shares as fully or partly paid up (as to their nominal value or any premium on them) otherwise than in cash if the consideration for the allotment is or includes an undertaking which is to be, or may be, performed more than five years after the date of the allotment. If the allotment for non-cash consideration is permissible, then an expert’s prior valuation and report on the consideration given is usually required. In any event, a public company may not allot shares in consideration of an undertaking to do work or perform services.
6. Acquisition of non-cash asset in initial period
A public company formed as such may not enter into an agreement with a subscriber to its Memorandum of Association for the transfer by him during the ‘initial period’ of any non-cash assets (whether to the company or some other person) if the consideration to be given by the company is worth one-tenth or more of the company’s nominal share capital then in issue. Such an agreement may be validated if:
- the consideration received by the company and any non-cash consideration given by it are independently valued, and a report is given to the company within six months of the agreement;
- the terms of the agreement are approved by ordinary resolution of the company; and
- copies of the resolution and the report have been circulated to members of the company, no later than the giving of the notice of the meeting at which the resolution is proposed.
7. Disapplication of pre-emptive rights
Unlike a private company, a public company may not exclude altogether the preferential rights conferred by law on its existing equity shareholders to subscribe for new shares or other equity securities and which it offers for subscription in cash: it may only dis-apply those provisions for a limited period.
8. Distribution of profits
Like a private company, a public company may make distributions to its shareholders only out of the excess of its accumulated realised profits (so far as not already utilised by distribution or capitalisation) over its accumulated realised losses (so far as not previously written off in a reduction or reorganisation of capital duly made); but unlike a private company, a public company is prohibited from making a distribution if its net assets are less than the aggregate in value of its called-up share capital and its un-distributable reserves. The distribution must not reduce the amount of those assets to less than that aggregate.
9. Treatment of shares held by or for public company
Where shares in a public company are forfeited or where a company acquires shares in itself in which it has a beneficial interest, such shares, unless previously disposed of, must be cancelled within three years of such forfeiture or acquisition. In general, a public company may not take mortgages, charges or liens over shares in itself.
10. Duty of directors on serious loss of capital
If the net assets of a public company are reduced to half or less of its called-up share capital, its directors must, not later than 28 days from the earliest day on which that fact is known to a director of the company, duly convene an extraordinary general meeting, to be held not later than 56 days from that day, for the purpose of considering whether any, and if so what, steps should be taken to deal with the situation.
11. Restrictions on loans and quasi-loans
Where a group of companies includes a public company, not only are loans to directors prohibited (as is the case with private companies and groups of private companies), but transactions (‘quasi-loans’)[1] in the nature of or in substitution for loans to such directors are also prohibited.
12. Company secretary
A private company does not have to appoint a company secretary, unless its Articles require it to do so. A public company must have a company secretary and it is the duty of the directors of a public company to take all reasonable steps to ensure that the secretary of the company is a person who appears to them to have the requisite knowledge and experience to discharge the functions of secretary to the company, and who complies with the statutory requirements. Whereas a private company secretary need not be specially qualified or experienced, the secretary of a public company must be someone with the appropriate knowledge and experience, e.g. a barrister, a solicitor or a chartered secretary.
13. Company investigations
In addition to their powers to issue securities to the public, public companies have a statutory power (not conferred upon private companies) to enquire into the existence of interests in their shares (either on their own initiative or upon the requisition of a members holding one-tenth of the voting capital).
14. Form and filing of accounts
A public company must submit its accounts to its members in a general meeting within 6 months of the end of its accounting period: a private company has up to 9 months. A small or medium-sized private company may be exempt from the obligation of having its accounts audited and may file abbreviated accounts.
A private company which qualifies as small or medium-sized may be exempt from certain provisions of the Companies Act relating to accounts and disclosure. A company (or a group containing such a company) is not eligible for small or medium-sized status (and relief from disclosure) if at any time during the year it was a public company, a banking or insurance company, an authorised person under the Financial Services and Markets Act 2000 or certain types of investment company.
15. Dormant companies
A private company which qualifies as a small company need not appoint auditors while it is dormant. A dormant company is currently required to file an abbreviated balance sheet with notes.
16. Financial assistance for acquisition by private company of its own shares
All companies are prohibited from giving financial assistance, either directly or indirectly, for the acquisition of their own shares. However, a private limited company is permitted to do so if a special resolution is passed following a statutory declaration of solvency by the directors and a report by the auditors.
The private company must have net assets which are not reduced by the acquisition, or, to the extent that they are reduced, the assistance is provided out of distributable profits.
17. Redemption or purchase of own shares out of capital
Subject in each case to strict compliance with the statutory safeguards (including a sworn solvency statement made by all directors), a private company may not only purchase its own shares or redeem any shares issued as redeemable shares out of its distributable profits (as may a public company), but may also effect such a purchase or redemption by applying assets representing its capital and non-distributable reserves.
A public company has to apply to the High Court if it wishes to reduce its share capital; for example in order to write off accumulated losses on the balance sheet, which is a costly procedure.
18. Disclosure of interests in shares
Persons entitled to interests in the shares of a private company carrying full voting rights need not disclose them to the company, and the company is not required to keep a register of such interests. A person who acquires an interest in the shares with voting rights in a public company may, in certain circumstances, come under an obligation to notify the company of his interest. A public company is required to keep a register of interests in its shares.
19. Sole director
A private company may have a sole director, whereas every public company[2] must have two directors.
20. Meetings and shareholder resolutions
A public company must hold an Annual General Meeting within 6 months of its financial year end. A private company does not need to hold an AGM unless its Articles require one. Shareholder resolutions in a public company have to be passed by the appropriate majority at a properly convened meeting, whereas most shareholder resolutions in a private company can be passed by a written resolution, which can be a quicker and simpler process.
21. Appointment of directors
Directors of a private company can be appointed at a general meeting by a composite resolution without further authorisation. At a general meeting of a public company, a single resolution appointing two or more directors may not be moved unless agreed by the general meeting without any vote being given against it.
22. Rights of a proxy
A proxy attending a general or class meeting of members in a private company has the same right as the member appointing him to speak at the meeting.
23. Practical differences between public and private companies.
There are a number of practical differences between public and private companies, including the following:
- The directors of a private company usually hold or control all or a majority of its shares.
- Shares in a private company are rarely traded, as there is no established market place and no readily ascertainable market price for them. Further, it is usual for the articles of association of private companies to impose restrictions on transfers of shares.
- It is common for private companies to pay little or no dividends, especially where, as is often the case, the directors also hold all or most of the shares and are virtually the owners of the company;most of the profits being applied towards directors’ remuneration, and any surplus to reserves. Shareholders in a private company who are not directors may therefore receive no income return from their shares. However, if the failure to pay dividends in contrast with substantial payments of remuneration to directors amounts to unfair prejudice, non-director shareholders may have rights under the Companies Act 2006.
- In the event of a dispute, minority shareholders in a private company are likely to be in a weak position. Their shares, as mentioned above, may yield no income and it is difficult to realise their capital value. Further, whereas commonly in a public company no single group of connected parties controls a majority of the shares, the opposite may be the case in a private company> In the event of a dispute, minority shareholders in a private company are likely to be in a weak position.
- Whereas the directors and shareholders in a private company are frequently the same persons, there will usually be a significant difference in personnel in a public company.
- In a public company, the position of a director is more like that of an employee paid to manage a business and shareholders are more likely to be investors, whether institutional or otherwise.
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