What are the key differences?
There are a number of differences between a private and a public company; 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.
The main difference between a public and a private company is that the shares of a public company are typically traded on a stock exchange (i.e. the company is listed), while a private company’s shares are not.
This difference gives public companies a substantial advantage over private companies in that, if a public company satisfies the conditions for listing, its shares can be listed or dealt with on a recognised stock exchange. This will enable 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) however, are not listed on a stock exchange, so the owners should carefully consider whether they are in a position to comply with these extra burdens, or whether they should consider re-registering as a private company.
This guide outlines some of the most important distinctions in law between public and private companies. Please note that this list is not exhaustive.
1. Shares
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.
Private companies are not subject to a minimum capital requirement.
Private companies are prohibited from offering their shares to the public.
Specific considerations apply to public companies in relation to the 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. This rule does not apply to employee share schemes.
A public company may not allot shares as fully or partly paid up (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.
1.3 Financial assistance for acquisition 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.
1.4 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 Companies Court if it wishes to reduce its share capital.
1.5 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 its interest.
2. Shareholders
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.
Like a private company, a public company may make distributions to its shareholders only out 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).
However, 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.
3. Directors
A private company may have a sole director, whereas every public company must have a minimum of two directors.
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.
3.3 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 in the nature of or in substitution for loans (quasi-loans) to such directors are also prohibited.
4. Corporate governance
4.1 Companies House certificate
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.
A private company may commence business as soon as it has been registered.
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 solicitor or a chartered secretary.
A company must prepare annual financial statements. The deadline for filing the financial statements at Companies House is 6 months after the end of its accounting period for a public company; a private company has up to 9 months.
Most private limited companies do not require a statutory audit unless their articles of association say that it must or enough shareholders request one.
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.
Public companies that are dormant must prepare and deliver to the registrar a balance sheet and notes, directors’ report and possibly a profit-and-loss account, if the company has traded in the previous financial year.
5. Practical considerations
There are a number of practical considerations to take into account when comparing private and public limited companies, including the following:
- The directors of a private company often 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, this will usually not be the case 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 akin to investors, whether institutional or otherwise.
The material contained in this guide is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.
© Miller Rosenfalck LLP, February 2020
