Public limited
company advantages
As a limited company, a public limited company, also called a plc, is a
business organisation that is formed by 7 to infinite shareholders. A plc
shares the advantages of a limited company with its private counterpart.
But there are also specific features of a public limited company, many of which
reinforce one another, that give it some unique advantages:
1. Raising capital
through public issue of shares
The most obvious advantage of being a public limited company is the
ability to raise share capital, particularly where the company is listed on a
recognised exchange. Since it can sell its shares to the public and anyone is
able to invest their money, the capital that can be raised is typically much
larger than a private limited company. It’s also possible that having stock
listed on an exchange could attract investment from hedge funds, mutual funds
and other institutional traders.
2. Widening the
shareholder base and spreading risk
Offering shares to the public gives the opportunity to spread the risk
of company ownership among a large number of shareholders. This may allow early
investors in the company to sell some of their own shares at a profit while
still retaining a substantial stake in the company. Obtaining capital from a
wide range of investors has some advantages over relying on one or two “angel
investors”, as many private companies will choose to do to facilitate growth.
While an angel investor may provide a large amount of capital and expertise,
the founders may not be comfortable with the level of influence over the
company’s direction that the angel will often expect.
3. Other finance
opportunities
As well as share capital, a public limited company will often find
itself in a better position when looking at other potential sources of finance.
The demands of being a public limited company and maintaining a stock exchange
listing, for example, can help to improve a company’s creditworthiness when
issuing corporate debt (and therefore reduces the return the company needs to
offer investors). Banks and other financial institutions may be more willing to
extend finance to a public limited company, particularly one that is listed.
The company could also be in a better position to negotiate favourable interest
rates and repayment terms on loans.
4. Growth and
expansion opportunities
The value of being able to raise finance is in how it can be employed to
serve the business. By having more finance potentially more readily available
and on better terms than a private company, the public limited company can be
in an advantaged position to:
·
New projects, new products or new markets
·
Make capital expenditure to support and enhance the business
·
Make acquisitions (whether in cash or by offering shares to the
shareholders of the target business)
·
Fund research and development
·
Pay off existing debt (or replace existing debt with new debt on better
terms)
·
Grow organically
5. Prestigious profile
and confidence
Whether deserved or not, having ‘plc’ at the end of a company name can
add standing and prestige. There is a sense of status about a public limited
company that its private company counterpart just doesn’t quite have, which can
affect how the business is viewed. While often more imagined than real, this
perception of being more established, larger or more powerful can affect the
behaviour of customers, suppliers and employees. More people are likely to be
aware of the company if it is public, particularly if it’s listed on a stock
exchange. In that case, it’s more likely to receive attention from the media
and investment professionals. This is effectively free publicity, meaning more
people will recognise the company and its products or services. Better brand
recognition can lead to more sales. It may also make you more visible to
valuable potential business partners. Credibility and confidence are reinforced
by:
·
Operating under a stricter legal regime than private companies in many
areas
·
Higher share capital requirements
·
Greater transparency (for example, in the required form of accounts)
·
For listed companies, the indirect endorsement of having their shares
listed on a recognised exchange
Again, these factors can affect the behaviour of (potential)
shareholders, customers and business partners.
6. Transferability of
shares
The shares of a public limited company are more easily transferable than
those in the private equivalent, meaning shareholders benefit from liquidity.
If shares are quoted on a stock exchange, shareholders and potential
shareholders will generally find it easier to transfer shares in the company, although
the market still relies on willing purchasers and sellers being available. The
fact the shareholders are less bound to remain with the company can give them
comfort – and may help the company by making people more willing to invest. Without
restrictions on transferability of shares that often apply in private companies,
it’s also easier to deal with situations like a shareholder’s death, allowing
shares to be transmitted in line with the terms of any will.
7. Exit Strategy
Going public can enhance the options for the founders to exit the
business at some point in the future, if they wish to do so. Both higher
transferability of shares and the increased visibility of the business and its
performance may increase the chances of bid interest from potential suitors.
Public limited company disadvantages
There are some important disadvantages of a public limited company,
compared to a private limited company. These public limited company
disadvantages include:
More regulatory
requirements
To help protect shareholders, the legal and regulatory requirements for
a public limited company are more onerous than for private limited companies.
For example, additional restrictions include:
·
A trading certificate must be obtained from the Registrar of Companies before
the company can trade (there is no such requirement for a private company)
·
The need to have at least two directors (only one is required in a
private company)
·
More onerous rules apply concerning loans to directors
·
A suitably qualified company secretary must be appointed (not
required for a private company)
·
As well as higher transparency around accounts, they must be produced
within 6 months of the end of the financial year (9 months for private
companies)
·
AGMs must be held, whereas in a private company decisions can more often
be made by resolution
·
There are various additional restrictions on the company’s share capital
and limits on pre-emption rights and dividends
If the company’s shares are listed, the company will also need to follow
the rules of the market. These rules, particularly those to be listed on the Stock
Exchange, are demanding. Understanding and applying these additional rules will
consume time and effort that cannot then be dedicated to growing the business.
Appointing staff or advisers, including the required company secretary, will
help but come at a cost.
Higher levels of
transparency required
Limited companies, whether public or private, have more of their details
in the public domain, available via Registrar of Companies, than other business
types. But the required level of transparency is much higher for public
companies. As well as needing to have its accounts audited, public limited
companies are generally unable to file abbreviated accounts, whereas smaller
private companies can often do so. The fuller form of accounts means a public
limited company has to disclose more detailed data about the business and its
performance, information which is then available to anyone who wishes to access
it. The accounts of public limited companies are often scrutinised more by
analysts and receive more media commentary.
Ownership and
control issues
With a private limited company, the shareholders will typically be
people known to the directors or founders. A private company will often be
selective over who to admit as a shareholder, ensuring they support the vision
and plans for the business. The use of pre-emption rights can allow
existing shareholders to maintain control over the company when a new share
issue is undertaken, a shareholder dies or wants to transfer their shares.
With a public limited company, it’s much harder to control who is a shareholder
of the company, and who the directors are ultimately accountable to. There is
therefore a possibility that the original owners or directors can lose control
of the direction of the company, face disputes or just spend a lot more time
managing shareholder expectations. Institutional shareholders can wield
particularly high levels of influence, often expecting consultation and
adoption of particular policies or standards in return for their investment.
More vulnerable to takeovers
At worst, a company can become vulnerable to a hostile takeover if a
majority of shareholders agree to a bid. With shares being freely transferable,
a potential bidder can build up a shareholding in advance of launching a bid
attempt.
Short-termism
Where a public limited company is listed, there can be added pressure
imposed by the market. The company’s share price represents the value of the
company as viewed by the market, and (potential) investors will usually expect
a healthy return. As well as dividends paid from profits, there will be a
desire for the share price to increase. This level of emphasis on the share
price, usually not so immediate a demand in a private company, can cause the
directors to focus almost exclusively on short-term results. They may therefore
miss strategic opportunities or threats, thereby not achieving the best for the
business in the long-term.
Initial financial
commitment is higher
The minimum financial commitment is higher for a public limited company
than for a private limited company. In order to trade, the plc must start with
at least E500,000 of nominal share capital, at least 25% of which is paid up.
That means at least E125,000 must be committed to the business, whereas in a
private company a single share of (say) E0.01 could be allotted and not even
paid for on issue. Associated costs of company formation may also be higher,
especially if the company’s requirements are complex. If the company’s shares
are to be listed on an exchange, it will typically pay legal and investment
professionals to advise and manage the listing process. There will be other
costs associated with obtaining a listing.
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