The Lifecycle of a Business - Private or public company?

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina.

On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

So, First Things First…..

Private or public company?

When setting up a UK company limited by shares, a decision will need to be made about whether to incorporate as a private limited company or a public limited company (PLC). Most UK companies are incorporated as private companies. However, that is not to say once a private company always a private company. A private company can, subject to satisfying certain requirements at the relevant time, re-register as a public company under the Companies Act 2006 (Act).

The main reason why a public company is incorporated is for the ability to offer shares to the public, which a private company is prohibited from doing. If a company is seeking a listing of its shares on a stock exchange then a PLC will be required either by converting an existing private company into a PLC or setting up a new PLC holding company in the group structure which will list. However, there is no requirement for a PLC to have its shares listed on a stock exchange and a PLC can be unquoted and its shares not traded.

The main differences on incorporation of a private and public company in England and Wales are:

• a PLC requires a company secretary and at least two directors whereas a private company only requires one director;
• a PLC requires a trading certificate to commence business or trading or exercise borrowing powers whereas this is not required by a private company;
• in order to obtain a trading certificate, a PLC must have a minimum allotted share capital of a nominal value of at least £50,000/EUR57,100; and
• shares in a PLC must be paid up as to a quarter of their nominal value and the whole of any share premium. In effect, on incorporation a PLC must have £12,500 paid up in nominal value for its shares. Shares in a private company can be issued nil paid and a private company can be set up with a minimal amount of share capital, e.g. one share of £1 nil paid.

Previously, the minimum allotted share capital amount of £50,000 meant that there was certain comfort that one was dealing with a company of substance when dealing with a PLC. The amount of £50,000 was enacted in the Companies Act 1985 but has not increased over time and is not a barrier to setting up a PLC in today’s money terms.

Once incorporated there are several differences between an unquoted PLC and a private company. This article does not focus on the differences between a listed PLC and an unlisted PLC or private company nor does it address any tax considerations.

Key on-going differences between an unlisted PLC and a private company

In addition to requiring two directors and a company secretary on an on-going basis, some other key differences are:

Shareholder resolutions and meetings - A PLC is required to hold an Annual General Meeting (AGM) each year whereas a private company is only required to do so if required by its articles of association (Articles). A PLC must give 21 days’ notice of an AGM, unless all the members entitled to attend and vote agree to a shorter period. A private company must give 14 days’ notice of an AGM unless its Articles specify a longer period.

All meetings of a private company can be held on shorter notice than 14 days if agreed by a majority in number of the members entitled to attend and vote at the meeting and holding 90% (or a higher percentage specified in the Articles not exceeding 95%) of nominal value of the shares entitled to vote. PLCs have a higher threshold – general meetings of PLCs (not AGMs) may be held on shorter notice if agreed to by a majority in number of the members entitled to attend and vote at the meeting and holding 95% of nominal value of the shares entitled to vote.

Private companies can pass written resolutions of its members whereas PLCs cannot and must convene a meeting.

Share capital – The regime around share capital matters is more onerous for a PLC. As highlighted above a PLC’s shares must be paid up as to a quarter of their nominal value and all of any share premium (except for shares allotted pursuant to an employee share scheme).
Private companies, in addition to disapplying statutory pre-emption rights on the allotment of new shares, can exclude the operation of the same in relation to all or specific allotments of shares. PLCs can only disapply these statutory pre-emption rights. Furthermore, directors of private companies with a single class of shares, have the general power to allot shares whereas PLC directors require shareholder authority to do so.

There are strict rules for a PLC if it proposes to issue shares for non-cash consideration. An independent valuation of the consideration must be obtained in advance of the allotment and be sent to the allottee. Shares cannot be issued: (i) if the consideration is an undertaking for services to be performed or work to be done for the company or any other person; or (ii) otherwise than cash, if the consideration includes an undertaking which is or may be performed five years after the date of allotment.

PLCs are also limited in share reconstructions and re-organisations. Share buybacks and redemption of shares are not allowed out of capital, whereas these are permitted by private companies. Private companies are further permitted to reduce their share capital by means of the solvency statement procedure under the Act unlike PLCs.

The financial assistance regime, whereby a company is prohibited from giving financial assistance directly or indirectly for the purposes of the acquisition of its shares, no longer applies to private companies but is still applicable to PLCs.

On a serious loss of capital, directors of a PLC must convene a general meeting to discuss what steps must be taken within 28 days of one of them becoming aware of a PLC’s net assets falling to half or less of its called-up share capital. The meeting must take place no later than 56 days after the date of the director becoming aware.

Accounts and accounting records – A private company must file its accounts at Companies House within nine months after the end of the relevant accounting period, whereas a PLC must file accounts within six months. Accounting records must be maintained for three years by a private company and six years by a PLC.

A PLC must lay annual accounts and reports before a general meeting and is required to circulate the accounts 21 days before the meeting. Private companies are not required to lay accounts before a general meeting but are required to circulate copies to members no later than the date for filing of accounts or, if earlier, the date it files the accounts.

Takeover code – The UK Takeover Code applies to a PLC with its registered office in the UK and where its place of central management and control is considered by the Takeover Panel to be in the UK, Channel Islands and Isle of Man. Unless a private company has, in the previous ten years, had its shares listed/admitted to trading, issued a prospectus or otherwise had its securities subject to a marketing arrangement or prices quotes for a certain period, the Takeover Code will not apply.

The more onerous rules and obligations applicable to a PLC may have cost consequences and can affect a company’s ability to carry out certain share capital transactions. Given this, then unless a PLC is required at the time of incorporation or in anticipation of an offer of shares to the public or listing on a stock exchange, private companies are usually incorporated rather than setting up as a PLC.

Disclaimer

This note reflects the law as at 11 July 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.