It’s safe to say that most companies start out as private limited companies, potentially shifting up a gear at a later date to be listed on the London Stock Exchange and become a public limited company. But what are the risks involved? And the corporate governance regulations you need to comply with? This article, in our series on the different kinds of company in the UK, looks at the characteristics that make up a public limited company and how that compares to a private company.
- What is a public limited company?
- How is a public limited company formed?
- Different types of public limited company
- What are the characteristics of a public limited company?
- What are the advantages of a public limited company?
- What are the disadvantages of a public limited company?
- Liability of shareholders and directors of a public limited company
- What is the public limited company registration process?
- Public limited company vs private limited company: what’s the difference?
- How are public limited companies different from partnerships?
- How are public limited companies different from joint stock companies?
- Who controls a public limited company?
What is a public limited company?
A public limited company is a limited liability company, formed in a similar way to a private limited company under the Companies Act 2006 (‘the Act’), that has chosen to raise capital by offering its shares to the general public.
Its liability is limited by way of shares, which means that under the Act, the liability of a company’s members (the people that own the company) is limited for each member to the amount as yet unpaid on the shares held by that member.
If a company needs to generate large amounts of capital for use in its business, one way to achieve this is by forming a PLC. A start-up business is unlikely however to begin life as a PLC – it’s more likely to form a private limited company first owned by a small number of founders and investors or funders, and later convert to a PLC once its business has been established and has a track record that will attract public investors. A large percentage of the shares of PLCs are often owned by investment and pension funds, known as ‘institutional investors’.
How is a public limited company formed?
A PLC is formed in a similar way to a private limited company. They both have constitutional documents under the Act (a memorandum and articles of association) which have to be filed at Companies House and govern the way the company is run.
There are slightly different requirements for a public company than a private company, for example, a public company must have at least two directors and a company secretary, whereas a private limited company is only required to have one natural director and there is no requirement to have a company secretary.
Another similarity to a private company limited by shares, is that the shareholders have limited liability for the debts of the business.
Different types of public limited company
You can recognise a PLC from its name because, under the Act, it is compulsory to include the ‘p.l.c.’ or ‘Public Limited Company’ denomination after the public company’s name. Most of the UK’s largest and most well-known companies are run as PLCs.
Public limited companies in the UK can be listed, quoted, traded, and unquoted traded.
- A listed company is a public company that has a class of its securities admitted to trading on a UK regulated market that have been officially listed with either a premium listing or standard listing to the Financial Conduct Authority's (‘FCA’) Official List (as required by the Financial Services and Markets Act 2000).
- A quoted company is described in the Act as a UK incorporated public company with equity shares that are: (a) listed in the FCA’s Official List and are admitted to trading on a UK regulated market for listed securities, (b) officially listed in the EEA, or (c) admitted to dealing on the New York Stock Exchange or the NASDAQ.
- A traded company is defined in several ways under the Act. For example, under Part 13 of the Act it is defined as a UK incorporated company with its shares admitted to trading by or on behalf of the company on either a UK regulated market or an EU regulated market provided those shares have voting rights at general meetings of the company’s shareholders. Under Part 15 of the Act however, a traded company is defined as a UK incorporated company with transferable securities admitted to trading on a UK regulated market. Parts 9 and 24 also have variations on the definition of what a traded company is.
- An unquoted traded company under the Act is a Part 13 traded company that is not a quoted company, so a UK incorporated company with its unlisted voting shares admitted to trading on either a UK regulated market or an EU regulated market by or on behalf of the company.
The UK’s largest publicly held companies listed on the London Stock Exchange are classified into an index known as the Financial Times Stock Exchange 100 or the ‘FTSE’.
However, as mentioned above, not all PLCs are listed on a stock exchange, even though they are theoretically entitled to do so. Having securities admitted to trading on a regulated market means a lot of additional regulatory and corporate governance compliance for a company as well as compliance with industry guidelines.
What are the characteristics of a public limited company?
PLCs are more highly regulated than private limited companies, particularly PLCs that are listed, traded, or quoted companies. One of the objectives of the regulators monitoring the various stock markets is to ensure that the markets are working efficiently and that investment opportunities are being provided to investors and access to capital is being provided to issuers. There are several legal and regulatory frameworks through which they aim to achieve this goal as well as through widely accepted industry standards.
These are the some of the key characteristics of a PLC:
- Its name will end with the designation ‘P.L.C.’ or ‘Public Limited Company’.
- It must have issued share capital of at least £50,000 (or the proscribed Euro equivalent). At least 25% of the nominal value of its shares and the whole of any share premium must be paid up on registration.
- A public company (that has not been re-registered as a public company) must not do business or exercise any borrowing powers unless the Registrar of Companies has issued it with a certificate in accordance with the Act confirming that it has the minimum allotted share capital (a ‘trading certificate’). It is an offence to trade without a trading certificate and the directors of the company could be fined.
- An auditor or auditors must be appointed for each financial year of the company, unless the directors reasonably resolve otherwise on the grounds that audited accounts are unlikely to be required. The Act contains specific rules for companies with and without an audit committee.
- It will have at least two directors (who can also be shareholders).
- It must have at least one company secretary who appears to the directors of the company to have the knowledge and experience needed to carry out the functions of the company secretary and has the relevant qualifications to undertake the role.
- A PLC is obliged to invite all its shareholders to an annual general meeting (‘AGM’) at which the company’s accounts are laid before the company, and at which the company can declare dividends. Often, other decisions of interest to shareholders are discussed at the AGM, such as the appointment of directors and their remuneration packages. An AGM must be held within six months following the end of the company’s financial year.
- PLCs can raise capital for business activities through the sale of shares to the public and can gain publicity for the investment through the process of listing shares for sale on an exchange.
- Usually for years that are not the first year, public company accounts must be filed within 6 months from the end of a company’s financial year (the limit is 9 months for a private company). Public companies must lay copies of their annual accounts and reports before the company in a general meeting. Accounts for quoted companies must also include a separate corporate governance statement required by the Disclosure Guidance and Transparency Rules, which are contained in The Disclosure Guidance and Transparency Rules FCA sourcebook.
What are the advantages of a public limited company?
The biggest advantage for any PLC is the opportunity it must access new investors and exchanges where it can raise capital by selling its shares to the public.
Another advantage is that a PLC can offer investors a certain amount of liquidity in that investors can sell their shares fairly quickly (particularly if the shares are trading on a stock exchange). If a PLC is planning to expand its business, it can issue shares to the public to fund activities such as:
- Buying property
- Paying off its debts
- Starting a new project
- Engaging in R&D
- Creating a new line of business
Being visible on a stock exchange brings a PLC additional credibility, and it is good publicity in terms of attracting potential investors like mutual funds, hedge funds and traders. PLCs are often thought of as being established companies with a more reliable investment profile. Indications as to the value of a company’s shares are also available to investors as the company’s share prices will be published and can be monitored regularly by prospective or existing shareholders. The more stringent financial requirements imposed on it makes it also more attractive as a candidate for bank loans, and it can find it easier to raise corporate debt.
What are the disadvantages of a public limited company?
Some disadvantages of becoming a PLC are that public companies (particularly listed, quoted, or traded companies) are more highly regulated. They must hold an AGM, and their accounts must be detailed, transparent and available to be inspected by the public.
They can be expensive and complex to set up or to convert a private limited company to a PLC, and you may need to engage specialist corporate lawyers and bankers to help you achieve this.
With an increased number of investors comes an increased number of shareholders in whose best interests the company (and its directors) has to act and to be accountable to. Under the Act, there are also restrictions placed on loans to directors (such as the requirement for approval from the company’s members), as well as on the issue of dividends and share capital, and the ability of a company to buy or redeem its own shares out of capital or reduce its share capital. There are also restrictions on financial assistance for the purchase of its shares.
If a PLC is listed on a stock exchange, there will be further reporting, corporate governance and disclosure requirements placed on it, so that potential buyers can understand the risks of their investment.
The company’s performance, business affairs and general actions will be seen and analysed by the financial markets which can affect the value placed by investors on the company and its shares. Poor performing companies can become the target of takeover attempts in which companies or individuals seek to acquire a majority shareholding of the PLC and assume control of it.
Another disadvantage of being a PLC is that the financial position of the company and how it is performing is disclosed not just to shareholders but to members of the public and to competitors. This brings with it the potential for negative press, particularly if the company is seeing a downturn in its profits.
Some AGMs have been disrupted by campaigners who object to the company’s business activities. In recent years, the UK has seen a trend in shareholder activism which can have big implications on the processes and policies the company’s directors put in place when running the company and ultimately result in changes to those policies.
Shareholders in PLCs expect to achieve a reasonable rate of return, and this can lead to problems where companies focus on the short term rather than longer term objectives, like growth and research and development.
Issues of control can also be a problem for a PLC. When a company is small, with just a few investors and directors, it’s relatively easy to do business, and shares can be issued to friends or colleagues who share the founders’ aims and objectives for the business. However, with a PLC, you can’t control who owns shares, and there’s always a danger that the original purpose of the company becomes diluted because of the influence on decision-making brought by large investors, as well as the founders’ original shareholdings. Large institutional investors can come to have a significant impact on the decision-making of the company, exercising their influence by bringing pressure on management, and requiring that they are granted preferential rights or vetos.
In terms of regulation, the UK Takeover Code applies to any public company registered in the UK, the Channel Islands, or the Isle of Man. It also applies in part to some companies incorporated in the EEA which are listed in the UK. The Takeover Code increases the complexity of selling or acquiring a public company, particularly if the company has a vast number of shareholders. If a PLC is listed on a stock exchange, there will be further listing and disclosure requirements placed on it, so that potential buyers can understand the risks of their investment.
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Liability of shareholders and directors of a public limited company
In a PLC, just like a private limited company, shareholders’ liability is limited to the capital they have originally invested in the business by virtue of the shares they own. If they have not fully paid for their shares, they can be called upon to do so.
Company directors run the management of a company and have a range of duties and responsibilities described in company legislation (including the Act) and through common law decisions of courts.
These are largely the same whether the company is private or a PLC, for example their duty to promote the success of the company. However, the directors of a PLC have more reporting requirements to the company’s shareholders, particularly if the company is listed, quoted, or traded.
Company directors must, among other things:
- Act in accordance with the decisions made by the company’s shareholders, and within the powers given to them in the company’s constitution.
- Act independently, and in line with their contracts of engagement with the company.
- Act in the best interests of the company and avoid conflict with their own interests. In a PLC, any independent directors’ authorisation of the conflict can only be given if such authorisation is allowed by the company's articles of association. Personal interests of the directors in any company transactions must be disclosed.
- Directors of public companies must avoid situations where they, or a family member, might receive a personal benefit from the actions of the company, unless this has been sanctioned by the company’s members in accordance with the company’s constitutional documents.
- Keep proper records and meet filing requirements at Companies House and HMRC.
- Directors of public companies who are listed on the stock exchange must prepare a remuneration report that discloses the pay and employment policies of senior and key management.
What is the public limited company registration process?
The initial registration process for a PLC at Companies House is similar to that of a private limited company. For unquoted and non-traded public companies at least one shareholder is required, and you will need to file a memorandum and articles of association.
Here is some of the key information you will need to register a PLC:
- Company name that is not similar to another on record, and that meets certain other requirements, and that ends in ‘P.L.C.’ or Public Limited Company.
- Registered office address.
- At least two directors (name, service and residential address, date of birth, nationality, occupation, other directorships, former name, and any shareholdings).
- Appropriately qualified company secretary.
- A minimum amount of share capital (£50,000).
- Certain security information for directors and shareholder(s).
- Shareholder(s), and number of shares issued, including their names, addresses, number of shares issued.
A PLC is required to complete a second stage in its registration, where it files a ‘trading certificate’ to Companies House in which it declares that it has raised its initial share capital. It cannot trade before this trading certificate is issued.
The company’s certificate of incorporation will state that it is a public company.
Public limited company vs private limited company: what’s the difference?
The Act states that a company is a “private company” if it is not a public company. Here are some of the principal differences between PLCs and private limited companies:
|Public limited company||Private limited company|
|Two directors are needed for a PLC, as well as a company secretary that has a suitable qualification.||Only one director is required for a private company and a private company is not required to have a company secretary.|
|PLCs can offer shares to the public and be listed on a stock exchange.||A private company’s shares cannot be offered to the general public.|
|The Takeover Code applies to public companies that have their registered office is in the UK, Channel Islands, or Isle of Man and either: their control centre is considered by the Takeover Panel to be in the UK, Channel Islands and Isle of Man or their securities are traded on a regulated market in one or more EEA member states (but not in the UK).||The Takeover Code may also apply to a small number of private companies if both the company's registered office its control centre are in the UK, Channel Islands or Isle of Man and, during the previous ten years: its securities have been admitted to trading on a UK regulated market or a UK multilateral trading facility like AIM or on any stock exchange in the Channel Islands or the Isle of Man; its securities have been subject to a marketing arrangement or it has filed a prospectus; or its share prices (or prices for other securities) have been regularly published for at least six months.|
|Public companies cannot buy back their own shares out of capital or cash.||Private companies can buy back shares.|
|Even if there is only one class of shares, allotting shares does not apply to public companies.||Under the Act, the directors of a private company with only one class of shares can allot shares without any further authority, unless the company's articles of association state otherwise.|
|A reduction of capital through a solvency statement process is not available to public companies.||Share capital reduction is an option for private companies.|
|After the first year, public companies must file their accounts within six months of the end of their financial year.||For private companies this is extended to nine months.|
|Public companies must hold an annual general meeting||Private companies are not obliged to hold an AGM.|
|Public companies are subject to a lot more governance and compliance and have complex reporting and disclosure requirements, particularly if they are listed or have shares that are admitted to trading. Shareholder activism and a trend towards transparency and accountability for public companies means that there are also a growing number of industry guidelines and codes that public companies will consider in their business plans, policies, and strategic decision-making.|
How are public limited companies different from partnerships?
A partnership is a form of business organisation in which two or more individuals (or companies) are jointly responsible for the running of a business. Unless their liability is limited, they are jointly responsible for all losses of the business. Neither the directors nor the shareholders of a PLC are responsible for the losses of the business beyond their shareholdings.
Partners receive and pay taxes on their share of the profits of the business. A PLC pays corporation tax on the profits of the business, and when these profits are paid to shareholders in the form of dividends, the shareholders can also pay tax on those dividends.
Setting up a partnership can be more flexible and therefore less administrative than setting up a company. The partners must draw up a partnership deed, decide a name, choose a nominated partner, and notify the tax authorities.
A traditional partnership is not a legal entity in its own right, and in order to employ staff and own property, all partners must agree and create a decision-making structure to this effect.
How are public limited companies different from joint stock companies?
PLCs can have an unlimited number of shareholders and issue shares to members of the public. The liability of the shareholders is limited, and they are not responsible for the losses of the company, beyond the amount they have paid for their shares.
A joint stock company is a bit like a cross between a company and a partnership. The company can issue and sell shares, but shareholders are responsible for all of the company’s debts, unlike the shareholders of a PLC. In the UK, joint stock companies are known as unlimited companies.
A PLC cannot be a joint stock company.
Who controls a public limited company?
The board of directors of a PLC controls its day-to-day activities. The shareholders also have a degree of control over the way the company itself is managed and run. This is described in the articles of association and reflected in the extent to which resolutions are passed by shareholders. Shareholders who own or control large numbers of shares may influence the running of the company directly through exercising their rights in the articles of association and at law by passing or vetoing resolutions. They may also indirectly influence, by applying pressure on the directors in an AGM or otherwise, and by the influence they have in the choice of directors in the first place.
With greater requirements for public companies regarding transparency and disclosure to shareholders, there has been an increased focus in the UK on shareholder rights and opinions, which has been welcomed by some as a means of holding public companies accountable to the market and their shareholders. What is clear is that this continues to be an industry objective and so public companies need to make sure that they are responsive to this growing trend.