A public company[a] is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (listed company), which facilitates the trade of shares, or not (unlisted public company). In some jurisdictions, public companies over a certain size must be listed on an exchange. In most cases, public companies are private enterprises in the private sector, and "public" emphasizes their reporting and trading on the public markets.
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Public companies are formed within the legal systems of particular states and so have associations and formal designations, which are distinct and separate in the polity in which they reside. In the United States, for example, a public company is usually a type of corporation though a corporation need not be a public company. In the United Kingdom, it is usually a public limited company (plc). In France, it is a société anonyme (SA). In Germany, it is an Aktiengesellschaft (AG). While the general idea of a public company may be similar, differences are meaningful and are at the core of international law disputes with regard to industry and trade.
Securities
Usually, the securities of a publicly traded company are owned by many investors while the shares of a privately held company are owned by relatively few shareholders. A company with many shareholders is not necessarily a publicly traded company. Conversely, a publicly traded company typically (but not necessarily) has many shareholders. In the United States, companies with over 500 shareholders in some instances are required to report under the Securities Exchange Act of 1934; companies that report under the 1934 Act are generally deemed public companies.[citation needed]
Advantages and disadvantages
Advantages
A public company possess some advantages over privately held businesses.
- Publicly traded companies are able to raise funds and capital through the sale (in the primary or secondary market) of shares of stock. That is the reason publicly traded corporations are important since prior to their existence, it was very difficult to obtain large amounts of capital for private enterprises, as significant capital could come only from a smaller set of wealthy investors or banks willing to risk typically large investments. The profit on stock is gained in form of dividend or capital gain to the holders.
- The financial media, analysts, and the public are able to access additional information about the business, since the business is commonly legally bound, and naturally motivated (so as to secure further capital), to disseminate public information regarding the financial status and future of the company to its many shareholders and the government.
- Because many people have a vested interest in the company's success, the company may be more popular or recognizable than a private company.
- The initial shareholders of the company are able to share risk by selling shares to the public. Those who hold a 100% share of the would have need to pay all of the business's debt; however, individuals who were to hold a 50% share would need to pay only 50% of the debt. That increases asset liquidity and the company does not need to depend on funding from a bank. For example, the founder of Facebook, Mark Zuckerberg, owned 29.3% of the company's class A shares in 2013,[1] which gave him enough voting power to control the business and allowed Facebook to raise capital from and to distribute risk to the remaining shareholders. Facebook had been a privately held company prior to its initial public offering in 2012.[2]
- If some shares are given to managers or other employees, potential conflicts of interest between employees and shareholders (an instance of principal–agent problem) will be remitted. As an example, in many tech companies, entry-level software engineers are given stock in the company upon being hired and so they become shareholders. Therefore, the engineers have a vested interest in the company succeeding financially and are incentivized to work harder and more diligently to ensure that success.[citation needed]
- Public companies have fiduciary duty to their shareholders, in addition to the directors' fiduciary duty to the company itself.
Disadvantages
Many stock exchanges require that publicly traded companies have their accounts regularly audited by outside auditors and then publish the accounts to their shareholders. Besides the cost, that may make useful information available to competitors. Various other annual and quarterly reports are also required by law. In the United States, the Sarbanes–Oxley Act imposes additional requirements. The requirement for audited books is not imposed by the exchange known as OTC Pink.[3][4] The shares may be maliciously held by outside shareholders and the original founders or owners may lose benefits and control. The principal–agent problem, or the agency problem is a key weakness of public companies. The separation of a company's ownership and control is especially prevalent in such countries as the United Kingdom and the United States.[5][6]
Stockholders
In the United States, the Securities and Exchange Commission requires firms whose stock is traded publicly to report their major shareholders each year.[7] The reports identify all institutional shareholders (primarily firms that own stock in other companies), all company officials who own shares in their firm, and all individuals or institutions owning more than 5% of the firm's stock.[7]
General trend
For many years, newly-created companies were privately held but held initial public offering to become publicly traded company or to be acquired by another company if they became larger and more profitable or had promising prospects. More infrequently, some companies such as the investment banking firm Goldman Sachs and the logistics services provider United Parcel Service (UPS) chose to remain privately held for a long period of time after maturity into a profitable company.
However, from 1997 to 2012, the number of corporations publicly traded on US stock exchanges dropped 45%.[8] According to one observer (Gerald F. Davis), "public corporations have become less concentrated, less integrated, less interconnected at the top, shorter lived, less remunerative for average investors, and less prevalent since the turn of the 21st century".[9] Davis argues that technological changes such as the decline in price and increasing power, quality and flexibility of computer numerical control machines and newer digitally enabled tools such as 3D printing will lead to smaller and more local organization of production.[9]
Privatization
In corporate privatization, more often called "going private," a group of private investors or another company that is privately held can buy out the shareholders of a public company, taking the company off the public markets. That is typically done through a leveraged buyout and occurs when the buyers believe the securities have been undervalued by investors. In some cases, public companies that are in severe financial distress may also approach a private company or companies to take over ownership and management of the company. One way of doing so would be to make a rights issue designed to enable the new investor to acquire a supermajority. With a supermajority, the company could then be relisted, or privatized.[citation needed]
Alternatively, a publicly traded company may be purchased by one or more other publicly traded companies, with the target company becoming either a subsidiary or joint venture of the purchaser(s), or ceasing to exist as a separate entity, its former shareholders receiving compensation in the form of either cash, shares in the purchasing company or a combination of both. When the compensation is primarily shares then the deal is often considered a merger. Subsidiaries and joint ventures can also be created de novo. That often happens in the financial sector. Subsidiaries and joint ventures of publicly traded companies are not generally considered to be privately held companies (even though they themselves are not publicly traded) and are generally subject to the same reporting requirements as publicly traded companies. Finally, shares in subsidiaries and joint ventures can be (re)-offered to the public at any time. Firms that are sold in this manner are called spin-outs.[citation needed]
Most industrialized jurisdictions have enacted laws and regulations that detail the steps that prospective owners (public or private) must undertake if they wish to take over a publicly traded corporation. That often entails the would-be buyer(s) making a formal offer for each share of the company to shareholders.[citation needed]
Trading and valuation
The shares of a publicly traded company are often traded on a stock exchange. The value or "size" of a company is called its market capitalization, a term which is often shortened to "market cap". This is calculated as the number of shares outstanding (as opposed to authorized but not necessarily issued) times the price per share. For example, a company with two million shares outstanding and a price per share of US$40 has a market capitalization of US$80 million. However, a company's market capitalization should not be confused with the fair market value of the company as a whole since the price per share are influenced by other factors such as the volume of shares traded. Low trading volume can cause artificially low prices for securities, due to investors being apprehensive of investing in a company they perceive as possibly lacking liquidity.[citation needed]
For example, if all shareholders were to simultaneously try to sell their shares in the open market, this would immediately create downward pressure on the price for which the share is traded unless there were an equal number of buyers willing to purchase the security at the price the sellers demand. So, sellers would have to either reduce their price or choose not to sell. Thus, the number of trades in a given period of time, commonly referred to as the "volume" is important when determining how well a company's market capitalization reflects true fair market value of the company as a whole. The higher the volume, the more the fair market value of the company is likely to be reflected by its market capitalization.[citation needed]
Another example of the impact of volume on the accuracy of market capitalization is when a company has little or no trading activity and the market price is simply the price at which the most recent trade took place, which could be days or weeks ago. This occurs when there are no buyers willing to purchase the securities at the price being offered by the sellers and there are no sellers willing to sell at the price the buyers are willing to pay. While this is rare when the company is traded on a major stock exchange, it is not uncommon when shares are traded over-the-counter (OTC). Since individual buyers and sellers need to incorporate news about the company into their purchasing decisions, a security with an imbalance of buyers or sellers may not feel the full effect of recent news.[citation needed]
See also
Notes
References
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