Which of the following is a key difference between private corporations and public corporations?

Companies can be public and private. The key difference between a public and a private company is that public companies are open to investment by the public. On the other hand, private (or proprietary) companies are not. Being open to investment by the public makes it far easier to raise capital. However, it attracts a much higher level of regulation and compliance to protect potential investors and the general public. Therefore, if you are looking to start a company, choosing the right company structure for your circumstances is essential. This article will explain ten regulatory differences between public and private companies.

Public Fundraising

The critical difference between public companies and private companies is that public companies can raise funds from the general public by issuing shares, unlike private companies who will have private investors. Public companies offering shares to the general public must provide a disclosure document (such as a prospectus) to potential investors.

By contrast, a private company cannot raise capital from the public unless it meets certain exemptions to the disclosure requirements. If a private company breaks this rule, ASIC can require it to change to a public company. Private companies can also offer their shares to existing shareholders or employees without following the disclosure process. One other exception to this, which is becoming more and more popular, is crowdsourced funding. This is where the company raises capital from the public via a hosting platform. Likewise, a company must meet certain requirements to exempt it from the disclosure requirements, such as there being an investor cap of $10,000 per annum and the preparation of an offer document.

Reporting Obligations

All public companies must prepare a financial report and a directors’ report every financial year. Private companies must only prepare these reports if they are a ‘large proprietary company’. A large proprietary company is a private company with any two of the following:

• revenue of $50 million;
• assets of $25 million; or
• 100 or more employees.

Furthermore, public companies must have these financial reports independently audited. Not that preparing and independently auditing these reports can be costly and time-consuming. Hence, this is an important consideration to consider when starting a public company or when taking a private company public.

Removal of Directors

If the shareholders of a public company wish to remove a director, they must give their notice of intention to move a resolution for their removal. This must occur at least two months before the meeting of shareholders to vote on the resolution is held. The director being removed has a right to put forward a case for their remaining in office. They can do so by either giving a written statement or speaking to the motion at the meeting. A director of a public company cannot be removed by a resolution of the board of directors.

If the shareholders of a private company wish to remove a director, they may do so by passing a resolution. To pass the resolution, more than 50% of the shareholders must be in favour of the removal. The company’s constitution or shareholders agreement may also contain other mechanisms for removing a director. For example, it may allow the board of directors to remove a director or allow a particular shareholder to remove their appointed director. 

Dividends

Each share in a class of shares in a public company must have the same rights to dividends unless provided for in the company constitution or by a special resolution. This means that if the company chooses to issue a dividend, each share in each class of shares has the same right to receive the dividend.

On the contrary, directors of private companies may pay dividends to whoever they like, as they see fit.

Resignation of Auditors

An auditor of a public company can only be removed by resolution of the company at a general meeting with ASIC’s consent. Private companies do not need ASIC’s consent to remove an auditor.

Related Party Transaction Provisions

In certain circumstances, directors of public companies must obtain shareholder approval before giving a financial benefit to a related party. An example of a related party transaction could be issuing shares to a family shareholder or signing a contract with a company owned by the director’s family.

Directors of private companies do not have this requirement.

Directors Participating in Votes on Material Personal Interest

The directors of public companies may not participate in a vote on a matter in which they have a significant personal interest unless they receive approval from the other directors or ASIC.

Directors of private companies may participate in such votes as long as they:

• disclose the nature and extent of the interest; and
• its relation to the company at a meeting.

Passing Circulating Resolutions

A circulating resolution is a resolution company directors (or shareholders) sign to indicate their approval for specific action without calling a general meeting. Public companies may not pass circulating resolutions of shareholders unless the company constitution explicitly allows for it (which is rare).

Private companies may pass circulating resolutions of shareholders or directors as long as all shareholders (or directors, as relevant) are given the proposed resolution and agree to it.

Proxy Vote Appointment

Public companies must allow a shareholder with attendance and voting rights at meetings to appoint a proxy to vote for them if they cannot attend. This is a replaceable rule for private companies. It means private companies can prohibit proxy appointments in their company constitutions if they do not wish to allow it.

Registering Share Transfers

If provided for in the company constitution, the directors of a private company may refuse to register a transfer of shares in the company.

Directors of public companies may have this power if included in the company’s constitution. However, if the public company is listed (for example, on a stock exchange), the company is generally required to have no such restrictions. The only exception to this rule is if the stock exchange’s rules allow it.

Key Takeaways

The key difference between a public and a private company is that public companies are open to investment by the public. There are significantly heavier regulations on public companies. Accordingly, although you can more easily raise funds by issuing shares to the public, your compliance costs will increase. You also lose the large degree of control that directors of private companies enjoy. For more information about setting up a private or public company, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a private company?

A private company cannot raise capital from the public unless it meets certain exemptions to the disclosure requirements. Private companies can also offer their shares to existing shareholders or employees without needing to follow the disclosure process.

What is a public company?

Public companies can raise funds from the general public by issuing shares. Public companies offering shares to the general public must provide a disclosure document to potential investors. Being open to investment by the public makes it far easier to raise capital. However, it attracts a much higher level of regulation and compliance to protect potential investors and the general public.

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