Unquoted Public Company

An unquoted public company, also known as an unlisted public company, is a type of business structure that is recognized in many jurisdictions. Despite being designated as a public company, it does not have its shares traded on any formal stock exchange. This unique structure has implications from corporate governance, regulatory compliance, stakeholder engagement, and capital raising perspectives.

Key Characteristics

Public Without a Listing

An unquoted public company has completed the formal process of registering as a public company under relevant regulatory authorities but has chosen not to list its shares on any public stock exchange. They may instead rely on private transactions to raise capital or trade shares.

Regulatory Compliance

Even though they are not listed, these companies often still have to adhere to several regulatory requirements meant to ensure transparency, corporate governance, and shareholder rights. This can include filing annual reports, holding annual general meetings (AGMs), and conforming to audit requirements.

Shareholder Rights

Shareholders of unquoted public companies generally hold the same rights as those in publicly listed companies, including voting on significant corporate actions, dividends, and access to certain forms of financial information.

Liquidity and Valuation

One of the main challenges faced by shareholders in unquoted public companies is the limited liquidity of shares. Since shares are not traded on a public exchange, finding a buyer or seller can be more difficult. This often results in discounted valuations compared to similar publicly traded companies.

Corporate Governance

Unquoted public companies are required to maintain standards of corporate governance similar to those expected of listed companies. This often includes the composition of a board of directors, the establishment of various committees (e.g., audit, remuneration), and adherence to ethical business practices.

Board Composition

The board of directors in an unquoted public company is typically composed of both executive and non-executive members. Non-executive directors are particularly important as they provide independent oversight.

Audit Committees

The presence of an audit committee is often mandatory. This committee is responsible for overseeing the financial reporting process, the audit process, the company’s system of internal controls, and compliance with laws and regulations.

Remuneration Committees

A remuneration committee often exists to set appropriate remuneration levels for executive directors and to ensure that such remuneration aligns with the long-term interests of the company and its shareholders.

Capital Raising

Without public trading of shares, unquoted public companies must rely on other forms of capital raising. Options include private equity, venture capital, private placements, and sometimes initial public offerings (IPOs) directed primarily at institutional investors but not followed by a public listing.

Private Equity

These firms often seek investments from private equity funds, which provide capital in exchange for a stake in the company. Private equity can be advantageous as it often includes not just capital but also strategic business advice and management expertise.

Venture Capital

For unquoted public companies in their earlier stages or those in innovative sectors, venture capital can be a suitable source of funding. Venture capitalists provide capital with the expectation of high returns, typically achieved through eventual sale or IPO.

Private Placements

The company might issue shares privately to a select group of investors rather than through a public offering. This can include high-net-worth individuals, institutional investors, or strategic partners.

Directed Offerings

In some cases, an unquoted public company may conduct an IPO, but instead of listing on a stock exchange, the offer is directed at institutional investors or used as an exit strategy for early investors.

Examples of Unquoted Public Companies

Several well-known companies have operated as unquoted public companies at different points in their journey. It is important to consider that some organizations may toggle between listed and unlisted statuses based on their strategic needs.

1. Cargill, Inc. Cargill is one of the largest privately-held corporations in the United States, known for its food processing capabilities. At various points, it has exhibited characteristics of an unquoted public entity.
   • Cargill
2. Mars, Inc. A global manufacturer of confectionery, pet food, and other food products, Mars is another large company that has maintained privacy while operating with public company-like governance.
   • Mars
3. Deloitte LLP Deloitte has a complex structure involving multiple privately held partnerships with public oversight, often blending characteristics of both unquoted and privately held firms.
   • Deloitte

Legal Frameworks

Jurisdictional Differences

The legal framework governing unquoted public companies can vary significantly between jurisdictions.

United States

In the U.S., SEC regulations play a significant role in dictating the terms under which a company must comply, even if it is not listed. Reporting requirements can be stringent based on the number of shareholders and the amount of assets.

United Kingdom

In the UK, unquoted public companies are subject to the Companies Act 2006, which mandates compliance measures for both listed and unlisted public companies, including reporting and governance standards.

European Union

EU regulations impose cross-border standards that can affect unquoted public companies, particularly regarding transparency and shareholder rights. Companies must also navigate individual member state regimes.

Reporting and Disclosures

Regardless of the jurisdiction, unquoted public companies generally must produce annual financial reports, undergo audits, and adhere to specific shareholder communication protocols.

Pros and Cons

Advantages

• Control: Founders and early-stage investors can retain significant control over corporate decisions without the same pressure from market analysts.
• Flexibility: These companies are not subject to the same strict disclosure requirements as publicly listed firms, allowing for more operational flexibility.
• Lower Costs: Without the need to comply with the extensive regulatory requirements of public listings, these companies can save on compliance costs.

Disadvantages

• Liquidity Issues: Lack of a public market for shares can severely limit the ease with which stocks can be bought and sold.
• Valuation Challenges: Determining the fair market value of shares can be more complex and often results in discounted valuations compared to publicly listed peers.
• Capital Raising Difficulty: Raising capital can be more challenging and often rely on more expensive financing methods like private equity and venture capital.

Conclusion

Unquoted public companies exist in a unique space within the corporate world. They combine the governance and regulatory oversight of public companies with the privacy and control often enjoyed by private companies. While they present certain advantages, such as lower compliance costs and increased control, they also come with significant challenges, particularly regarding liquidity and capital raising. Understanding these dynamics is crucial for stakeholders navigating their roles within or in relation to unquoted public companies.