Public Limited Company (Pros & Cons)

Presented by: Group - 2

Date: 5th May, 2016HUL - 476: Basics of Financial Management

Course Instructor: Dr Harjeet Singh Kalra

1. Definition

2. Registration

3. Directors of Company

4. Share Capital

5. Type of Shares

9. Factual Analysis

7. Key points

6. Formation/Paper process

8. Pros & Cons of PLCs

10. References

What is Public Limited Company?

Public Limited Company (legally abbreviated to PLC) is a type of

public company (publicly held company). It is a limited (liability)

company whose shares may be freely sold and traded to the public

(although PLC may also be privately held, often by another plc), with

a certain minimum share capital and the letters PLC after its name.

Have you ever seen the word ‘PLC’ after a company’s name?

Directors of Company

Formation of a public limited company requires a

minimum of one director (differing from country to country.

In India, three directors are required). In general terms,

anyone can be a company director, provided they are not

disqualified on one of the certain grounds.

in the case of PLCs or their subsidiaries, the person is over 70

years of age or reaches 70 years of age while in office, unless they

are appointed or re-appointed by resolution of the company in

general meeting of which special notice has been given.

the person is an undischarged bankrupt, subject to a Bankruptcy

Restrictions Order (BRO) or Bankruptcy Restrictions Undertaking

(BRU)[4] or otherwise disqualified by a Court from holding a

directorship, unless given leave to act in respect of a particular

company or companies.

Share Capital

The members must agree to take some, or all, of the

shares when the company is registered. The memorandum

of association must show the names of the people who

have agreed to take shares and the number of shares each

will take. These people are called the subscribers.

A company can decrease its authorised share

capital by passing an ordinary resolution to

cancel shares which have not been taken or

agreed to be taken by any person.

Types of Shares

A company may have as many different

types of shares as it wishes, all with different

conditions attached to them. Generally share

types are divided into certain categories.

1. Bearer shares – Are a legal instrument denoting company ownership, and are

usually in the form of share warrants. A share warrant is a document which

states that the bearer of the warrant is entitled to the shares stated in it. If

authorised by its articles, a company may convert any fully paid shares to "share

warrants".

2. Cumulative preference Shares – These shares carry a right that, if the

dividend cannot be paid in one year, it will be carried forward to successive

years.

3. Ordinary Shares– As the name suggests these are the ordinary shares

of the company with no special rights or restrictions. They may be divided

into classes of different value.

4. Preference Shares – These shares normally carry a right

that any annual dividends available for distribution will be paid

preferentially on these shares before other classes.

5. Redeemable Shares – These shares are issued with an

agreement that the company will buy them back at the option of

the company or the shareholder after a certain period, or on a

fixed date. A company cannot have redeemable shares only.

PLC has access to capital markets and can offer its

shares for sale to the public through a recognised stock

exchange.

It can also issue advertisements offering any of its

securities for sale to the public. In contrast, a private

company may not offer to the public any shares in itself.

Also…

Formation of Company

Most companies are now

formed electronically via

company formation agents.

Pros & Cons of

Public Limited Company

PROS

You still have a limited liability in case something bad happens

If your company experienced a devastating loss for almost any reason and had to shed its assets to pay creditors, then your personal assets would not be at risk like they would be in a sole proprietorship or some partnerships. Unless you used your home, your vehicle, or other assets as collateral to get the business off the ground, these items are never at

risk as you operate your business.

PROS

You receive the opportunity to raise the capital that you need

Because you’re issuing shares as a PLC, you’re gaining the chance to add capital when you need it. Those shares may even grow in value over the time that you hold them, which increases your personal net worth and encourages further investment from new and existing shareholders. If you can create success, then you’ll be building the foundation for even more success later on down the road.

PROS

It gives your company credibility

Let’s compare three types of businesses that do the exact same thing. One is a sole proprietorship. The second is a general partnership. The third is a PLC. With whom would you be the most likely to do business? Most folks would say the PLC because being public gives the company added credibility and value. Customers know that a public business isn’t just going

to disappear the next day with their hard earned cash. They’re accountable to others at a different level than the other two business structures.

PROS

It gives a business more resale value

If you are the founder or principal owner of a business that goes public, then your path toward an exit becomes much easier to make. Because you’re a PLC, your business structure makes it much easier for ownership groups or other corporations to buy you out. This can still happen in any business structure, of course, but because you’ve already limited your liability,

you’re also limiting the liability of future owners as well.

PROS

Your stock can be used to facilitate the purchase of future acquisitions

Because public stock has a value associated with it, often higher than shares that are privately held and traded, they can be used to purchase additional assets that your company may want or need. Depending on the purchase, the entire acquisition could potentially be paid in stock if you so wished. Stock can also be used as a benefit through the issuance of stock options, giving you much more financial flexibility.

PROS

It allows for diversification

Both you and your shareholders get the chance to diversify an investment portfolio when you take your stock public. This way you are able to ensure that whatever wealth you have built already has the best chance to maintain its value over time.

PROSCompensation levels in a PLC are typically higher

Because there is more capital involved through the sale of shares and because there is a need for high quality managers to continue profitable growth, compensation levels can be quite high at a PLC. This is especially true when compared to self-employed business owners or managers in private companies. The goal is to attract the best talent and most PLCs and their shareholders are willing to invest more into these salaries so their own financial stability can be achieved.

CONS

PLC can be a bit difficult to get set up

Unlike a sole proprietorship or a general partnership which requires very little paperwork, you’ll need to file a large amount of documentation to take your company public. Your business name will need to be registered and you’ll need to submit your final accounts in addition to setting up a board and creating your articles of association.

CONS

You’ll need to share your profits

Although not every PLC will pay out extensive dividends to shareholders, you’ll still be paying out more of your profits when you have taken your company public. You’re responsible for their financial well-being from the investment in addition to your own, which means the decisions you can make for the company may be limited because you must keep the company in the black as much as possible.

CONS

You have less overall control of the company

Shareholders are going to have a say in the direction the company takes. They have the ability to elect directors and those folks have the ability to appoint managers that oversee the daily operations of the business. If you and your shareholders aren’t on the same page, the company could stall because of the differences in opinion.

CONS

There will be more expenses

Shareholders have the opportunity to view the minutes from virtually every executive-level meeting that happens. You’ll also be hosting a shareholder meeting at lease once per year, if not more often. You’ll be investing manpower into the creation of the reports that are required to be submitted for regulatory compliance or you’ll be contracting that need out to others to do the work on your behalf.

CONS

You’ll experience double taxation at times

Not only will the profits the company is able to create be subjected to whatever corporate level taxes are in force at the time, but any personal dividends that are earned from owning shares of the company will also be taxed. You would also be taxed for any salary you would draw from the company for your services rendered.

CONS

Sensitive information about the company must be revealed consistently

It’s not just your financials that must be released to the public under current regulations as a PLC. A company must also release what their ongoing business strategies happen to be, what compensation arrangements have been formed, and even what executives are earning as a salary. Financial results that aren’t as positive as some investors would like to see, combined with high salaries and other expenses, can drive the value of shares lower.

CONS

Control of the company can be taken away

If a group of shareholders is able to take a majority control through the purchase of shares, then they can dictate the direction the company takes. This includes removing the existing managers and executives if they so choose because they have the largest voting block.

Factual Analysis of Pros & Cons

Public companies triumph because of 3 things:

Limited liability (encourages the public to

invest)

Professional management (boosts

productivity)

Corporate personhood (business can

survive the removal of founder)

Number of public companies dropped in

the Anglo-Saxon world by 38% since

1997 in America

Dropped by 48% in Britain market. IPO’s also dropped from average of 311

a year 1990-2000 to just 81 in 2000-2010.

The average life expectancy of public

companies have shrank from 65 years in

the 1920’s to less than 10 in 1990’s.

average job tenure of CEO fell from 8.1

years in 2000 to 6.30 years in 2009

Emerging market companies nowadays have embraced

two slightly different model from PLC such as the SOE’s

and family conglomerates.

In June 2011, SOE’s accounted

- 80% of china’s market

- 62% of Russia’s market

- 38% of Brazil market.

Replacement for PLC

Advantage of SOE’s:

political ties with government can

protect them from unwelcome

competition.

Cons of public companies:

Worse at managing their problems

Regulation

Growing short termism

Venture capitalists are recouping their investment by selling

new companies to established ones rather than preparing

them for independent life.

In 2010 five large companies gobbled up 134 start-ups

Two of the most talked-about start-ups of recent years—

Skype and Zappos—chose to sell themselves to giant firms

(Microsoft and Amazon respectively). This may not be good

for the start-ups.

Imagine if Microsoft or Apple had sold themselves to IBM in

the 1980s and you get a sense of the problem.

Extensive Cons

Interests are misaligned along the entire chain.

An employer running a 401K selects a committee which selects an investment provider which in turn selects fund managers who select companies whose selected board members appoint managers.

Each step is swathed in regulation that, even if well-intentioned, is shaped by lobbyists to benefit one or other of the parties rather than the system as a whole.

Shares aren’t shared alike

Individuals have been net sellers of shares for decades: in their place institutions

have expanded relentlessly.

Financial institutions now hold in excess of 70% of the value of shares on

America’s stock exchange.

The leaders include familiar names as BlackRock, vanguard and JPMorgan

Chase.

Rhetoric and reality of shareholder dominance

In 1970s, when power began to move in the direction of shareholders.

According to that philosophy, shareholders are the center of the corporate

universe; managers and boards must orbit around them.

In law and practice, they don’t have final say over most big corporate decisions

(boards of directors do).

If only corporations really did put shareholders first, the reasoning goes,

capitalism would function much better.

A Study…

Eugene Fama and Kenneth French found that from 1973

to 2002, a large and growing percentage of corporations

issued shares each year.

From 1973 to 1982, the percentage was 67%;

From 1993 to 2002, it was 86%.

Decline in holding period:

In the 1950s the average holding period for an equity traded on the New York

Stock Exchange was about seven years.

Now it’s six months.

This shift to the short term has three causes.

Managers have only two major tools at their disposal:

Selling Shares

Casting Votes

References & Accomplishments

https://en.wikipedia.org/wiki/Public_limited_company

http://www.safeshieldllc.com/Public-Limited-Company.aspx

The Economist – 19th May & 12th October, 2015

The Big Idea – July & Aug, 2012