Differences in owning shares in a private limited company and a public limited one

Last updated: December 2020 | 3 min read

Shareholders in both private and public companies have the same basic rights under statute law.

For example, holders of at least 5% of the voting shares can insist that the directors call a general meeting.

Why investors in shares in listed companies usually have little say in the how the company is run is usually more to do with the rights attached to the types of shares they own, and the percentage ownership of the total number in the class.

Except where the articles of association or a shareholders agreement state otherwise, an individual investor has no power over the company unless he or she holds at least a certain proportion of the equity that has voting rights attached to it.

5% is the minimum proportion of shares that has any statutory rights, although these are rather limited – mostly allowing other shareholders to being made aware of opinions and information. It isn’t until a shareholder has more than 25% of the equity that he or she would be able to influence decisions.

Shareholders, of course, can join to together to meet the thresholds.

The reasons for a company to list include to raise capital from external investors and to allow early investors to cash out their ownership. Very few companies do so, because the cost of the regulatory hurdles outweighs the advantage of public ownership. Those that do tend to be very large.

A medium size public listed company might have 10 million shares, each worth £200. In order to have any rights, a shareholder would have to invest £100 million. That leaves few private individuals who can afford such a stake, and even fewer who would wish to hold such a value in a single company.

Rights only attach to voting shares. Often a public company will offer different classes of shares to retail investors than to founders and institutional investors (banks, pension funds and private equity investors). These may not have voting rights, and are likely to have much lesser rights than the ordinary shares of the company. For example, retail investor may not have preferential rights to dividends.

Usually a private investor has to take or leave rights when buying shares because the proportion bought is so small. There are no terms for consideration. The terms attached to the shares are likely to favour the majority owners of the voting shares over retail investors.

For a small investor – a private individual – who is likely to have a portfolio valued at most in tens of millions, this maybe isn’t a significant decision factor. The choice is simply between buying in to the company in the expectation that share prices will rise and a capital gain can be made on holding the share and not doing so.

For institutions, particularly pension funds and hedge funds, both of look to have the board accountable to them (most likely alongside other investors and in different ways), this may be more of an issue when deciding whether to buy.

No control whatsoever, leaves a shareholder completely at the whim of the board and of those owners who do have it.

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