Stock Ownership We can classify a corporation according to whether its shares of stock

Stock Ownership We can classify a corporation according to whether its shares of stock

can be traded in financial markets. A corporation whose shares of stock are traded in financial markets is considered a public corporation. A corporation whose shares cannot be traded in financial markets is con- sidered a private corporation. 1

Federal securities laws—specifically the Securities Exchange Act of 1934, as modified in 1982—requires a corporation to register its securi- ties if it has more than 500 shareholders and more than $3 million of assets. To register securities, a corporation must file a detailed descrip- tion of the firm and the securities, as well as:

■ quarterly financial reports on Form 10-Q; ■ annual reports on Form 10-K, providing financial statement informa-

tion, along with other descriptive information about the firm; and ■ Form 8-K detailing specific events, such as the acquisition or disposi- tion of assets, as they occur.

We discussed these disclosures in Chapter 6. If a corporation has either less than 500 shareholders or less than $3 million of assets, it can choose not to register, and is referred to as a private corporation or a privately-held corporation. If it does register with the Securities and Exchange Commission, it’s considered a public corporation.

The shares of stock of a public corporation—also referred to as a publicly-held corporation—can be owned by and traded among the general public. Anyone can buy and sell the shares of stock in a public corporation and these shares can be traded in the financial markets—on national or regional stock exchanges or in the over-the-counter market.

1 A private corporation whose stock is owned among a very few individuals is re- ferred to as a closely-held corporation or a close corporation. In a close corporation,

the stock is owned by a single shareholder or a tightly-knit group of shareholders who are active in the management of the firm.

Common Stock

What difference does it make whether the corporation’s stock is pri- vately held or publicly-held? There are many differences. One difference is the stock’s marketability. If the shares are publicly traded, they are marketable. Investors can easily buy or sell the shares. If shares are privately-held, there may be restrictions as to whom you can sell your shares, possibly making it difficult to get cash when you need it.

Another difference is the diversification of the owners’ wealth. If the shares are closely-held, the owners are usually also the managers. Owner-managers have a great deal of their wealth tied up with the cor- poration. Not only does the value of their stock depend on the fortunes of the company, so does their income. In a publicly-held corporation, owner-managers can sell off parts of their ownership.

Still another difference is the firm’s access to capital. A publicly- traded corporation can raise new capital by issuing more shares to the general public. A privately-held corporation may not be able to do this since ownership may be restricted to a few shareholders. In addition, a privately-held corporation may reach a point when the number of share- holders and the size of the firm increases to the point requiring the regis- tration of securities—changing the firm’s status from private to public.

A further difference is confidentiality. A publicly-held corporation is required to disclose information to shareholders and the investing pub- lic through financial statements, annual reports, and press releases. Securities laws and exchange rules require publicly-traded corporations to disclose to investors important information such as a merger, a new product or discovery, the sale of a significant asset, and labor disputes. Private corporations do not have to reveal any information to the pub- lic. Therefore, a private corporation has the advantage because it is more difficult for its publicly-traded competitors to figure out what it is doing. For example, the two candy companies, Hershey Foods Corpora- tion (Hershey Kisses, Reeses Peanut Butter Cups) and Mars, Incorpo- rated (M&Ms, Milky Way bars), are competitors. Hershey Foods is publicly-traded, whereas Mars is a private company. Mars has access to all of Hershey’s financial statements and other disclosures, whereas Her- shey has no financial information on Mars.

Another difference is the cost of communication. A publicly-traded corporation must file annual financial statements with the Securities and Exchange Commission, prepare and send annual reports to sharehold- ers, and correspond with shareholders (Securities Exchange Act of 1934, Rule 13a). The costs of these communications can add up, in terms of both the direct expenses for accountants, lawyers, and other personnel, and the indirect expense of tying up managements’ time in shareholders’ affairs instead of managing the firm.

FINANCING DECISIONS

All these differences must be weighed in deciding whether to be a private or a public corporation. There are over 4 million corporations in the U.S., but only about 9,000 have publicly-traded stock. The fact that we observe some private and some public corporations tells us that the weighing these factors can go either way.

Corporations do change their status, going from public to private or private to public. It is possible that as a corporation changes—in terms of the ownership, the types of investments it makes, and its need for capital—a change from public to private or private to public may be appropriate. RJR Nabisco went private in 1989, only to go public once again as RJR Nabisco Holdings two years later when it needed more capital.