RDP 2016-03: Why Do Companies Hold Cash? 2. Institutional Background

Gianni La Cava and Callan Windsor

May 2016

There are differences in the organisational structure of private and public companies.[9] For our purposes, the most important differences are:

  1. Public companies have more financing channels: public companies can raise equity from the general public via share offers with prospectuses, while private companies cannot.
  2. Public companies have a more dispersed ownership structure: public companies have no limit on the number of shareholders, while private companies must have no more than 50 non-employee shareholders.
  3. Public companies have greater disclosure requirements: compared to public companies, small private companies are not generally required to report their financial statements to shareholders, and all private companies are not required to hold annual general meetings (AGMs) unless it is in their constitution (Table 1). The accounts of private companies are therefore generally less visible to owners than public companies, giving private company managers potentially more discretion in decision-making
Table 1: Company Disclosure Requirements
Under the Corporations Act
  Private Public
Small Large Unlisted Listed
Reports? No(a) Financial report
Directors' report		 Financial report
Directors' report		 Financial report
Directors' report
Remuneration report
Audit? No Yes Yes Yes
Reporting to members? No +4 months(b) +4 months(b), (c) +3 months(b)
AGM? No(d) No(d) Yes Yes (≥ 28 days' notice)
Constitution? No No Yes Yes
Directors voting on personal interests? Yes Yes No(e) No(e)

Notes: (a) Members holding 5 per cent or more of the votes, or the Australian Securities and Investment Commission, can require a financial and directors' report for a financial year (and direct them to be audited), and send them to all shareholders
(b) After company's financial year end
(c) Or 21 days prior to AGM, whichever is earlier
(d) Unless in constitution
(e) Unless the other directors are satisfied that the interest should not disqualify the director from voting

Source: Governance Institute of Australia

As Figure 4 highlights, public companies can be further divided into listed companies and unlisted companies (i.e. companies that issue shares that are not traded on a public exchange). An example of a private company in Australia is the transport company Linfox; an example of an unlisted public company is the food company Bundaberg Sugar; and an example of a listed public company is the conglomerate Wesfarmers.

Figure 4: Public and Private Companies in the Databases
Under the Corporations Act
Figure 4: Public and Private Companies in the Databases

Source: Governance Institute of Australia

Footnote

Public and private companies are distinguished by their ownership structure and their disclosure requirements. There are also differences between companies (incorporated businesses) and unincorporated businesses. Companies have a separate legal identity and are owned by shareholders, who have limited liability for business debts. In contrast, unincorporated businesses are not separate legal entities, so their owners are personally liable for any business debts incurred. Unincorporated businesses include sole proprietors, partnerships and trusts. The aggregate financial accounts data indicate that unincorporated business cash holdings have been rising over time (relative to GDP), though not as much as company cash holdings. [9]