How to Become an Unlisted Public Company Limited by Shares

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Table of Contents

• Legal Terms to Describe Companies
• Enterprise Business Structures
• Changing Company Structures
• Internal Changes Once You’re a Public Company
• How can lawyers help you obtain the benefits of going public without the burdens?
• Key Takeaways
• Frequently Asked Questions

Some founders dream of an IPO, meticulously planning every step towards that glamorous moment. In some cases, they go public almost by accident. However, in most cases, businesses naturally grow and develop, requiring a formal change to the business structure. This article will explain how your business can become an unlisted public company by limited shares as well as undertake any legal obligations. 

Legal Terms to Describe Companies

The terms used to describe the various business entities that operate in Australia depend on multiple factors. These factors may include the:

• operations of the business;

• aims of the business; and

• business’ size.

The Australian Tax Office (ATO) refers to a ‘business’ as an ‘enterprise’. An enterprise is any business or other commercial activities that do not relate to:

• private recreational pursuits and hobbies;

• activities carried on as an employee, labour-hire worker, director or office holder; or

• activities carried out without a reasonable expectation of profit.

However, although there may not be a reasonable expectation of profit, the term ‘business’ also includes:

• charities;

• deductible gift recipients;

• religious organisations;

• government organisations; and

• some non-profit organisations.

Groups within Groups

There are three different types of businesses the definition captures (as determined by the number of employees):

• small businesses, employing less than 20 staff;

• medium businesses, employing between 20 to 199 staff; and

• large enterprises, employing 200+ staff.

However, once a business reaches a certain size in terms of employees, different regulations impact its structure.

Enterprise Business Structures

As mentioned above, a large enterprise has 200 or more employees. By the time your company has reached this stage, you are likely to have a significant number of non-employee shareholders. However, once the number of non-employee shareholders exceeds 50, you must change your company structure from a private company to a public company.

Public companies can be either unlisted or listed on a registered exchange, such as the Australian Securities Exchange (ASX). Both listed and unlisted companies can sell shares to the public. However, as the companies raise funds from the general public, there are higher compliance requirements to protect investors. Furthermore, changing from a private company to an unlisted public company also attracts increased obligations under the Corporations Act. These obligations may include:

• preparing financial statements; and

• opening your registered office for a certain number of hours each business day.

Changing Company Structures

Once you reach the threshold of 50 non-employee shareholders, you must change your company structure from a proprietary limited company to an unlisted public company limited by shares. Furthermore, you must inform the Australian Securities and Investments Commission (ASIC) of these changes.

To alter your structure, you must ensure at least 75% of shareholders present at the meeting come to an agreement. However, this special resolution must satisfy certain requirements before it is passed. For example, sufficient notice must be given that the meeting is taking place. Furthermore, the matter that shareholders intend to vote on must be disclosed in advance.

Once shareholders have approved the change in company structure, you must inform ASIC of the changes. You will require two forms to notify ASIC:

1. notification of the resolution (Form 205); and

2. application for change of company type (Form 206).

Internal Changes Once You’re a Public Company

Once you’ve changed your company structure, you’ll be required to comply with greater levels of regulation under the Corporations Act. This largely attempts to protect the public from dishonest business people who aim to exploit the average investor’s lack of experience. Below are some examples of the different requirements for a proprietary limited company in comparison to an unlisted public company.

1. Changes to Minimum Office Holders

If you’re changing from a proprietary limited company to an unlisted public company, the requirements for minimum officeholders will change. The minimum amount of officeholders will increase from at least one Australian-residing director to three directors (two of whom must reside in Australia).

In addition to the requirement for three directors, you’ll also need to nominate at least one company secretary who resides in Australia.

2. Share Register

Unlisted public companies are still required to maintain a share register. However, unlike proprietary limited companies, you are not required to inform ASIC every time there is a change in members. Furthermore, your members must be able to inspect the share register.

3. Financial Report Requirements

Unlisted public companies must maintain and lodge financial reports with ASIC. Furthermore, you must have these records audited. This ensures that the reports accurately represent the financial health of the company. These reports are complex financial documents that will require the assistance of experienced accountants.

4. Disclosure and Reporting Obligations

As an unlisted public company, you will also have increased disclosure and reporting obligations. This may include:

• issuing detailed prospectuses/disclosure documents for any public offerings;

• immediately disclosing any material changes or events that could impact the company’s value or operations; and

• providing more extensive details in annual reports beyond just financial statements.

5. Restrictions on Related Party Transactions

Stricter rules and approval processes will be established around related-party transactions, such as contracts/dealings between the company and its directors, executives, or associates. This aims to prevent conflicts of interest.

6. Changes to General Meetings

Public companies may need to hold annual general meetings (AGMs) and follow more formal procedures for calling and conducting shareholder meetings compared to proprietary companies.

7. Increased Potential for Shareholder Activism

With a larger, more diverse shareholder base, public companies face higher risks of shareholder activism and disputes than closely held proprietary companies.

How can lawyers help you obtain the benefits of going public without the burdens?

Generally, companies, with the help of lawyers, try to avoid the burdens associated with being an unlisted public company by employing various strategies. Here are some common practices companies use to avoid or delay this transition:

1. Limiting the number of non-employee shareholders

The key trigger for having to transition to an unlisted public company is exceeding 50 non-employee shareholders. To avoid this, companies may intentionally limit their shareholder base to keep the number of non-employee shareholders below this threshold. 

This can be done by:

• restricting share transfers or new issuances to non-employees;

• offering employee share schemes instead of public offerings; and

• consolidating existing shares to reduce the overall number of shareholders.

2. Maintaining a closely-held structure

Companies may choose to remain closely held by having a small group of shareholders who are actively involved in the business’s management and operations. This allows the company to retain its proprietary limited status and avoid the increased reporting and compliance requirements of an unlisted public company.

3. Utilising corporate groups or trust structures

Some companies may structure their operations using a corporate group or trust structure, where the proprietary limited company acts as a subsidiary or trustee. This can help distribute the shareholder base across multiple entities, potentially keeping each individual entity below the 50 non-employee shareholder limit.

Key Takeaways

Inevitably, some changes are required by law once you make the exciting change from a proprietary limited to an unlisted public company. Your company’s requirements will vary depending on the industry you operate in and the services you provide. 

If you have any questions about changing from a proprietary limited to an unlisted public company, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions