If you are operating a successful business, you may wish to transform your company from a private company into a public company. As with any business decision, it is important you understand the impact of the change in structure, particularly if you are the business founder or director. This article will consider your responsibilities as a director of a public company and how it differs from private companies.
Public vs Private Companies
A private company is a company that does not offer shares to the public. These companies may be owned and operated by individuals, or they may have external private investors and shareholders. Contrastingly, a public company can issue and sell shares to the general public to raise additional funding.
Generally, public companies are more regulated, have different reporting obligations and can be more onerous to manage as a result. For example, before publicly listing on the stock exchange, the company must prepare a full prospectus, also known as the company's initial public offering (IPO). Prospectus documents need to disclose the relevant information to allow potential investors to make an informed decision about the performance, assets and liabilities of the company before purchasing shares in the company.
General Company Director Responsibilities
In addition to their operational responsibilities, all company directors also have legal responsibilities. These are derived from common law and the Corporations Act. These core duties include:
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Director Duty |
Description |
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Perform Your Role With Care, Diligence and Skill (Directors Duty of Care) |
You must be aware of and engaged with the company's
day-to-day operations. The Court will assess a director's ability to fulfil this duty based on what can be expected of an ordinary person in their position. |
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A director must stop the company from insolvent trading. A company is insolvent when it cannot pay its debts on time. Insolvent trading is more than short-term cash flow issues. Should a director become aware or concerned about the business' solvency, they should promptly seek legal and accounting advice to take steps to rectify this issue and avoid criminal penalties or fines. |
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Act in Good Faith in the Best Interests of the Company |
A director must act for the benefit of the company and its shareholders. This means that directors should avoid personal conflicts of interest when acting on behalf of the company, or take steps to manage the conflict by disclosing it. |
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Do Not Improperly Use the Position to Gain a Personal Advantage |
Similarly to the above duty, directors must act for the benefit of the company and its shareholders. Directors cannot use their position or the information they learn in this position, for their own personal benefit. |
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Maintain Proper Records and Prepare Financial Reports |
Directors must ensure accurate financial records are kept for the company. This means at least keeping records of the company's transactions, financial position and performance. |
It is important to note that these duties will also apply to shadow directors. This means that even if you are not formally appointed as a director and registered with ASIC, if you are acting as a director and instructing the registered directors, you will likely need to fulfil your director's duties.
Duties Particular to Directors of Public Companies
The above director's duties predominantly apply to both public and private companies. However, the way a director fulfils their duties may change depending on whether the company is public or private.
For example, all company directors must act in the best interest of the company and avoid conflicts of interest. For a public company, this means:
- disclosing all conflicts of interest to the board;
- abstaining from any board vote related to the conflict;
- not participating in the meeting.
Likewise, suppose the public company wants to enter into a related party transaction. The affected director must disclose their interest before the matter is put to the shareholders.
Key Takeaways
When setting up or operating a business, it is important to understand what your director's duties are and how they can change depending on whether your company is publicly listed or privately owned. Operating a public company typically has additional disclosure obligations for directors and prospective shareholders. This structure can be more difficult to manage. Failure to uphold and comply with the director's duties can lead to criminal or civil penalties depending on the severity of the breach. These duties can also apply to unofficial shadow directors.
