Conversion of a Private Limited Company to a Public Limited Company

The decision to take your company public can be a transformative one, opening doors to significant growth and exciting possibilities. The conversion of a private limited company to a public limited company is provided for by the Companies Act, Act no.17 of 2015 (The Companies Act).

The distinction between a Private Limited Company and Public Limited Company, is that the latter allows for the members of the public to become investors in the company but the former does not. Private Companies are also limited to having a maximum membership of 50 persons, while the there is no such limitation for Public Limited Companies.

There are several reasons that could influence a Company’s decision to convert from a Private Limited Company to a Public Limited Company, what is commonly known as “going public”. Chief among the reasons is the need to raise capital more easily by issuing shares or debentures to the public through initial public offerings (IPOs) or subsequent offerings. This influx of capital can be used for expansion, research and development, acquisitions, or other strategic initiatives.

This article explores the conversion process from a private limited company to a public limited company, highlighting the key benefits and outlining the essential steps involved.

Reasons that a private company could have for going public include:

Liquidity for Existing Shareholders: Going public provides an opportunity for existing shareholders, including founders, employees, and early investors, to sell their shares on public exchanges, providing liquidity and potentially unlocking significant value.
Enhanced Visibility and Prestige: Public companies often enjoy higher visibility and credibility in the market. Being listed on stock exchanges can enhance the company's reputation among customers, suppliers, and partners, which may lead to better business opportunities and partnerships.
Employee Incentives: Publicly traded companies can offer stock options, or other equity-based incentives to employees, which can be valuable tools for attracting and retaining talent.
Acquisition Currency: Publicly traded stock can be used as currency for acquisitions, allowing the company to pursue growth opportunities through mergers and acquisitions more easily.
Valuation Benchmarking: Public markets provide a transparent valuation benchmark for the company, which can help attract investors, facilitate M&A transactions, and provide a basis for employee compensation.
Enhanced Corporate Governance and Transparency: Public companies are subject to more rigorous regulatory requirements and disclosure obligations, which can enhance corporate governance practices and transparency, leading to greater investor trust and confidence.
Exit Strategy for Investors: Going public provides an exit opportunity for early-stage investors, such as venture capitalists or private equity firms, who may be seeking to monetize their investments.
Currency for Partnerships and Alliances: Publicly traded stock can be used as a form of currency in strategic partnerships, alliances, and joint ventures, providing flexibility in structuring deals and collaborations.
Brand Recognition and Marketing: Being a public company can serve as a marketing tool, increasing brand recognition and awareness among consumers, which can have positive effects on sales and market share.

Procedure for conversion

The Companies Act outlines the procedure that a Company should follow through the conversion process as follows:
1. Passing a Special Resolution

First the Company would need to pass a special resolution to the effect that it will be converting to a Public Limited Company.

A special resolution is one that is passed by a majority of at least 75% of the members of a certain class.

2. Application for Registration

An application for registration of the conversion is made to the Registrar of Companies. The application should contain a statement of the new name of the company and a statement of the proposed company secretary containing the particulars of the person proposed to be secretary.

The application is filed together with the following accompanying documents:

The Special resolution converting the Company to a Public Limited Company.
The Proposed Amended Articles of the Company.
The Company’s Balance sheet (should be prepared not more than 7 months prior to the date of lodging the application).
An Unqualified report by the Companies Auditors on the Balance Sheet.
A written statement by the auditors confirming that the Company’s net assets are more than the called-up share capital plus the distributable reserve.
Consent of the person proposed to be secretary.

Conditions that must be met prior to conversion

The Companies Act imposes certain conditions that must be met before the Registrar can accept an application for conversion into a Public Limited Company.

Key among these conditions are:

The Company must have a share Capital.
The Company must not have previously converted itself into an unlimited Company.
The Company must have made the necessary changes to its name and Company’s articles in order to become a public Company.
The Company must provide a balance sheet not more than seven months old, accompanied by an unqualified auditor's report and a statement confirming that the net assets are at least equal to the aggregate of called-up share capital and undistributable reserves.
The Registrar shall not register the conversion unless an independent valuation of non-cash consideration has been conducted or the allotment is related to a share exchange or proposed merger. Allotment is considered in connection with a share exchange if it involves transferring shares from another company and is open to all holders of those shares.

Registration of the Conversion

Upon the successful application of the conversion, the Registrar of companies shall register the conversion of the company into a public company, allocate a unique number to the company if it had not already had one, and issue to the company a certificate of incorporation, stating the company’s unique number and that the Company is now a public Company.

Conclusion

In conclusion, the decision to convert a private limited company to a public limited company signifies a strategic move towards expansion and heightened market presence, leveraging benefits ranging from enhanced liquidity and investor appeal to greater flexibility in strategic partnerships and acquisitions.

HOW CAN WE HELP YOU?

At CM SME Club, we specialize in guiding businesses in selecting the most suitable business entity for their needs including guiding you through conversion. We are here to assist you in the seamless incorporation of your business. Contact us via email or call +254 745 342 125 for support in your entrepreneurial journey and let us help you propel your venture to success.

Published on Aug. 22, 2024, 1:10 p.m.