Non-Publicly Traded Company Shares: Understanding Ownership and Trading

Every company, whether it has stock listings or not, operates and exists independently. While public companies list their shares on stock exchanges, many others are privately owned. This article will explore what happens to shares in a company that does not trade publicly on the stock market.

Contractual Limitations and Control Over Shares

Unlike publicly traded companies, privately held companies can set various contractual limitations on the shares they issue. For instance, they may require that the recipient of the shares must hold them for a specific duration. In other cases, the company may limit the ability to sell the shares to employees or certain other designated individuals. Such restrictions can significantly influence the liquidity and tradability of the shares.

Trading of Privately Held Shares

Privately held shares are still tradable; however, the process is far less formal and regulated than for publicly traded securities. Price negotiations between the buyer and seller typically determine the value, often based on a valuation method that takes into account the company's business performance. Factors such as the urgency of the seller's need for cash may also affect the price. In essence, the principle of supply and demand still governs the value of these shares.

Record Keeping and Ownership Verification

There are two primary methods for recording ownership of privately held shares: bearer shares and registered shares.

Bearer Shares

In a bearer share system, the ownership of the shares is linked to physical possession of the share certificate. Selling the shares entails merely transferring the physical document.

Registered Shares

Much more common, registered shares are recorded in a company's register of shareholders. Any transfer of these shares must be documented, and a formal registration process usually must be completed.

Practical Examples in a Private Company Setting

To illustrate the practicalities of private share ownership, consider a company that sells shares exclusively to its employees and distributes dividends based on a valuation method that considers the company's assets and profits. Employees may sell their shares only among themselves and are not allowed to retain them upon leaving the company, as the firm may reclaim them.

Share Trading Challenges

One employee at the company mentioned faced challenges in understanding certain aspects of the shareholding contract. Here is an example of how the situation might play out:

Colleague: ldquo;I'm finding it difficult to sell my shares because they're not as liquid as I thought.rdquo;

CEO: ldquo;I understand. These shares are specifically designed for internal use and compliance with company policy.rdquo;

Me: ldquo;So, you're saying there are specific limitations on what I can do with these shares?rdquo;

Colleague: ldquo;Yes, I was under the impression that these shares would be easy to sell, but now I see that there are restrictions.rdquo;

Me: ldquo;That's correct. The rules are there for a reason, and flexibility is limited to ensure company governance and policy compliance.rdquo;

Conclusion

While the process of owning and trading shares in a non-publicly traded company can differ greatly from a publicly listed company, these mechanisms ensure that both the company and its shareholders adhere to established practices and policies. Understanding these aspects is crucial for any individual or entity involved in such transactions.