5.5 Strategic Choices 159A privately-owned business can choose from many enterprise forms. The
choice of enterprise form affects the regulation of all corporate governance issues
(for incorporation, see Volume I). For example, it affects the question of legal
personality, limited liability, the transferability of shares, the duty to disclose
information, and the making of payments to owners. The business can be owned
by a sole trader. Other enterprise forms available to a privately-owned business
can range from a partnership (partnership^125 or limited partnership^126 ) to limited-
liability companies (public limited-liability company^127 or private limited-liability
company^128 ).
A privately-owned business has more freedom to use its capital and return
funds to owners even where it is a limited-liability company. It is particularly easy
where the firm is a partnership.
This can be illustrated by private equity. Shares in a target company that has been taken
over by a private equity fund will, after refinancing, usually be owned by a limited
partnership. The limited partnership is either the sole shareholder, or the top managers of
the target company have been given a block of shares in order to align their interests with
those of the private equity fund. As there are no external minority shareholders claiming
equivalent treatment or the furtherance of the long-term interests of the firm, it is easier to
decide on distributions to owners. As the entity that owns shares in the target is a limited
partnership, most questions can be based on contract between investors. It is therefore easy
for the limited partnership to make distributions to investors. Private equity investors may
have used a holding company with limited liability in order to reduce legal risk or for tax
purposes.
A privately-owned business has few disclosure obligations compared with a listed
company (see section 5.9).
Privately-owned companies and publicly-owned companies. A privately-owned
company can stay private or go public, and a publicly-owned company can stay
public or go private.
Depending on the governing law, going public may require changing the com-
pany form of the firm. Member States’ company laws usually distinguish between
two forms of limited-liability companies: those whose shares can be traded only
privately and those whose shares can be traded on a stock exchange.^129 Legal rules
regulating those two basic company forms can be found in two separate statutes
(Aktiengesetz/AG and GmbH-Gesetz/GmbH) or the same statute (Companies Act
2006/ltd and plc).
(^125) Developed from the societas.
(^126) “Kommanditgesellschaften” developed from the commenda.
(^127) Such as companies mentioned in Article 1(1) of Directive 77/91/EEC (Second Company
Law Directive).
(^128) Such as companies mentioned in Article 1 of Directive 68/151/EEC (First Company
Law Directive).
(^129) See Article 1 of Directive 77/91/EEC (Second Company Law Directive).