Closely Held Shares

Closely Held Shares

Closely held shares refers to stocks that are held by a small number of investors in a closely held corporation; a closely held corporation is one where a small number of investors possess most of the corporation's available shares. So there are few opportunities for new investors to buy into the company (or sell out) because trading volume is light; majority shareholders tend to hold onto their shares for the long term because they are part of — or have in interest in — the company. In order for the firm to qualify as a closely held company, a minimum number of shares must be held by persons outside of the business (such as members of the public). In many ways, closely held shares behave the same as actively traded shares: They both represent ownership rights in the corporation; and they both come with the same right to vote, receive dividends, and collect a distribution of the company’s net assets if the company is liquidated. Closely held shares refers to stocks that are held by a small number of investors in a closely held corporation; a closely held corporation is one where a small number of investors possess most of the corporation's available shares. Closely held shares are different from the shares of privately held companies, which do not trade shares at all; they are also distinct from publicly traded companies, which are more actively traded each day. Dell decided to take the company private, buying out public shareholders to the tune of $25 billion, in order to refocus the company after a tough year. As a private company, it wouldn't have to appease public shareholders; instead, it could focus on rebuilding the brand how they (the closely held shareholders) wanted.

Closely held shares refers to stocks that are held by a small number of investors in a closely held corporation.

What Are Closely Held Shares?

Closely held shares refers to stocks that are held by a small number of investors in a closely held corporation; a closely held corporation is one where a small number of investors possess most of the corporation's available shares. These shareholders — also called “majority” or “controlling” stockholders — are either affiliated with the company, its management, or family members; they may also have another type of close relationship or interest in the company.

Closely held shares refers to stocks that are held by a small number of investors in a closely held corporation.
A closely held corporation is one where a small number of investors possess most of the corporation's available shares.
A closely held company's shares don't trade actively because most — or all — of the shares are owned by the insiders.
Closely held shares have the sames rights and privileges as actively traded shares in a public corporation.
Closely held companies are less susceptible to hostile takeovers and generally have a more stable share price that is more reflective of the actual business profits.

Understanding Closely Held Shares

Closely held shares are different from the shares of privately held companies, which do not trade shares at all; they are also distinct from publicly traded companies, which are more actively traded each day.

Although closely held corporations do trade their stock publicly at times, they do so irregularly and infrequently. So there are few opportunities for new investors to buy into the company (or sell out) because trading volume is light; majority shareholders tend to hold onto their shares for the long term because they are part of — or have in interest in — the company.

In order for the firm to qualify as a closely held company, a minimum number of shares must be held by persons outside of the business (such as members of the public).

Closely Held Shares vs. Actively Traded Shares

In many ways, closely held shares behave the same as actively traded shares: They both represent ownership rights in the corporation; and they both come with the same right to vote, receive dividends, and collect a distribution of the company’s net assets if the company is liquidated. The biggest difference is not so much in the shares themselves, but in the ownership structure of the company that is issuing them.

Because closely held shares do not trade frequently in the open market, it is the value of the company itself (rather than market sentiment or irrational investor activity) that generally determines the share price. Also, all decisions made on the behalf of the business are solely for the interest of the business itself, with fewer external constituents to satisfy. So closely held companies tend to be more stable than other companies.

Although they might enjoy greater stability than actively traded corporations, closely held corporations also might find it more difficult to raise additional working capital through the sale of associated stock.

Closely held corporations are more resistant to hostile takeovers and proxy wars than are actively traded companies. Their close-knit nature, and the fact that controlling shareholders rarely release any of their shares, make it difficult for an outside entity to gain a foothold in attempting a takeover, thus adding another measure of stability.

There are few opportunities for investors to purchase closely held shares. However, publicly traded shares are generally readily available; buying and selling them is as simple as placing an order with any broker or brokerage firm.

Special Considerations

It is usually more difficult to value a closely held company. Because there is no public marketplace for selling its shares, it may be challenging to obtain the data necessary to make a valuation analysis. On the other hand, it is easy to assess the value of a publicly held company both because it is valued by the worth of its stockholders, and because the corporation’s filings are publicly accessible.

When a company’s shares are closely held, the company has the option to apply for S Corporation (S Subchapter) status with the Internal Revenue Service (IRS). If the company qualifies, it would report income but not pay taxes. Instead, the shareholders in the S Corporation would pay taxes on their proportional share of the profits. If the S Corporation sees losses, then the owners of the closely held shares would receive tax deductions.

Example of Closely Held Shares

Dell Technologies Inc. (DELL) went public in 2018 after being privately held for the prior five years. Prior to this, the firm's CEO and founder, Michael Dell, took the firm private in 2013.

Dell decided to take the company private, buying out public shareholders to the tune of $25 billion, in order to refocus the company after a tough year. As a private company, it wouldn't have to appease public shareholders; instead, it could focus on rebuilding the brand how they (the closely held shareholders) wanted.

The tactic paid off. When the company came back to market in 2018, it was valued at $70 billion. At this time, $22 billion worth of shares were provided to the public.

Related terms:

Active Stocks

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Broker and Example

A broker is an individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. read more

Closed Corporation

A closed corporation is a company whose shares are held by a select few individuals who are usually closely associated with the business. read more

Closely Held Corporation

A closely held corporation is a firm with a limited number of shareholders. Discover the pros and cons of closely held versus public corporations. read more

Company

A company is a legal entity formed by a group of people to engage in business. Learn how to start a company and which is the richest company in the world. read more

Hostile Takeover

A hostile takeover is the acquisition of one company by another without approval from the target company's management. read more

Issue

An issue is the process of offering securities to raise funds from investors. read more

Market Sentiment

Market sentiment reflects the overall attitude or tone of investors toward a particular security or larger financial market. read more

Poison Pill

A poison pill is a defense tactic utilized by a target company to prevent, or discourage, attempts of a hostile takeover by an acquirer. read more

Private Company

A private company is a company held under private ownership with shares that are not traded publicly on exchanges. read more