Who wants to go public?

At the time of writing, Twitter’s stock debuted at 73 percent above its initial public offering (IPO) price, an impressive turnout for a company who, according to news reports, never really made net profits in the past years.  In the Philippines, Travellers International Hotel Group, the developer and operator of Resorts World Manila, and Harbor Star Shipping, tug boat operator in the country, recently listed in the Philippine Stock Exchange (PSE).

Ever wonder why companies go public? What are the advantages and disadvantages of listing in a stock exchange? 

Perhaps the most obvious reason why companies go public is to raise capital. The stock exchange may be described as a market place where both local and foreign stock investors can buy and sell shares of stock. In other words, the stock exchange makes the company’s shares available to the general public and this makes almost everyone a potential investor or stockholder. Thus, a successful public offering can raise substantial capital that may be used by the company for a variety of purpose including operations expansion and development of research and new technology. 

Going public also gives prestige to a company. Note that before listing, the company must go through the rigorous scrutiny of stock exchange regulators. Here in the Philippines, for example, one of the requirements for listing is a track record where the company must prove that it has met the required earnings before interest, taxes, depreciation and amortization (EBITDA) for three (3) full fiscal years immediately preceding the application for listing. Perhaps it is this prestige why listed companies are generally regarded as more stable and financially able, giving them an advantage in terms of borrowing, hiring key employees, and even in marketing products.

Visibility may be another reason why a company would want to go public.  In case you have not noticed, a listed company generally attracts more attention from the media and as long as there is proper management, this publicity may prove to be an effective advertising campaign.

Going public may also be a viable exit strategy because the stock exchange provides a ready market for the company’s shares. As distinguished from the case of private companies, stockholders of the latter who want to leave the business must look for a buyer of either the company’s assets or the company’s shares. 

Selling the assets of the business is generally followed by an application for closure of business operations with the Bureau of Internal Revenue (BIR) and Securities and Exchange Commission (SEC). Before the registration of a company is cancelled, a tax clearance must be secured triggering a BIR audit of the company’s books for the last three preceding taxable years. This makes the closure of a company a long and tedious process. On the other hand, selling the shares of a private company can be difficult since the company is usually owned by a close knit of individuals or entities that hold a huge number of shares. It is not always easy to find an investor who will instantly jump into the occasion and purchase the entire shares being disposed of. 

While the benefits are clearly there, a company who wants to go public must also factor-in the costs involved. 

In the IPO stage alone, cash outs will have to be made for underwriter’s commissions, legal and accounting fees, and registration fees. Following the IPO, expect compliance costs to increase due to additional reportorial obligations required from listed companies.   

Then, there are taxes involved. Under existing tax rules, the sale of shares in closely held corporations (which refers to a corporation at least 50 percent in value of the outstanding capital stock or at least 50 percent of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by, or for not more than 20 individuals) through IPO is subject to a final tax, based on the gross selling price or gross value of the shares sold, at the rate of four percent if the proportion of disposed shares to outstanding shares is up to 25 percent, two percent if the proportion of disposed shares to outstanding shares is over 25 percent but not over 33 1/3 percent, and one percent if the proportion of disposed shares to outstanding shares is over 33 1/3 percent.

After the IPO, the sale of listed shares through the stock exchange is subject to the stock transaction tax (STT) at the rate of 1/2 of one percent based on the gross selling price or gross value of the shares sold. 

Non-resident investors may also lose the benefits of a tax treaty in place between the Philippines and his home country because, according to a 2007 BIR ruling, exemption from capital gains tax (CGT) under tax treaties do not include STT.  STT is not a tax on the earnings derived from the sale of stocks but is an excise tax imposed on the privilege to sell shares of stocks. Thus, STT cannot be considered as an identical or substantially similar tax on income in place of CGT. 

A listed company should also ensure that the minimum percentage of listed securities held by the public, or the minimum public float, is maintained because otherwise, the sale of these shares shall be subject to the five percent/10 percent capital gains tax (CGT) and to .375 percent Documentary Stamp Tax (DST).

There are also intangible factors that must be considered before deciding to go public. For a company owner, there is the possibility of losing some authority over the business because as more stockholders come in, business decision makers are also likely to increase. There’s also that possibility of attracting hostile stockholders who can take control of the corporation once they obtain the required stockholding.

Clearly, going public has its pros and cons and company owners are advised to think twice before attempting to list.

Mary Karen E. Quizon is a senior manager from the tax group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected].

For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.