August 27, 2003

Held Close

I was complaining about the phrase closely held, as in "closely held company," earlier today. It gets used often in financial media, such as the Wall Street Journal, seemingly as the opposite of publicly held.

I was complaining about this because it doesn't make logical sense -- "public" and "close" aren't opposites. If something is publicly held, wouldn't the opposite be privately held? If something is closely held, the opposite would be widely held, wouldn't it? There are plenty of examples of publicly traded companies that are owned by just a handful of shareholders. If I slept with my GE stock under my pillow every night, and kept it in my breast pocket every day, would it qualify as closely held?

Turns out closely held means "A corporation for which most of the voting stock is held by a small number of shareholders, but which is still publicly traded. These shares are generally not available to the public, and given the fact that there are few shareholders, the shares are usually very thinly traded." So closely held isn't a synonym for privately held, it means something else entirely. (Privately held, for the record, means that the company is not traded on the open market. It's the opposite of a public company.)

However, it's clear I'm not the only one for whom this distinction is not clear. Privately held companies are called closely held all the time, a prime example being Google; everyone from CNN to WSJ to TheStreet.com has referred to the search engine company as "closely held Google," while the company itself claims to be privately held. Can't be both, and I'm guessing the company is right. Which means some poor copy editing has been going on.

Posted by Andrew Huff at August 27, 2003 02:28 PM
Comments

Just to play Devil's advocate....

It might be both. Most start-up firms, and Google is certainly one, don't necessarily own the entire company. Many of the venture capital firms who invest in the company are part of the shareholders. It's still private, but agrees in spirit with the "closely-held" meaning. It frequently happens at start-ups that the members of the board, usually composed of the VC and investors, shakes up the management. They have the power to do this since they are part-owners.

Posted by: brian at August 27, 2003 04:33 PM

You'd be right, Brian, except that according to the definition of "closely held," the company must be publicly traded. Google is not, even though it has venture capital behind it.

The structure of any corporation involves shares -- when I started my short-lived music publicity firm with two friends, we incoporated as an S-corp. and received equal amounts of shares in the company. That didn't make us public.

It's most likely that the definition is not accurate anymore, that it has expanded in practice to include situations like Google. But if that's the case, the definition should be updated.

Posted by: Andrew at August 27, 2003 05:00 PM

I agree with you, Andrew. Companies really should be defined separately as public v. private and closely v. widely held.

The company that I work for, for example, is privately held. That is, they haven't raised capital by accessing the public equities market. Rather, they've raised capital by asking specific individuals to purchase an equity share directly from the company. As a result, we have more than a handful of shareholders, which I guess would make us widely, but closely, held.

As an aside, I think the investorwords.com definition of closely-held is somewhat confusing and also somewhat inaccurate. It says that closely held means that the shares are publicly traded, but not available to the public. Huh?

Posted by: Jeffrey Utech at August 28, 2003 08:34 AM

Rather, that should say we are "widely, but privately, held".

Posted by: Jeffrey Utech at August 28, 2003 08:35 AM

It says that closely held means that the shares are publicly traded, but not available to the public. Huh?

I think what they're trying to get at is that although the company is publicly traded, all shares are owned by a small group of investors who rarely release their holdings.

It's quite possible that this is a completely different definition than the one actually used on the Street. Also, there may be another concept of "public company" that we non-financial types are unaware of. A lot of this stuff requires a securities lawyer to figure out.

Posted by: Andrew at August 28, 2003 10:16 AM