3.2.2.2 Non-public corporations and closely held corporations

Corporations without listed shares are non-public corporations. They can include companies with various types of shareholdings. Non-public corporations can be corporations with publicly held but non-listed shares, with closely held shares only, or statutory close corporations. This chapter focuses on closely held or close corporations.

A closely held corporation is the most commonly used form of business entity in the United States.1 It generally has a small number of shareholders and no ready market for its shares.2 In addition, shareholders in such corporations often have close relationships with one another and have a strong desire to participate in management.3 However, because of their small and illiquid interests, minority shareholders in closely held companies are more vulnerable to abuse at the hands of the majority than those in a public one.4

Given that in small corporations business is usually conducted in an informal way and minority shareholders bear considerable risks, 5 several states have enacted separate legislation for statutory close corporations.6

To date, there is no generally accepted definition of a close corporation.7 Some courts have developed a common law definition. For instance, the Massachusetts Supreme Court ruled that there must be: (1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operation of the corporation.8 On the other hand, some states give a specific definition in the statute. Delaware's statutory definition, for example, requires that a statutory close corporation must have no more than thirty shareholders, at least one restriction on the transferability of stock, and no public offering of the stock.9 To make comparisons with close corporations in China with respect to exit remedies, there is no need to extensively explore the differences between closely held and statutory close corporations. Instead, we only need to group these corporations as one category which imposes restrictions on shareholder exit in contrast to public corporations whose shareholders are at liberty to exit.