Going Private Transactions
Going Private: The Pros and Cons of Taking Your Company Off the Stock Market
In the past few years, smaller and smaller to mid-sized public companies are choosing to go private for a variety of reasons. Some of the key motivations include reducing legal and accounting costs, focusing on long-term goals, reducing the risk of securities litigation, limiting the disclosure of sensitive business information, and gaining more flexibility in terms of corporate governance.
The process of going private typically involves a controlling shareholder acquiring the shares of minority shareholders. This can be done through a variety of methods, including a merger, tender offer, or reverse stock split. Going-private transactions are usually spearheaded by the company's senior management and may be financed by outside debt and equity investors. The choice of method depends on factors such as the need for financing, the shareholder base, and the likelihood of a competing bid.
A tender offer is a popular option when the proponents of the going-private deal don't already own a controlling interest in the company. In this scenario, they offer to buy out certain or all shareholders individually. The goal is to reach the 90% ownership threshold that would allow for a short form merger or reverse stock split to get the rest of the outstanding shares. If the board of directors has been involved, the company must set up a special committee to advise shareholders on whether to accept the offer.
Mergers, on the other hand, come in two forms: long and short. In a long-form merger, an acquirer negotiates and gets approval from the board of directors and shareholders. If approved, the company merges with an entity formed by the acquirer, and shareholders receive either appraisal rights or the merger consideration. In a short-form merger, the acquirer with over 90% of the company's stock can merge without a shareholder vote. Minority shareholders receive cash or debt for their shares, subject to appraisal rights under state law.
When it comes to going private transactions, the normal "business judgment rule" for director decisions doesn't apply. Instead, a more stringent "entire fairness" standard is used, which requires the acquirer to prove that the deal was both fair in process and fair in price. To shift the burden of proof and avoid conflicts of interest, it's common for the company to appoint a special committee of independent directors. The role of the special committee is to negotiate the best deal for shareholders, and they should have their own advisors and not be influenced by insiders.
The SEC closely scrutinizes going-private transactions, which they view as inherently one-sided. As a result, they require extensive disclosure and certifications regarding the transaction, including the purpose of the deal, the terms and conditions, the background of the transaction, and the fairness of the process. Companies must comply with these requirements or face penalties from the SEC.
In conclusion, going private can have many benefits for small to mid-sized public companies, including reduced costs, increased focus on long-term goals, and greater flexibility in terms of corporate governance. However, it's also a complex and closely regulated process that requires careful consideration of factors such as financing, shareholder base, and SEC compliance. Ultimately, the decision to go private should be made with a clear understanding of both the advantages and the challenges involved.