Going Private

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Going Private
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By Ahmad Nasrudin · Updated on November 29, 2020
What’s it: Going private is when a company’s stock is no longer traded for the public. It is the opposite of going public, i.e., a company lists its shares on a stock exchange for trading by the public. And, when it is listed on the stock exchange, we call it a public company.
On the other hand, going private causes public companies to become private companies (closed companies). It may be because the company bought back all of its outstanding shares. Or, a private company acquires it and buys most of the shares. The stock exchange then delisted the shares and can no longer be traded on the open market.
Force delisting . The company no longer meets the requirements for listing on the stock exchange, for example, because it was liquidated or received a prolonged penalty without showing any intention of improvement.
Focusing strategy . By going private, companies can focus on long-term goals and objectives.
Public companies often have to meet or exceed the short-term expectations of stock investors and analysts. Failure to meet expectations causes a large drop in their share price. Finally, they should focus more on short-term performance than on long-term goals.
Too-low share price . A company usually goes private when the market price of its shares is substantially below its book value. At the same time, private acquirers may see the company as having strategic resources for them. Therefore, the low share price allows them to acquire the company at a low price.
No benefit . Listed shares on the stock exchange do not provide benefits to the company. Indeed, in the beginning, they were able to raise funds at the initial offering.
However, when their share price fell, the market capitalization also fell. Investors are less interested in small-cap stocks. It makes trading in the company’s stock illiquid.
Finally, when companies need capital, they cannot raise funds optimally through the right issues because of low prices. Also, investors may not be interested in the company’s new shares.
There are several ways to run go private, including:
The acquirer takes over the controlling stake in the target company. To finance acquisitions, they may rely on debt.
They acquired it because the target company has strategic assets that can be synergized with its assets.
Then, the acquirer restructures the target company and makes it more competitive with the acquirer’s support. If successful, the target company can generate sufficient cash flow to pay back the debt.
Usually, the acquirer is a private equity firm. They usually pawn the target company’s assets as collateral to get the debt to finance the acquisition.
In this case, the target company’s management buys the stock from the public and makes it private ownership. Similar to private equity purchases, management usually relies on debt to finance acquisitions.
The positive side of this acquisition is that the acquirer comes from internal. These are people who are familiar with the target company’s business. They understand performance, prospects, and how to restructure the company to be competitive.
Under a tender offer, a company makes a public offer to buy back most or all of the company’s shares. To finance purchases, the acquirer might use a mixture of cash and stock. For example, Company X makes a tender offer to Company Z. In this case, Company Z’s shareholders will receive 80% in cash and 20% in Company X’s shares.
First , short-term expectations no longer interfere with the company in developing a strategy. It doesn’t have to spend a lot of time and resources just to secure its share price.
For example, a public company might pay dividends regularly to please investors. By going private, they may not have to do it regularly. That way, they can increase long-term capital by increasing retained earnings. They can invest it to make more money in the future.
Second , the company saves resources. Companies incur some costs for regulatory compliance, compliance, and reporting. They have to pay the costs of accounting, auditing, internal control, consultants to produce periodic reports, quarterly and annually.
Third , sensitive information can be more secure. Public companies must apply the principle of information disclosure. They announce their operational and financial performance through annual, quarterly reports or public presentations. Competitors can use this sensitive information to find weak points and destroy them.
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Going private is the process of acquiring most of the outstanding shares of a public company , so that ownership is concentrated with a small number of investors. This is a good option when the market price of outstanding shares is low, making it cheaper to buy them. A business is more likely to entertain this option when it is having difficulty raising funds by selling shares or bonds , which is a common problem for firms that have a thin market for their securities . A going private transaction may also be accomplished through a management buyout or a private equity buyout.
By going private, a business no longer has to make periodic reports to the Securities and Exchange Commission , so its financial statements are no longer available to the general public. This can represent a substantial cost reduction, since the firm no longer has to undergo quarterly auditor reviews or a year-end audit .
Going private means that shareholders will not be able to trade their shares on the open market. However, if trading volumes were already low, this does not represent a significant disadvantage.


Harvard Law School Forum on Corporate Governance

Posted by Warren S. de Wied, Philip Richter, and Robert C. Schwenkel, Fried, Frank, Harris, Shriver & Jacobson LLP, on

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Harvard Law School Forum on Corporate Governance
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Warren S. de Wied , Philip Richter , and Robert C. Schwenkel are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here ); The Effect of Delaware Doctrine on Freezeout Structure and Outcomes: Evidence on the Unified Approach by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here ); and Fixing Freezeouts by Guhan Subramanian.
The stock market downturn in the midst of the Coronavirus pandemic has generated increased interest in taking public companies private. Many boards of directors may not be receptive to these transactions in the near term, anticipating that their companies should recover when the crisis passes, and recognizing that the financing market creates risk and uncertainty. But going private may be an attractive option for some, and companies can expect to receive overtures from major stockholders and financial sponsors, despite potential financing challenges. Hence, a reminder of the legal fundamentals of these transactions seems timely.
The terms “take private” and “going private” transaction (for convenience, in this memorandum , we use the term “going private”) are both used to describe an acquisition of a public company by a controlling stockholder or other affiliate, or a transaction by a financial or other buyer that raises the specter of potential conflicts of interest on the part of members of senior management or the board of the target. The general framework under federal and state law that applies to any acquisition or sale of a public company applies to going private transactions. In addition, these transactions are subject to state law principles governing conflict of interest transactions, and may be subject to Rule 13e-3 under the Exchange Act.
Going private transactions frequently result in litigation, and the parties should be sensitive to the potential for litigation and consider what procedural safeguards may be appropriate to address these risks. In Delaware, a substantial body of case law provides a roadmap to navigate these issues. While certain Delaware legal doctrines, such as “Revlon” duties and “entire fairness,” do not apply in some states, in our experience, deal practice in going private situations does not differ meaningfully where the target is not incorporated in Delaware.
In addition, if Rule 13e-3 applies, the transaction is subject to heightened disclosure requirements and certain waiting period requirements under federal law. The Rule 13e-3 requirements are separate from, and have no impact on, the substantive law of the state of incorporation that governs the transaction. The heightened disclosure requirements under Rule 13e-3 increase the potential for litigation, and some disclosures mandated by Rule 13e-3 may draw additional scrutiny in litigation, but the fact that a proposed transaction may be subject to Rule 13e-3 should not alter the parties’ substantive focus. As in any M&A transaction, the parties should focus on issues of deal process, strategy and tactics to optimize their outcome.
By their nature, going private transactions tend more often to be initiated by an inbound inquiry. In cases where the initiating party is a financial sponsor or other non-controlling party, the acquirer will hope to gain an advantage over other potential suitors by building a rapport with key insiders, getting a head start on diligence, and potentially submitting a preemptive offer and/or persuading the target to forego an auction or pre-signing market check. Sometimes, the acquirer will seek to get the target comfortable with foregoing a pre-signing market check by offering the target the right to conduct a post-signing “go shop” process. In deals with a “go shop,” there is typically a reduced or two-tier breakup fee that serves as a lesser deterrent to competing offers and provides a lesser reward for the initial merger partner if its bid is ultimately topped by a competing bidder.
Of course, not every acquirer wants to bid against itself, or meet the target’s threshold for a preemptive offer and, in any case, the target may insist on a pre-signing market check. However, a financial sponsor or other non-controlling party should consider whether it makes sense to do as much work as possible up front on the basis of public information, to shorten the potential transaction timeline and maximize its opportunity to get to a deal before a competitive process develops. It should also be mindful that, once the board or a special committee becomes actively involved, it likely will establish rules of engagement that preclude discussions with management regarding their post-closing role and compensation until the broader transaction terms are finalized and generally limit the opportunity for potential acquirers to align with key insiders. A potential acquirer that is a member of management or the board, or that engages in preliminary discussions with these persons, should consider that these persons have a duty of candor. Caution should be taken to refrain from communications that may result in the acquirer’s interest being disclosed to the board before the acquirer is ready for that step. An insider pursuing a going private transaction (and any potential acquirer engaged in discussions with an insider) should also bear in mind that generally the insider does not have the right to share the target’s confidential information with potential equity partners or debt financing sources without the target board’s consent.
For a non-controlling acquirer, these issues of process, strategy and tactics require balancing the desire to “get a jump” on other suitors against the possibility that the acquirer’s actions create animosity within the target’s board that negates any first mover advantage. There is no prohibition on a founder or insider, in its capacity as a stockholder, aligning itself with a preferred acquisition partner, but the board or a special committee may insist that the founder or insider not lock itself into an alliance with a single bidder and remain neutral in the process. In addition, where an insider does align with a particular bidder, that insider will be precluded from participating in the board’s oversight of the transaction process. Moreover, the course of dealing between the acquirer, insiders and the target must be accurately disclosed in the proxy or tender offer statement for the transaction, and those disclosures, and any omissions in those disclosures, may have reputational consequences for the acquirer and/or increase litigation risk.
As in any M&A process, the target’s board will be focused on issues of value and deal certainty. But, if the board is prepared to engage, it will also be focused on running the right process, including establishing an appropriate process to address conflicts of interest, seeking to minimize disruption to the business and, usually, to avoid the risk of leaks or public disclosure and, if the transaction is a “Revlon” transaction, ensuring that the process is reasonably designed to maximize value.
As a general matter, the target has no obligation to disclose the receipt of a going private proposal. On the other hand, a potential acquirer may have disclosure obligations under Regulation 13D. The 13D rules apply to any more than 5% “beneficial owner” (persons who have or share voting or dispositive power over the relevant securities) or group of stockholders that collectively “beneficially own” more than 5% of a class of registered equity securities of the target. The SEC takes the position that a 13D amendment must be filed promptly after the filer forms a “plan” to engage in a transaction or makes a proposal for a potential transaction, not when a merger agreement is signed or a tender offer is commenced, and that generic disclosures reserving the right to engage in transactions do not satisfy the filer’s obligation to disclose an actual plan or proposal. A person who previously filed a Schedule 13G is generally required to file a Schedule 13D within ten days after it forms the intent to change or influence control of the target, although this requirement does not apply to persons who filed a 13G pursuant to Rule 13d-1(d) (which applies to persons who held their securities before the target became a reporting company).
In the current market environment, there is a temptation for interested parties to go into the market and acquire a “toehold” position in the target. Any such acquisition is, of course, subject to the Hart-Scott-Rodino Act (requiring clearance for acquisitions of voting securities by any person not solely for investment in excess of approximately $94 million), the 13D rules and the federal securities laws generally. An interested party considering acquiring a toehold should carefully consider the rules related to disclosure of any 13D group (which do not apply to a party who does not own stock), if the acquirer plans to engage in discussions with key equity holders.
Rule 13e-3 transactions are subject to additional disclosure obligations (including, importantly, the requirement for the parties to the transaction to file with the SEC all reports, opinions and appraisals from outside parties materially related to the transaction). Participants in a potential Rule 13e-3 transaction should be mindful of these requirements and ensure that appropriate steps are taken in connection with materials (including valuation materials) presented by outside parties (e.g., financial advisors) that may later be required to be disclosed.
Revlon . A potential acquirer should be aware that the target’s board may have fiduciary duties under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (506 A.2d 173 (Del. 1986) if the transaction constitutes a “sale of the company.” In that circumstance, the board may feel obligated to shop the company and evaluate alternative transactions in order to create a competitive process and comply with those duties. With a controlling stockholder transaction, however, Revlon generally does not apply. If a controlling stockholder proposes a going private transaction to the target’s board or stockholders, it should generally make it clear at the time of its proposal that it is solely a buyer and not a seller, and will not support an alternative transaction.
Safeguards to Avoid Entire Fairness in a Controller Transaction . A controlling stockholder owes fiduciary duties to other stockholders under Delaware law, although this does not mean the controlling stockholder is precluded from exercising its fundamental rights as a stockholder, such as the right to vote its shares against alternatives. Moreover, the Delaware courts will apply the “entire fairness” standard to a going private merger transaction with a controlling stockholder, unless certain procedural safeguards are met. In Kahn v. M & F Worldwide Corp. , 88 A.3d 635 (Del. 2014), the Delaware Supreme Court affirmed that the business judgment rule would apply in circumstances where the controlling stockholder conditioned a going private proposal from the outset on both approval by an independent special committee empowered to negotiate and to say “no” to the deal and approval by a majority of the unaffiliated minority stockholders. The “from the outset” requirement means that the procedural protections must be offered before substantive economic negotiations have begun—when it is still possible to replicate an arm’s-length transaction.
Assuming the target is not “for sale” and the transaction satisfies the two requirements listed above, the transaction will be reviewed under the business judgment rule, so long as (1) the special committee is independent and disinterested, (2) it meets its duty of care in negotiating price, (3) the vote of the minority is informed (through a disclosure document that includes comprehensive disclosures reflecting the discussions and negotiations between the parties, financial projections and other material information) and (4) the vote of the minority is not coerced.
It should be noted that the issue of who is a “controlli
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