A Brief Roadmap to Going Private

Abstract

In the midst of increasing regulatory burdens and a shaken economy that is slow to recover, more and more U.S. companies are choosing to forego their public status through “going private” transactions. “Through the end of August, sixty public companies had already [gone] private in 2003, . . . up from forty-nine during the same period in 2002 and thirty-two in 2001.” The number of companies going private in the sixteen-month period following the passage of the Sarbanes-Oxley Act numbered 120, 30% more than in the sixteen-month period prior to its July 30, 2002 enactment. Experts expect that with the sluggish economic recovery and increased regulatory compliance costs, the going private trend will continue to pick up speed. The purpose of this paper is to offer the reader a basic roadmap to going private, introducing and bridging the major considerations involved in the typical going private transaction. Part Two provides an overview of going private, beginning by defining “going private” and highlighting the major reasons companies go private, including the effective closure of capital markets, avoidance of regulatory expenses, long-term value maximization, and decreasing agency costs. It continues by pointing out current sources of these reasons, such as market downturns and the passage of the Sarbanes-Oxley Act, which combine to make an environment highly favorable to going private transactions. The section then presents barriers that may prevent a company considering going private from making the move and introduces the key players in a going private transaction. Part Two closes by analyzing the popular means by which to finance a going private transaction and the current climate in which such financing may be procured. Part Three presents the legal considerations that come into play when a company chooses to go private, including federal disclosure rules and state compliance laws. These considerations may affect both the choice of whether to take a company private and the optimal transaction structure chosen once such a decision has been made. The section begins by examining Rule 13e-3, the federal disclosure standard that governs going private transactions, describing its mechanics and disclosure requirements. Relevant state law issues are then introduced, with particular attention being given to legally enforceable standards of review, including the well-known “entire-fairness” test. Finally, Part Four details the possible means of structuring the going private transaction, which include the long-form merger, the tender offer, the reverse stock split, and the asset sale and dissolution. Advantages and disadvantages of each structure are compared, and reflect timing, financing, tax, and legal considerations, including recent Delaware case law that makes the tender offer the transaction of choice for controlling shareholders taking a company private.