Going Private Transactions: Delaware’s Race to the Bottom?

Abstract

Since the fall of companies such as Enron, Worldcom and Adelphia Communications corporate governance issues have gained national attention. As a result of these corporate crises and corresponding legislative responses such as the Sarbanes-Oxley Act (“Sarbanes-Oxley”), these issues have not only forced many public companies to reevaluate their governance policies, but also their status as a public concern altogether. As in the 1960’s and 1970’s, going private has once again become a viable option for many public companies. With this trend in mind, it is important for both practitioners and academics to analyze the legal issues surrounding going private transactions within a conceptual framework that both charts the current dynamics of the law and provides some answers as to where the law is headed. For practitioners, the ability to frame and forecast going private developments is paramount to capably handling their clients’ current and future needs. For the academician, a competent framework can operate as a prism to view and anticipate issues ranging from market inefficiencies to shifts in value so that they may be applied in a substantive way to the existing corporate legal regimes. One such framework that has been utilized by both practitioners and academics can be seen in the market for corporate charters. The dynamics and characterizations of this market hinge on whether states are in a race to the bottom or a race to the top. Put another way, this market can be defined by determining whether states design rules that may be inefficient, but favor (and attract) those parties that are ultimately in charge of deciding where to incorporate, or whether those states promulgate optimal rules that buoy shareholder value as their core goal. While the race to the bottom/race to the top argument has been well-canvassed in existing legal, financial and economic literature, it has yet to be applied explicitly to going private transactions. The purpose of this paper is to apply the debate and its theoretical framework to going private transactions and to argue that states are engaged in a race to the bottom within this context. Going private transactions offer a unique opportunity to analyze this debate specifically because there are multiple mechanisms to take a corporation private–including traditional negotiated mergers, tender offers, asset dispositions, and reverse stock splits. Similarly, going private transactions raise the specter of self-dealing and shareholders may end up with a sub-optimal value because of the coercive nature of such transactions.