Issuing stock on the public markets is not right for every business. Some public companies decide to delist or ‘go private’ often due to the high costs of complying with the requirements of the Securities and Exchange Commission (SEC). However, going private can be nearly as complex as going public, so it is important to be extremely thorough.
The SEC scrutinizes going-private transactions to ensure that unaffiliated shareholders are treated fairly. A company that is going private, together with its controlling shareholders and other affiliates, must, among other requirements, file detailed disclosures pursuant to SEC Rule 13e-3.
The SEC allows a public company to deregister its equity securities when they are held by fewer than 300 shareholders of record, or fewer than 500 shareholders of record if the company does not have significant assets. Depending on the facts and circumstances, a company may no longer be required to file periodic reports with the SEC once the number of shareholders of record drops below the above thresholds.
To comply with SEC Rule 13e-3 and Schedule 13E-3, companies executing a going-private transaction must disclose:
- The purposes of the transaction, including any alternatives considered and the reasons they were rejected
- The fairness of the transaction, both substantive (price) and procedural
- Any reports, opinions and appraisals ‘materially related’ to the transaction
The SEC’s rules are intended to protect shareholders, and some states even have takeover statutes to provide shareholders with dissenters’ rights. Such a transition results in a limited trading market to be able to sell the stock.
Failure to act with the utmost fairness and transparency can bring harsh consequences. SEC scrutiny can lead to costly damages awards and penalties if your company is guilty of treating minority shareholders unfairly or making misleading disclosures.
Handle with care
Companies that pursue going-private transactions should exercise extreme caution. To withstand SEC scrutiny and avoid lawsuits, it is critical to structure these transactions in a manner that ensures transparency, procedural fairness, and a fair price.
In addition to helping you comply with the SEC rules, we can evaluate whether going private can help your company reduce its compliance costs or allow it to focus on long-term goals rather than satisfying Wall Street’s demand for short-term profits.