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Reporting Issues to Consider in ‘Going Private’ Transactions

Some companies may decide to delist from the public markets, especially if shareholders and the reporting requirement of the Securities and Exchange Commission (SEC) are stunting their growth. In terms of financial reporting and regulatory scrutiny, however, the process of going private is almost as complex as going public. Below is a closer look at what to expect if you decide to delist.

Critical disclosures

The SEC scrutinizes going private transactions to ensure that unaffiliated shareholders are treated fairly. Among other requirements, a company that is delisting, together with its controlling shareholders and other affiliates, must generally file detailed disclosures pursuant to SEC Rule 13e-3.

To comply with this rule, companies must disclose the purposes of the transaction (including any alternatives considered and the reasons they were rejected) and the fairness of the transaction (in terms of both price and procedure). The company also must identify any reports, opinions, and appraisals ‘materially related’ to the transaction.

Failure to act with the utmost fairness and transparency can bring harsh consequences. The SEC’s rules are intended to protect shareholders, and some states even have takeover statutes to provide shareholders with dissenters’ rights.

Case in point

One of the leading companies in the PC market, Dell, decided to go private in 2013. The company’s board president and founder, Michael Dell, opted to delist because he said that public shareholders did not appreciate his new-and-improved strategic direction. Dell felt that taking the company private through a management buyout was the most effective way to achieve its long-term value potential.

Dissenting minority shareholders argued the buyout price of $13.75 per share was unfair. The Delaware Chancery Court agreed, ruling that Dell’s stock had been underpriced by more than 20 percent in the management buyout. This decision is expected to add millions of dollars to Dell’s going private transaction, if it is not appealed and overturned.

Handle with care

In light of cases like Dell’s, 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.

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