Going private

Going Private Versus Public Company

The news media has recently focused on initial public offerings (IPOs) involving special purpose acquisition companies (SPACs). However, amid the economic upheaval generated by the COVID-19 pandemic, another significant transaction is gaining traction: privatizations. A company going private (also known as delisting) has several advantages, such as:

  • Lower accounting, regulatory, and governance costs
  • Fewer liability risks
  • More freedom to focus on long-term growth rather than short-term earnings to placate Wall Street investors

Is it time for your company to go private? To respond to this question, you must first comprehend how these transactions function and how you must report them to the Securities and Exchange Commission (SEC).

SEC requirements

According to SEC guidelines, a corporation can choose to deregister its equity shares for two reasons:

  1. If there are fewer than 300 shareholders of record
  2. If there are fewer than 500 shareholders of record and the company has no significant assets

Once the number of shareholders of record falls below specified limits, a firm may no longer be required to file periodic reports with the SEC, depending on the facts and circumstances.

A common practice is a tender offer, which purchases minority shareholders’ shares in going-private transactions. A merger, a reverse stock split, or a private equity acquisition are all options for the transaction. The goal is to lower the number of shareholders to the point where the company can choose to stop being a public corporation.

Going-private deals are scrutinized by the SEC to ensure the proper treatment of unaffiliated shareholders. For example, SEC Rule 13e-3 requires a corporation going private, together with its controlling shareholders and any affiliates, to file extensive disclosures, among other things.

Detailed disclosures

Companies implementing a going-private transaction must disclose the following to comply with SEC Rule 13e-3:

  • The transaction’s aims, including any alternatives examined and the reasons for their rejection
  • The transaction’s substantive (pricing) and procedural fairness
  • Any “materially connected” reports, views, or appraisals to the transaction

SEC rules safeguard shareholders. Some states also have takeover statutes that give shareholders the right to vote against a merger. As a result of this shift, there is a limited trading market to sell the stock.

Failure to act fairly and transparently might have profound implications. For example, suppose the SEC finds that your company has mistreated minority shareholders or made deceptive disclosures. In that case, the SEC may pursue you for considerable damages and penalties.

Fo a company going private

With borrowing rates so low and market volatility so high, now may be an opportune time for public companies in trouble to contemplate delisting. Please contact our RRBB accountants and advisors to discuss the advantages and disadvantages of going private. We can assist you in complying with SEC regulations and structuring your transaction to ensure transparency and procedural integrity.

© 2022


Get free tax planning and financial advice