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Going Private

By Jeffrey Steele

December 2009

There are a number of reasons a public reporting company may consider going private (or “going dark”). These reasons include:

A public company thinking about going private should first engage in a cost/benefit analysis of remaining a public company versus going private. This analysis should include an examination of the reasons the company went public in the first place and whether those rea- sons remain valid and useful. An example is the ability to use the company’s publicly tradable equity as “currency” to accomplish acquisitions.

If the company is suffering from a small public float with limited trading and limited analyst coverage, or simply has a longer term languishing stock price, which makes the company’s equity undesirable to use for acquisitions (or if the company is no longer interested in making acquisitions), then the costs of being a public reporting company may be viewed to outweigh the expected benefits of being a public company.

If, however, the company continues to use its equity in acquisitions, it may decide to remain public and accept the costs of being a public reporting company in order to maintain this advantage. Going private may also significantly reduce the value and attractiveness of employee stock option or other stock compensation plans. If the use of options or other equity rewards is important to a public company, this should be taken into account when considering whether to go private.

A public company seeking to go private may accomplish this in two ways.

Going Private

The first is a “going private” transaction by which the company or perhaps a new company established by some or all of the company’s management buys out the existing public stockholders with cash. Examples of this approach include so called “management buy outs.” Generally, this approach involves using the company’s cash and/or leveraging the value of the company’s assets in the form of a loan to buy out the company’s stockholders.

The disadvantage of this approach is the depletion of the company’s cash reserves and/or the addition of debt (often significant) to finance the purchase which can leave the company in a more precarious financial situation post going private than it was before. Also, because such transactions generally involve the participation of the company’s insiders in the form of management and possibly directors, whether in the form of simply being the remaining stockholders of the company following the buyout or in the form of establishing their own company to buy out the public company’s stockholders, such transactions involve a conflict of interest and give rise to concerns with respect to the proper discharge of the corporate insiders fiduciary duties to the public stockholders.

These concerns often give rise to additional transaction components such as the establishment of an independent committee of the Board of Directors, often represented by its own legal counsel and other advisors, to negotiate and approve the transaction, the engagement of a financial advisor to render a “fairness opinion” and the seeking of the approval of the disinterested minority stockholders by some means (such as the approval of the majority of the minority stockholders). Such transactions will also often be carefully reviewed by the SEC and appropriate time periods should be factored into the assumptions regarding time to complete such a transaction in order to allow for SEC review.

It should also be expected that the SEC will be interested in disclosure of all material information relating to the valuation of the company for purposes of the determination of the buy out price and that any and all background materials, including reports and presentations by financial advisors engaged to assist in the process, may be required to be disclosed. All of this can, of course, add time, complexity and cost to the transaction.

Going Dark

The second approach involves simply “going dark” by voluntarily ceasing to file the company’s public reports (10-K, 10-Q, 8-Ks, etc. with the SEC (by means of the filing of a simple form with the SEC) and without the need to buy out existing stockholders. This second approach, however, is available only if the company’s stockholder base is smaller than certain thresholds (300 or 500 “of record” stockholders of any class, depending upon certain other considerations).

If a company’s stockholder base is too large, some form of stockholder buyout will likely be the only available means to go private. It is important to remember in this context that “of record” stockholders is likely a very different (i.e., much smaller) number than the number of beneficial stockholders for a public company given the large number of beneficial stockholders who hold their stock in “street name.” Therefore, it is possible that, following a determination that a company may have less than the 300 or 500 “of record” stockholders such that it can qualify to simply “go dark,” the street or nominee holder holding many, beneficial stockholders shares in “street name” may decide to cease doing so and distribute such shares to the beneficial holders.

Such an event is known as a “broker kick out,” and if it occurs, may likely result in the formerly public company having more than 500 stockholders of any class and again being required to return to its former status as a public reporting company.

For more information on going private or to discuss specifics to your organization, please contact Jeffrey Steele.

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