Chapter Fourteen: Tiring of the Public Eye? Delisting, Deregistration and Going Private

The company’s duty to file periodic and current reports under Section 12(g) is immediately suspended upon filing the Form 15, and its registration under the 1934 Act terminates 90 days after filing. The suspension will terminate if the company crosses the Section 12(g) size thresholds as of the end of any future fiscal year. The suspension applies only to the duty to file periodic (Forms 10-K and 10-Q) and current (Form 8-K) reports. The company will remain subject to the other obligations that attach to being registered (e.g., proxy rules and Section 16 reporting obligations) until 90 days after filing Form 15 when the company’s Section 12(g) registration is automatically terminated.

Suspension After Filing 1933 Act Registration (Section 15(d))

A company that issues equity or debt securities to the public in an offering registered under the 1933 Act must file annual, quarterly and current reports with the SEC pursuant to Section 15(d) of the 1934 Act. This reporting requirement applies even though the company does not list the securities on a national securities exchange or market and the company has not crossed the size thresholds triggering 1934 Act registration. Unlike registration under Section 12 of the 1934 Act, a company can never terminate its reporting obligations under Section 15(d)—these obligations may only be suspended. A company’s periodic reporting obligations under Section 15(d) are automatically suspended for a fiscal year, other than a fiscal year in which a 1933 Act registration statement became effective, if at the beginning of that year the registered securities are held of record by fewer than 300 persons (or in the case of a bank, a savings and loan holding company or a bank holding company, 1,200 persons). A company must file a Form 15 with the SEC as a notice of the automatic suspension within 30 days after the beginning of the fiscal year in which the suspension is effective. If a company has one or more effective Form S-3 and/or Form S-8 registration statements, in order to rely on the Section 15(d) automatic reporting suspension, it must deregister any remaining unsold securities from those registration statements prior to filing its annual report on Form 10-K for the prior fiscal year. Otherwise, the Form 10-K serves as a post-effective amendment, rendering the automatic suspension under Section 15(d) unavailable.

A company may file a Form 15 under Rule 12h-3 under the 1934 Act to suspend its Section 15(d) reporting obligations at any time if it meets either of the record holder thresholds previously identified for the termination of its Section 12(g) registration. However, like the Section 15(d) automatic reporting suspension, a company generally cannot rely on Rule 12h-3 to suspend its Section 15(d) reporting obligations for the fiscal year in which a 1933 Act registration statement becomes effective or is updated by Section 10(a)(3) of the 1933 Act (e.g., by filing a Form 10-K). Moreover, if a company is relying on the fewer than 500 record holders and $10 million in assets threshold, it cannot rely on Rule 12h-3 to suspend its Section 15(d) reporting obligations for (1) the fiscal year in which a 1933 Act registration statement becomes effective or is updated by Section 10(a)(3) of the 1933 Act and (2) the two succeeding fiscal years. (In limited circumstances in connection with the completion of a merger or an abandoned IPO, a company may rely on Rule 12h-3 to suspend its Section 15(d) reporting obligations, even if a registration became effective or was updated in the same year.)

If a company is no longer able to rely on either of the record holder thresholds, its reporting obligations under Section 15(d) are revived and the company must resume reporting, starting by filing a Form 10-K for its prior fiscal year within 120 days of the end of such fiscal year.

Going Private Transactions: Flying Below the Radar

In a going private transaction, a significant shareholder group (often insiders) offers to purchase all or most of the company’s equity securities held by the general public. The company then files a Form 15 to deregister under the 1934 Act and will no longer have its stock publicly traded.

The Board of a public company may determine that a going private transaction is in the best interests of shareholders and the company for a number of reasons:

• Small Float for Orphan Company. A company with a small public float and little or no analyst coverage sometimes is unable to realize the benefits of being a public company. Stock prices for these types of companies, sometimes referred to as orphan public companies, may be undervalued and shareholders may have limited liquidity.
• Management Focus. The management team at a public company may feel market pressure to favor short-term gains over the pursuit of long-term strategies or objectives. Going private may also free up management’s time and effort to focus on running and growing the business.
• No Third-Party Purchasers. The company may have sought and failed to find a third-party purchaser to maximize shareholder value.
• Weary Outside Shareholders. Outside shareholders may be prepared to liquidate their investment, while significant shareholders and management may not be ready to sell.
• Liquidity. A going private transaction can provide public shareholders with an opportunity to sell their shares at a premium to recent market prices.
• Elimination of 1934 Act Reporting Obligations. Going private relieves a company of the expenses and burdens of preparing and filing 1934 Act reports with the SEC and complying with proxy requirements and stock exchange or market rules.

There are downsides to going private, including:

• Cost, Decreased Liquidity and Loss of Public Profile. Future cost savings may be offset by other considerations, such as:
  • The cost to complete the going private transaction;
  • Decreased liquidity for remaining shareholders;
  • The loss of the public markets as a source for equity and debt financing;
  • A potentially heavy debt burden (if the transaction is financed); and
  • A loss of public profile or prestige compared to status as a public company.
• Conflicts of Interest. Going private transactions raise special concerns because the proponent typically has a conflict of interest. The proponent is frequently represented on the company’s Board and has a fiduciary duty to the other shareholders, while it is in the proponent’s personal financial interest to pay the minimum purchase price for the company.

Process of Going Private

A going private transaction may take many forms, but the ultimate result is that the proponent acquires all or most of the outstanding stock, and the selling shareholders receive cash, redeemable preferred stock or debentures for their shares. The two most common transaction types are a self-tender and a proxy solicitation to propose a merger.

Self-Tender. A company self-tender that buys out the general public will leave the proponent shareholder group holding a majority of the company’s outstanding equity. The self-tender is followed by a second-step merger transaction in which all shareholders other than the proponent group are squeezed out.

Friendly Merger/Proxy Solicitation. Alternatively, the company can solicit shareholder proxies to merge the target company with an insider entity or an acquirer entity controlled by a third party. As with a self-tender, the proponent group will be left with a majority of the shares, and selling shareholders will receive cash or other consideration.

If any Board member has a conflict of interest in the transaction, the company’s Board will often appoint a Special Committee of independent directors to review the proposal, negotiate with the proponent and make recommendations to the full Board. The Special Committee may retain independent counsel and a financial advisor to evaluate the proposed transaction and opine on the fairness of the transaction. If the acquirer in a going private transaction is a controlling shareholder, the shareholder will likely condition its offer at the outset on approval by both (1) the Special Committee of independent directors empowered to select its own advisors and definitively say “no” to the transaction and (2) an informed, uncoerced majority of the unaffiliated minority shareholders. (We discuss how to manage conflicts of interest in Chapter 2.) If the Board is unable to cleanse a conflict of interest, or a controlling shareholder fails to implement adequate procedural protections for the minority shareholders, the transaction will be subject to entire fairness review, which includes demonstrating fair dealing and a fair price. If a controlling shareholder can show that the transaction was either approved by a properly empowered and functioning Special Committee of independent directors, or approved by an informed vote of a majority of the minority shareholders, the shareholder can shift the burden of persuasion to the challenging shareholder.

Rule 13e-3

Rule 13e-3 under the 1934 Act governs going private transactions and imposes significant disclosure requirements on a public company going private. Among other items, the company must disclose in the proxy statement or tender offer document filed with the SEC:

• The purpose of the transaction;
• Alternatives considered and reasons for their rejection;
• Reasons for the structure of the transaction and for undertaking it at that particular time;
• Reasons the issuer believes the transaction is fair;
• A description of any opinions, reports or appraisals from outside parties that are materially related to the transaction, including a discussion of the analysis underlying a financial advisor’s fairness opinion;
• Any firm offers made by any third party for the company during the past two years; and
• Extensive financial information.

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Practical Tip: Key Players in a Going Private Transaction

Special Committee. A going private transaction often involves a conflict of interest between an insider proponent that may control the company and the other shareholders. The Board will want to ensure that a Special Committee is selected and granted broad authority. The Special Committee will have the ability to choose its own financial, legal and accounting advisors and will become the voice of the Board in the transaction. The first significant act of the Special Committee is to choose its outside financial advisor.

Financial Advisor. The financial advisor will advise the Special Committee on the financial structure of the going private transaction and on strategic alternatives to the transaction. The Special Committee will also request that the financial advisor deliver a fairness opinion to the Special Committee. A fairness opinion is a statement by the financial advisor that the consideration or financial terms of the transaction are fair, from a financial point of view, to the company and its shareholders. Obtaining a fairness opinion is an important step in establishing that the Board has satisfied its fiduciary duty of care.

Information Agent. Even before the going private transaction begins, an information agent, typically a proxy solicitation or consulting firm, will provide an analysis of the company’s shareholder base and, based on that, help give strategic advice on the structure of the transaction. Following the commencement of the offer, the information agent will handle the distribution of tender offer documentation (if the transaction is structured as a self-tender) and will field questions from shareholders about the offer or procedures for tendering their shares. Dealer Manager. The dealer manager (typically an investment banking firm retained by the company) will solicit tenders or consents and communicate generally regarding the transaction with brokers, dealers, commercial banks and trust companies. In smaller deals, the information agent plays this role.

Depositary. In a self-tender transaction, the depositary, typically a company’s transfer agent, receives tenders of shares and provides daily updates to the company on the number of shares tendered.

Outside Counsel. Outside counsel will prepare the transaction documents and handle filings and communications with the SEC. It will also advise the Board (and Special Committee if the Special Committee does not retain separate counsel) on the legal aspects of the transaction and on the fiduciary duties of the directors. The Special Committee may wish to retain independent counsel.

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