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Reasons to Go Private

A publicly held company whose shares are listed on a stock exchange is required to have full annual audits, as well as quarterly reviews of its financial results. Now that the Sarbanes-Oxley Act also calls for certification of the adequacy of internal control systems, many smaller companies consider the total cost of being public so excessive that they must go private.

The Mechanics of Going Private

In order to delist from an exchange and deregister with the Securities and Exchange Commission (SEC), a company must have less than 300 shareholders or have less than $10 million in assets for its last three fiscal years and less than 500 shareholders. If this is the case, it can simply send a notification letter to the exchange on which the company is registered, and complete the one-page Form 15 (which suspends its periodic reporting obligations) and file it with the SEC. No investor approval is required for going private. If a company goes private, its shares will still be traded on the Pink Sheets, where there are no reporting requirements (and no fees).

The 300-shareholder and 500-shareholder limits just noted are for shareholders of record. This means that a company's stock transfer agent must have fewer than these limits in its database. However, some of those shareholders of record can be the brokers with whom shareholders have placed their stock certificates. Thus, a single broker in the stock transfer agent's database may represent the holdings of a multitude of shareholders.

Because brokers can represent shareholders in the calculation of shareholders of record, a company can actually have far more than three hundred shareholders and still qualify to go private. Thus, a common strategy for going private is simply to encourage shareholders to shift their stock certificates to brokers. However, there is the possibility of a broker kick-out, where a broker returns stock certificates to their owners once a company goes private. Since a kick-out is at the option of the broker, one can never tell when the number of shareholders of record may suddenly jump above the designated shareholder limit.

If a company exceeds the 300-shareholder or 500-shareholder limits just noted, then it must formulate a plan to eliminate some of the shareholders, typically with either a stock buyback or reverse stock split, and notify the SEC of its intentions using the Schedule 13e-3. The SEC may comment on this Schedule, which can delay the implementation of the shareholder reduction plan. If the reduction plan is successful, the company can then file the Form 15 and go private.

Note: If the number of shareholders subsequently exceeds these limits, a company is obligated to resume its reporting obligations.

Podcast

A discussion about taking a company private is available on Episode 84 of the Accounting Best Practices podcast. Listen Now.