Taking a company private

Taking a company private occurs when a business deregisters its equity shares. Doing so allows it to avoid the burdensome reporting and control requirements of being a publicly-held business. A company can go private under one of the following two circumstances:

  • There are no more than 300 shareholders of record
  • There are no more than 500 shareholders of record and the company has not exceeded $10 million of assets as of the end of the last three fiscal years

Note that under the 2012 Jumpstart Our Business Startups (JOBS) Act, the criterion for having 500 shareholders and a $10 million asset cap has increased to 2,000 shareholders or 500 unaccredited investors – in regard to being forced to file reports with the SEC. Presumably, the same requirements work in reverse to make it easier to go private.

A shareholder of record is a person or entity listed in the shareholder records of a business as owning its stock. A brokerage can be the shareholder of record on behalf of its clients. Thus, it is possible to have many more actual shareholders than is indicated by the number of shareholders of record.

For either of the two preceding circumstances, going private involves filing the very simple Form 15 with the SEC. Only the approval of the board of directors is required to go private; there is no shareholder vote. In addition, if a company’s shares are listed on a stock exchange, the exchange should be notified. The type of notification varies by exchange.

If senior management is at all uncertain about a company’s ability to continue as a public company, it should try to keep the number of shareholders as low as possible. This means not handing out a few extra shares to employees, or issuing warrants, or any other action that will result in a scattering of a small number of shares amongst a large number of new shareholders.

If there are too many shareholders, the company will have to find a way to reduce the number, such as through a stock buyback program or a reverse stock split. It then documents its intentions in the much more elaborate Schedule 13e-3, which it files with the SEC. Schedule 13e-3 requires a discussion of the purposes of the stock buyback or reverse split, any alternatives considered by the company, and whether the transaction is unfair to unaffiliated shareholders.

The SEC views going private transactions with considerable suspicion, on the grounds that they must be one-sided transactions in favor of those buying existing shares. Consequently, expect the SEC to review and comment on the Schedule 13e-3, possibly several times, which can result in a multi-month delay between filing the form and taking any of the actions noted in it. Once the company then takes steps to reduce the number of shareholders that were outlined in the Schedule 13e-3, it can file a Form 15 and take itself private.

A company that is trying to go private must be careful not to undertake share repurchases in a manner that would be construed as a tender offer, since the filing of a tender offer requires substantial documentation. A repurchase is considered a tender offer if most of the following conditions are present:

  • There is active and widespread solicitation of shareholders for their shares
  • The solicitation is made for a substantial percentage of company stock
  • The offer to purchase is for a premium over the current market rate
  • The terms of the offer are firm, rather than negotiable
  • The offer is contingent upon the tendering of a fixed number of shares
  • The offer is open only for a limited period of time
  • The offeree is subjected to pressure to sell stock
  • There is publicity concerning the repurchase program

Thus, the avoidance of a tender offer may mandate occasional stock repurchases in small numbers over a period of time, where contacts are made with individual shareholders. To avoid the condition regarding a substantial percentage of company stock, consider only buying back the shares of odd lot shareholders, which should constitute a very small proportion of total shares outstanding. It is best to involve the company’s securities attorneys in this process, to mitigate the risk of having a formal tender offer.

Much of this discussion has been about ways to avoid the filing requirements associated with going private. However, there is a risk of shareholder lawsuits if a company goes private without a formal tender offer to buy back shares, since it will be very difficult for shareholders to liquidate their holdings once the company has gone private. Thus, the risk of lawsuits must be weighed against the ease of using a Form 15 filing to go private.

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