Private transactions

In the world of corporate finance, the term "private transactions" often surfaces, especially when discussing the transition of a public company to a private company. This process, known as a "going private transaction," involves a publicly traded company being transformed into a private entity. This article delves into the intricacies of private transactions, exploring the roles of various stakeholders, the procedural safeguards in place, and the significant benefits that such transactions can offer.

What Are Private Transactions?

Private transactions refer to the process where a public company is converted into a private company. This typically involves the purchase of all outstanding shares of the public company by a private entity or a group of investors, often including the company's management team. The target company, which is initially a publicly traded company, undergoes a transformation that results in its shares no longer being available on the open market.

The Mechanics of Going Private Transactions

A going private transaction can take several forms, including a management buyout, where the management team of the target company buys out the public shareholders. This type of transaction often involves significant debt financing sources to fund the purchase price. The management team, along with financial sponsors, may propose a going private proposal to the target board, outlining the terms of the proposed transaction.

The Role of Independent and Disinterested Directors

In many going private transactions, independent and disinterested directors play a crucial role in ensuring that the transaction is in the best interests of the public shareholders. These directors are responsible for evaluating the private proposal and ensuring that the purchase price offered provides the best value for shareholders. They may also oversee a pre-signing market check to explore alternative transactions that could offer better terms.

Procedural Safeguards and Corporate Governance

To protect the interests of public shareholders, several procedural safeguards are typically implemented. These include the formation of a special committee of disinterested directors to evaluate the transaction, the use of financial advisors to provide fairness opinions, and the requirement for a proxy statement to be filed with the SEC. The vast majority of these transactions are governed by state law, including Delaware law, which provides a framework for ensuring fair treatment of shareholders.

Disclosure Obligations and SEC Filings

Disclosure obligations are a critical component of the deal process. The target company must provide detailed information about the proposed transaction, including financial projections and the terms of the merger agreement. SEC filings, such as the proxy statement, ensure that shareholders have access to all relevant information before they decide whether to approve the transaction.

The Benefits of Going Private

Going private can offer significant benefits to the target company and its management team. By removing the pressures of quarterly earnings reports and public scrutiny, the company can focus on long-term strategic goals. This longer-term perspective can lead to greater innovation and growth, ultimately benefiting the company's stakeholders.

Avoiding Hostile Takeovers

Another advantage of going private is the ability to avoid hostile takeovers. As a private company, the target is no longer subject to the same level of potential interest from outside parties looking to acquire the company through a hostile bid. This can provide stability and allow the management team to implement their vision without external interference.

The Deal Process: From Proposal to Completion

The process of going private involves several key steps, starting with the initial private proposal. The target board, often with the assistance of financial advisors, evaluates the proposal to determine if it is in the best interests of the shareholders. If the board approves the proposal, a definitive agreement is negotiated and signed.

Tender Offers and Shareholder Approval

In some cases, the transaction may involve a tender offer, where the buyer offers to purchase shares directly from the public shareholders. This can expedite the process, as it allows shareholders to decide whether to sell their shares at the offered price. Once the tender offer is complete, the company can proceed with a short-form merger to finalize the transaction.

Challenges and Considerations

Despite the potential benefits, going private transactions are subject to greater scrutiny from regulators and shareholders. The deal process must be carefully managed to ensure compliance with all legal and regulatory requirements. This includes addressing any potential conflicts of interest, such as those involving interested parties, and ensuring that the transaction is conducted in a fair and transparent manner.

Break-Up Fees and Alternative Transactions

To protect the interests of the target company, break-up fees may be included in the merger agreement. These fees compensate the buyer if the transaction is not completed due to the acceptance of a superior offer. The target board must also consider alternative transactions that could provide better value to shareholders.

Conclusion

Private transactions, particularly going private transactions, offer a complex yet rewarding opportunity for public companies to transition to private ownership. By understanding the roles of various stakeholders, the procedural safeguards in place, and the potential benefits, companies can navigate the process effectively. With careful planning and execution, going private can provide the best value for shareholders and position the company for long-term success.