GOING PRIVATE 2003
Practical Tips
From the Trenches
December 3, 2003
Presented By:
Sherman A. Cohen
Co-Chair
Growth Companies and Private Equity Group
Arnall Golden Gregory LLP
2800 One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3450
404.873.8630
email: sherman.cohen@agg.com
1
What Is a
Going Private Transaction?
For federal securities law purposes,
“going private” is the process by
which a publicly traded company
is converted to private ownership
by affiliated persons
2
Why Are Going Private
Transactions Regulated?
• Elimination of public share ownership at
propitious times by management or
controlling shareholders
• Transactions themselves may be coercive
• Potential for overreaching of unaffiliated
shareholders exists because of lack of
arms- length bargaining between affiliates
and the issuer
3
The Effects Necessary to
Trigger SEC Rule 13e-3
Governing
Going Private Transactions
•
Causing a class of Section 12(g) or 15(d)
equity securities to be held by fewer than
300 record holders
or
•
Causing a class of equity securities not to
be listed on a securities exchange or
authorized to be quoted on an inter-dealer
quotation system
4
Types of Transactions
Covered by Rule 13e-3
•
Purchase of an equity security by issuer or
affiliate of the issuer
•
Tender offer for an equity security by an
issuer or affiliate of the issuer
•
Proxy solicitation subject to proxy rules
covering merger, consolidation or
recapitalization
5
Types of Transactions
Covered by Rule 13e-3
(cont’d)
•
A sale of substantially all of the assets of an
issuer to its affiliate or group of affiliates
•
A reverse stock split of a class of equity
securities involving the purchase of
fractional interests
6
Definition of Affiliate
•
Person who controls, is controlled by, or is
under common control with the issuer
•
According to the SEC, factors indicating
such a “control” relationship include:
 common board membership between the
acquiror and the issuer
 significant management equity
participation in the acquiror

generally more than 10%
7
Definition of Affiliate
(cont’d)
 in the event of an acquisition by an
unaffiliated entity where the issuer’s
management will remain intact, relevant
factors include:

increases in consideration to be
received by management

alterations in management’s executive
agreements favorable to such
management

the equity participation of management
in the acquiror, and

the representation of management on
the board of the acquiror
8
Definition of Affiliate
(cont’d)

SEC staff will not issue a no action letter
with respect to whether a person is an
affiliate
9
Contractual Considerations in
Going Private Transactions

Does the company have any contractual
obligations to maintain SEC reporting?
 registration rights agreements
 prior merger agreements
 warrants
 bond or loan transactions

Usually these restrictions can be handled
by obtaining waivers from the affected
parties
10
Typical Going Private
Transactions:
Advantages and Disadvantages

Reverse Split
In a reverse split, the total number of
shares is reduced on a pro rata basis, and
those shareholders who wind up owning
only a fraction of a share receive cash in
lieu of the fractional share
11
Typical Going Private
Transactions:
Advantages and Disadvantages
(cont’d)
Advantages:

Relatively simple from a legal perspective
 no third party agreement and negotiation
with outside parties required

No appraisal rights available to dissenters
under Delaware law
 but dissenters’ rights are available under
Georgia law
12
Typical Going Private
Transactions:
Advantages and Disadvantages
(cont’d)
Disadvantages:

Requires shareholder approval
 which may present a challenge for some
companies where control is not
sufficiently concentrated to ensure
approval
13
Typical Going Private
Transactions:
Advantages and Disadvantages
(cont’d)
Disadvantages: (cont’d)

Subject to corporate law restrictions on
payments of distributions to shareholders
 not available if company has negative
stockholders’ equity

Absence of appraisal rights (under
Delaware law) may subject a reverse stock
split to greater SEC scrutiny than other
forms of going private transactions
14
Typical Going Private
Transactions:
Advantages and Disadvantages
(cont’d)
Disadvantages: (cont’d)

Less flexibility than a merger transaction
as to who the shareholders of the posttransaction company (the “continuing
shareholders”) will be
15
Typical Going Private
Transactions:
Advantages and Disadvantages
(cont’d)
Tender Offer Followed by a Second-Step
Merger
•
In a cash tender offer, the public shares of
the target company are acquired for cash
•
If the cash tender offer results in 90%
ownership by the acquiror, a second-step
“short form” merger can be performed, which
can be accomplished rapidly since no
shareholders meeting or proxy solicitation will
be required
•
Transaction is subject to the tender offer
rules as well as the going private rules
16
Typical Going Private
Transactions:
Advantages and Disadvantages
(cont’d)
Advantages:
•
Speed of the transaction if 90% of the
shares of each class of stock are
successfully tendered
•
“Entire fairness” test under Delaware law
(which requires that the directors of a
corporation going private engage in fair
dealing and obtain a fair price) is generally
not required if:
 acquiror obtains a non-waivable “majority
of the minority” tender
17
Typical Going Private
Transactions:
Advantages and Disadvantages
(cont’d)
Advantages: (cont’d)
 the price paid in the short-form merger
to the non-tendering shareholders is
the same as the tender price, and
 the controlling stockholder/acquiror
has made no “retributive threats”

Perceived to be less coercive than merger
or reverse stock split on the front end
 becomes coercive if 90%+ approval is
obtained and is followed by “squeeze
out” merger
18
Typical Going Private
Transactions:
Advantages and Disadvantages
(cont’d)
Disadvantages:
•
Difficulty in obtaining 90%-plus
shareholder approval and difficulty of
obtaining a “majority of the minority”
•
Additional expenses and delay if tender
is not successful, since tender will need
to be followed with negotiated merger
and proxy statement
19
Typical Going Private
Transactions:
Advantages and Disadvantages
(cont’d)
Negotiated Merger Transaction with a NewlyCreated Shell Corporation
•
Some corporate statutes permit
companies to differentiate among
shareholders with respect to what they
receive in a merger, thereby facilitating a
merger in which some shareholders
receive stock in the surviving company
while others receive cash
20
Typical Going Private
Transactions:
Advantages and Disadvantages
(cont’d)
Advantages:
•
Fairly typical structure
•
More control over who will have equity in
the surviving company after the
transaction
•
Possible differentiation of merger
consideration among shareholders as
described above
21
Typical Going Private
Transactions:
Advantages and Disadvantages
(cont’d)
Disadvantages:
•
Subject to Delaware’s “entire fairness”
standard, including the requirements of fair
dealing and a fair price
•
However, Delaware law also provides
that the use of a properly functioning
independent committee of directors (i.e.
exercising due care) in arms-length
negotiations with third parties or
management shifts to the plaintiff the
burden to disprove fairness
22
Best Practices in Negotiated
Going Private Transactions
•
Formation of a special committee of the
board of directors in order to negotiate
and/or approve a transaction between the
issuer and the majority or controlling
stockholder
•
Inclusion of certain key provisions in the
definitive merger agreement
23
Best Practices in Negotiated
Going Private Transactions
(cont’d)
•
Obtaining an independent fairness opinion
from a financial advisor to support the final
price being paid to the issuer’s
shareholders as a “fair price”

Having the financial advisor conduct an
extensive market check before and after
the signing of the acquisition agreement to
verify the market value of the issuer
24
Special Committee
Best Practices
•
Independence and disinterest of all special
committee members
•
Prompt formation of the special committee
as soon as it is determined that a majority
or controlling stockholder stands on both
sides of the transaction
•
A record of informed, deliberate and careful
deliberations
25
Special Committee
Best Practices
(cont’d)
•
A record demonstrating that the special
committee was advised by legal counsel of
its duties and responsibilities
 separate from the issuer’s counsel
•
A real ability of the special committee to
“just say no” if the price offered by the
acquiror is not fair and best under the
circumstances
26
Special Committee
Best Practices
(cont’d)
•
The absence of “take it or leave it” or other
coercive behavior by the acquiror, whether
in negotiations or otherwise
•
The payment to the committee member of
a fixed fee that is not excessive and is
determined in advance
27
Recommended Merger
Agreement Provisions
•
If feasible, a “majority of the minority”
provision
•
The ability to entertain other offers without
incurring a breakup fee
•
A nominal breakup fee
•
The ability to easily exercise a fiduciary out
28
Mandated SEC Disclosure
Requirements in
Going Private Transactions
SEC Rule 13e-3 require a discussion of the
following aspects of a going private transaction,
among others:
•
The acquiror’s purpose for effecting the
going private transaction
•
The acquiror’s opinion as to the fairness of
the transaction to the issuer’s shareholders
 if the merger consideration is differentiated
among shareholders, the disclosure must
address the fairness as to each group of
shareholders
29
Mandated SEC Disclosure
Requirements in
Going Private Transactions
(cont’d)
•
All reports, opinions or approvals from
outside parties
•
Any discussions during the two years prior
to the filing of the Schedule 13E-3
concerning transactions between the issuer
and its affiliates
30
Mandated SEC Disclosure
Requirements in
Going Private Transactions
(cont’d)
•
Information regarding contacts or
negotiations during the same period
between the issuer and other parties with
respect to a possible merger, acquisition or
tender offer
•
Certain financial statements
•
Pro forma financial statements
•
Financial projections
31
SEC Hot Buttons
•
SEC generally will review all of the
company’s reports (10-Qs, 10-Ks and
proxy statements) in addition to the going
private transaction
•
SEC will give particular scrutiny to:
 analysis of fair price
 procedural fairness to all groups of
shareholders
 history of negotiations and board
deliberations
32
Post-Closing Issues
•
Policing the 300 shareholder limit
 if the company creeps back over 300
stockholders, SEC reporting requirements
spring back into effect
 former “street” holders will start becoming
record holders
•
Employee stock plans – how to maintain
compliance
33
Post-Closing Issues
(cont’d)
•
Keeping investors informed
 annual/quarterly reports?
 try to stay on “pink sheets”?
 still subject to 10b-5 fraud liability

Insiders still subject to Section 16 reporting
and short-swing profits liability for 90 days
after closing the transaction
34
SHERMAN A. COHEN
Sherman Cohen is a partner with the Atlanta law firm of
Arnall Golden Gregory LLP and co-chair of its Growth
Companies/Private Equity practice group. He
specializes in representing growing companies in a wide
variety of financing and strategic transactions, including
mergers and acquisitions, joint ventures, equity offerings
and debt financings and venture capital transactions.
Clients of Mr. Cohen include publicly-held and private
companies in the technology, healthcare, and distribution
industries.
Cohen is actively involved in business and civic
organizations, and currently serves as an officer and
member of the Board of Directors and Executive
Committee of the American-Israel Chamber of
Commerce, Southeast Region.
35
SHERMAN A. COHEN
(cont’d)
He also is an active member of the Atlanta Venture
Forum and The Technology Association of Georgia,
and serves as a sponsor of the Atlanta chapter of the
Young Entrepreneurs Organization.
Cohen has lectured on a variety of topics, including
going private transactions, the effects of SarbanesOxley on private companies and the legal aspects of
venture capital transactions.
A native of Atlanta, Cohen received his undergraduate
degree from the Wharton School of the University of
Pennsylvania (cum laude), with majors in accounting
and finance and graduated from Columbia University
School of Law, where he was a Harlan Fiske Stone
Scholar.
36