Going Private Transaction

US Going Private Transaction

Key issue

For going private transactions, the most important legal issue is to make sure that a controlling stockholder and corporate executives of a target company protect interests of public investors of the company though this going private transaction.


Advantages

• Permiting a controlling stockholder and its publicly traded subsidiary to integrate their operations more efficiently and effectively, without concerns for fairness to other stockholders.
• Allowing the board of directors to focus on long-term objectives rather than short-term profits to meet the expection.
• Permiting the public stockholders to realize a better price for their shares than they would realize from continuing to hold the shares or selling in the market, perhaps due to low trading volumes, or lack of any other buyer.
• In the case of a leveraged buyout, allowing the acquiror and the target company to realize the tax benefits of a more leveraged capital structure than would be acceptable for the target as a public company.
• Making sure that the company to save costs and avoid the disadvantages of complying with the requirements of securities laws, which require, among other things, periodic disclosure of material strategic and operating information and corporate governance.
• Reducing the misunderstanding and thus lawsuits rerived from public stockholders.

Disadvantages

• Loss of visibility
• The inability to quickly tap the public markets for debt or equity financing

Structure

In brief, a going private transaction may be accomplished in the following ways:

One-way step; or
Tender offer followed by a back-end merger (known as a two-step merger)

Whatever ways is adopted must comply with the fiduciary duty required in Delaware General Corporation Law (the "DGCL").  In addition, the choice of these structure depends in part on whether the going private transaction involves a controlling stockholder.


Procedure

First of all, an special committee consists of independent, disinterested directors of a target company shall be set up by the board of directors of the target company, after receiving a tender offer by a controlling stockholder.

Then, the tender offer of going private transaction must be approved by the majority of minority stockholders, commonly referred to as the majority of the minority doctrine.

If any of these steps above failed to be accomplished, the reviewing court will apply the stringent entire fairness doctrine and place the burden of proving the procedure and substantive fairmess to the controlling stockholer.


Disclosure

Federal securities laws give rise to many information disclosure requirements that apply to going private transactions. SEC impose many filing requirements such as Schedule 14A, Schedule 14C and Schedule TO.


Litigation

The fiduciary duty required in the DGCL, a famous state law on corporate governance, is a critical liability that is not only owed by the board of directors to stockholders, but also owed by a controlling stockholder for minority stockholders.

There are two types of lawsuits about going private transactions. The one is brought by an aquiror against a takeover defensive by a target company"s board of directors. The another is brought by stockholders of the target company, based on claims of breach of fiduciary duties of management, resulting in a derivative action, or claims of breach of Section 14(A) of the Securities Exchange Act of 1934, or opposition to the going private transaction, then requesting their appraisal right.


Case

Case 1: In re Appraisal of Dell Inc.
Although Michael Dell and the board of directors met the fiduciary duties required in the DGCL and implemented procedural safeguards, the judge of the reviewing court held that the trading price of the proposed going private transaction did not demonstrate the intrinsic value of the target company.
 
Case 2: In re Dole Food Co., Inc. Stockholder Litigation
During the going private transaction of Dole Food Co., Inc., David Murdock, the CEO and the controlling stockholder of the target company, had taken series of measures to reduce stock price before he filed a tender offer and provided the special comittee with wrong information. Thus, the reviewing court held that he violated the fiduciary duty and were fined with millions of dollars.

Case 3: Chinese Concepts Stocks
With poor protection of Cayman Islands Company Law for public investors, many companies of China choose to register in Cayman Islands, rather than Delaware state, which requires that a controlling stockholder and the board of directors of a target company owe a fiduciary duty to minority stockholders. The result is that many Chinese companies, especially  in Internet sector, were starting to preparing going private transactions without concerns of minority stockholders several years after going public.