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U.S. public companies may decide to delist — or “go private” — for various strategic and financial reasons. For example, chain retailer Walgreens recently finalized a private equity deal worth approximately $10 billion, after trading on the New York Stock Exchange for nearly a century. The company has endured years of regulatory and operational struggles, and management decided delisting was the best path to achieve its “ambitious turnaround plans.” This strategy aims to give management the opportunity to leverage the expertise of a private equity investor with a “strong track record of successful retail turnarounds” and to eliminate the pressure of Wall Street scrutiny.
While delisting can lower a company’s compliance costs and alleviate market pressure to deliver short-term results, it isn’t a decision to be taken lightly. In fact, going private can be nearly as complex as going public.
Meeting the SEC requirements
The U.S. Securities and Exchange Commission (SEC) scrutinizes going-private transactions to ensure that unaffiliated shareholders are treated fairly. A company that’s going private — together with its controlling shareholders and other affiliates — must, among other requirements, file detailed disclosures pursuant to SEC Rule 13e-3.
The SEC allows a public company to deregister its equity securities when they’re held by fewer than 300 shareholders of record, or fewer than 500 shareholders of record if the company doesn’t have significant assets. Depending on the facts and circumstances, a company may no longer be required to file periodic reports with the SEC once the number of shareholders of record drops below these thresholds.
Disclosing the details
To comply with SEC Rule 13e-3 and Schedule 13E-3, companies executing a going-private transaction must disclose:
- The purposes of the transaction, including any alternatives considered and the reasons they were rejected,
- The fairness of the transaction, both substantive (price) and procedural, and
- Any reports, opinions and appraisals “materially related” to the transaction.
The SEC’s rules are intended to protect shareholders, and some states have takeover statutes to provide certain dissenting shareholders with appraisal rights. Delisting results in a limited trading market to be able to sell the stock, significantly lowering liquidity for investors.
Failure to act with the utmost fairness and transparency can bring harsh consequences. SEC scrutiny can lead to costly damages awards and penalties if a company is guilty of treating minority shareholders unfairly or making misleading disclosures.
Weighing the pros and cons
To withstand SEC scrutiny and avoid lawsuits, it’s critical to structure going-private transactions in a manner that ensures transparency, procedural fairness and a fair price. Management also must realistically assess the deal’s long-term implications. Besides high transaction costs and exposure to legal and regulatory risks, delisting could limit the company’s access to capital, impair the perceived value of its brands, reduce liquidity for the remaining shareholders and, in the case of a leveraged buyout, saddle it with a heavy debt burden.
Contact us to help evaluate your options. If it’s time for your company to exit the public markets, we can assist with the SEC’s financial reporting requirements and help structure a deal that’s right for your situation.
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