© 2003 haynes and boone, llp an introduction to going private transactions by jennifer wisinski...

© 2003 Haynes and Boone, LLP

An IntroductionAn Introductiontoto

Going Private Going Private TransactionsTransactions

byby

Jennifer WisinskiJennifer Wisinski

June 18, 2003June 18, 2003


What is aWhat is a“going private “going private transaction”?transaction”?

Three elementsThree elements::

1.1. As a result of the transaction, a class of equity As a result of the transaction, a class of equity securities will not be listed on a securities securities will not be listed on a securities exchange or quoted on an inter-dealer quotation exchange or quoted on an inter-dealer quotation system or a class of equity securities will be held system or a class of equity securities will be held by fewer than 300 persons.by fewer than 300 persons.


What is aWhat is a“going private “going private transaction”?transaction”?

Three elements (cont’d)Three elements (cont’d)::

2.2. Undertaken by the issuer or an affiliate of the Undertaken by the issuer or an affiliate of the issuer.issuer.

3.3. Involves a merger, tender offer or reverse stock Involves a merger, tender offer or reverse stock split.split.


Why do companiesWhy do companies“go private”?“go private”?

TraditionalTraditional::Buy out by management or a controlling stockholder. It is common in Buy out by management or a controlling stockholder. It is common in a management buyout for management to team up with a third party a management buyout for management to team up with a third party financing source who may provide substantial equity capital and may financing source who may provide substantial equity capital and may control or significantly influence the buyout group.control or significantly influence the buyout group.

CurrentCurrent::With the enactment of the Sarbanes-Oxley Act and increasing With the enactment of the Sarbanes-Oxley Act and increasing corporate governance, combined with the recent relative inactivity in corporate governance, combined with the recent relative inactivity in the capital markets, some public companies, especially small-to-the capital markets, some public companies, especially small-to-medium sized companies, are beginning to think that the costs of medium sized companies, are beginning to think that the costs of “being public” outweigh the benefits.“being public” outweigh the benefits.


What is the typical What is the typical structure of astructure of a

going private transaction?going private transaction?

• MergerMerger• Tender Offer, followed by a mergerTender Offer, followed by a merger• Reverse Stock Split (less common but Reverse Stock Split (less common but

used to terminate SEC reporting used to terminate SEC reporting obligations)obligations)


Why does the SEC have Why does the SEC have special rules that apply to special rules that apply to

going private going private transactions?transactions?

The SEC has historically viewed going private The SEC has historically viewed going private transactions with a critical eye because of the inherent transactions with a critical eye because of the inherent conflicts of interest involved in the transaction where conflicts of interest involved in the transaction where management or a controlling stockholder stands on both management or a controlling stockholder stands on both sides of the transaction. As a result, the SEC rules sides of the transaction. As a result, the SEC rules require additional disclosure in a going private require additional disclosure in a going private transaction that is not required for typical M&A transaction that is not required for typical M&A transactions.transactions.


What is a typical process for a What is a typical process for a going private transaction and going private transaction and why is the process important?why is the process important?

The “process” of a going private transaction is important The “process” of a going private transaction is important because the SEC places an emphasis on procedural because the SEC places an emphasis on procedural fairness as well as substantive fairness. In addition, a fair fairness as well as substantive fairness. In addition, a fair process may be helpful in handling litigation that often is process may be helpful in handling litigation that often is filed when a going private transaction is announced. A filed when a going private transaction is announced. A fair process will help support the argument that the fair process will help support the argument that the directors did not breach their fiduciary duties in the directors did not breach their fiduciary duties in the transaction. As a result, a key element to a successful transaction. As a result, a key element to a successful going private transaction is management’s emphasis on a going private transaction is management’s emphasis on a fair process.fair process.


The typical process (up to The typical process (up to signing the definitive signing the definitive agreements) involves:agreements) involves:

• Company announces that it has received a Company announces that it has received a proposalproposal– the announcement often results in litigation being filed and the announcement often results in litigation being filed and

may lead to other potential bidders making an offer to buy may lead to other potential bidders making an offer to buy the companythe company

• Board forms a Special Committee of directors Board forms a Special Committee of directors who will not participate in the company after who will not participate in the company after the closingthe closing– members should be independent and have bargaining members should be independent and have bargaining

powerpower


The typical process (cont’d):The typical process (cont’d):• Special Committee hires its own legal advisors and Special Committee hires its own legal advisors and

financial advisorfinancial advisor• Special Committee determines negotiation process Special Committee determines negotiation process

and begins to negotiate the terms of the transaction and begins to negotiate the terms of the transaction (a formal auction may be helpful but is not (a formal auction may be helpful but is not necessarily required to obtain the best price)necessarily required to obtain the best price)

• Special Committee considers any other offers made Special Committee considers any other offers made for the companyfor the company

• Buyout group works to arrange financingBuyout group works to arrange financing


The typical process (cont’d):The typical process (cont’d):

• Transaction agreements are drafted and negotiatedTransaction agreements are drafted and negotiated• Financial advisor delivers fairness opinion to Special Financial advisor delivers fairness opinion to Special

CommitteeCommittee• Special Committee approves the transactionSpecial Committee approves the transaction• The parties sign and announce the execution of the The parties sign and announce the execution of the

transaction agreementstransaction agreements


What SEC filingsWhat SEC filingsare required in aare required in a

going private transaction?going private transaction?• Schedule 13DSchedule 13D• Schedule 13E-3Schedule 13E-3• Schedule 14A proxy statement if proxies are being Schedule 14A proxy statement if proxies are being

solicitedsolicited– If the transaction is structured as a merger or a reverse stock split, a If the transaction is structured as a merger or a reverse stock split, a

preliminary proxy statement is prepared and filed with the SEC. The SEC preliminary proxy statement is prepared and filed with the SEC. The SEC often reviews going private transactions and the proxy statement cannot often reviews going private transactions and the proxy statement cannot be finalized and mailed to stockholders until the SEC clears the documentbe finalized and mailed to stockholders until the SEC clears the document


What SEC filings are What SEC filings are required (cont’d) … ?required (cont’d) … ?

• Schedule TO if the transaction involves a tender Schedule TO if the transaction involves a tender offeroffer– If the transaction is structured as a tender offer, tender offer If the transaction is structured as a tender offer, tender offer

documents are prepared and filed with the SEC and the tender offer is documents are prepared and filed with the SEC and the tender offer is commenced (the SEC does not have the right to review and comment commenced (the SEC does not have the right to review and comment on the tender offer documents before they are mailed). The SEC may on the tender offer documents before they are mailed). The SEC may comment on the tender offer documents after they are mailed.comment on the tender offer documents after they are mailed.


What types of additional What types of additional disclosures are necessary?disclosures are necessary?• FairnessFairness – – the company and each affiliate in the the company and each affiliate in the

transaction must state whether they reasonably believe transaction must state whether they reasonably believe the transaction is fair or unfair to the unaffiliated the transaction is fair or unfair to the unaffiliated stockholders, including the reasons for their beliefs (the stockholders, including the reasons for their beliefs (the SEC will review this carefully)SEC will review this carefully)

• Purpose of the TransactionPurpose of the Transaction – – a description of why a description of why company is engaging in the transaction at this time and company is engaging in the transaction at this time and what alternatives were considered (the SEC will review what alternatives were considered (the SEC will review this carefully)this carefully)

• Plans or ProposalsPlans or Proposals – – a description of plans or a description of plans or proposals for extraordinary transactions involving the proposals for extraordinary transactions involving the companycompany


Types of additional Types of additional disclosures (cont’d) …disclosures (cont’d) …

• Past ContactsPast Contacts – – a description of offers and negotiations a description of offers and negotiations relating to an acquisition of the company during the past two relating to an acquisition of the company during the past two years (it is important for the company to keep detailed notes years (it is important for the company to keep detailed notes with dates of meetings, telephone calls, etc., relating to with dates of meetings, telephone calls, etc., relating to potential acquisition)potential acquisition)

• Background of Affiliates in the TransactionBackground of Affiliates in the Transaction – – the identity the identity and background of all affiliates involved in the transactionand background of all affiliates involved in the transaction


Types of additional Types of additional disclosures (cont’d) …disclosures (cont’d) …

• AlternativesAlternatives – – a description of alternative transactions the a description of alternative transactions the company considered or the possibility of doing no company considered or the possibility of doing no transactiontransaction

• Reports and AppraisalsReports and Appraisals – – all reports, opinions and all reports, opinions and appraisals received from outside parties that are materially appraisals received from outside parties that are materially related to the transaction (including “board books” created related to the transaction (including “board books” created by the financial advisor)by the financial advisor)


How long does theHow long does theprocess take?process take?

• Length of time before the transaction agreements are Length of time before the transaction agreements are executed depends onexecuted depends on– whether and for how long a formal auction is in place;whether and for how long a formal auction is in place;– how long it takes the buyout group to arrange financing;how long it takes the buyout group to arrange financing;– length of negotiations on transaction agreements between the issuer and length of negotiations on transaction agreements between the issuer and

the buy out group; andthe buy out group; and– length of negotiations among the members of the buyout group.length of negotiations among the members of the buyout group.

• Length of time from signing to closing depends on the Length of time from signing to closing depends on the time necessary to clear SEC comments if reviewed.time necessary to clear SEC comments if reviewed.


In summary, what should a In summary, what should a company that is getting company that is getting ready for a going private ready for a going private

transaction do to help it run transaction do to help it run smoothly?smoothly?

• Select diligent and independent board Select diligent and independent board members to serve on the special committeemembers to serve on the special committee

• Give the special committee broad authority to Give the special committee broad authority to negotiate the transaction on behalf of the negotiate the transaction on behalf of the company and consider alternativescompany and consider alternatives

• Hire experienced legal and financial advisorsHire experienced legal and financial advisors


In summary, cont’d …In summary, cont’d …

• Keep detailed notes of meetings and discussions for Keep detailed notes of meetings and discussions for disclosure in the SEC documentsdisclosure in the SEC documents

• Obtain a price that is demonstrably fair (within the Obtain a price that is demonstrably fair (within the ranges of the fairness opinion)ranges of the fairness opinion)

© 2003 haynes and boone, llp an introduction to going private transactions by jennifer wisinski...

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