Financial Reporting Issues to Consider in “Going Private” Transactions

In the midst of mounting inflation, supply shortages, geopolitical turmoil, threats of cyberattacks and continuing COVID-19 concerns, public stock prices are expected to fluctuate in the coming months. This situation has unsettled shareholders and makes long-term strategic planning challenging. Now might be a good time to consider getting off the rollercoaster by taking your company out of the public eye by “going private”.

While public companies enjoy easier access to capital, some small- and mid-market public companies may benefit from delisting. “Going private” stabilizes a company’s value, because it allows management to focus on long-term goals rather than satisfying Wall Street’s demand for short-term profits. Plus, it can reduce compliance costs, lower taxes and eliminate much public and regulatory scrutiny.

But going private can be nearly as complex as going public. So it’s important to understand the financial reporting requirements before you take the plunge.

SEC requirements

Among other requirements, a company that’s going private — together with its controlling shareholders and other affiliates — must file detailed disclosures pursuant to Securities and Exchange Commission (SEC) Rule 13e-3.

The SEC scrutinizes such transactions to ensure that unaffiliated shareholders are treated fairly. To comply with SEC Rule 13e-3 and Schedule 13E-3, companies 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.

Failure to act with the utmost fairness and transparency can bring harsh consequences. The SEC’s rules are intended to protect shareholders, and some states even have takeover statutes to provide shareholders with dissenters’ rights. Such a transition results in a limited trading market to be able to sell the stock.

Handle with care

Going private certainly isn’t for every public company, and other possible remedies exist for problems such as high compliance costs and corporate governance risk. But if the timing’s right and your shareholders are supportive, going private could be a great way to improve your company’s outlook.

Beware, however, that going-private transactions require diligence to withstand SEC scrutiny and prevent lawsuits. If you’re planning to delist your company’s stock, we can help structure and report your transaction to ensure transparency, procedural fairness and a fair price. Contact us to determine what’s right for your company’s situation.