Member Article

As the general counsel of a public company, you are busy working one day and the CEO walks into your office and says, “I’ve been thinking that I would like to make a proposal to take this company private. I need your advice on how to get started.” The following points should be considered to help make the process easier.

• Is this a going private transaction? A going private transaction is one with a controlling shareholder or other affiliated person that sufficiently reduces the number of public stockholders in order to allow the company to deregister from SEC reporting requirements. For example, a transaction in which the CEO, whether alone or in concert with other shareholders and/or other financing sources, buys all the shares held by public shareholders would be a typical going private transaction.
• Who is your client? As general counsel, you need to remember that the company, and more specifically its board of directors, is your client regardless of how long you have worked with your CEO and the strength of your relationship. If the CEO determines to proceed with a going private proposal, he or she will have to get separate legal counsel.
• Does the CEO have a Schedule 13D on file? If the CEO has a Schedule 13D on file, discussions and proposals will have to be publicly announced sooner than otherwise required.
• Remember that the process is critical. Unlike mergers between unaffiliated parties, the process of a going private transaction is just as important as the substantive fairness of the transaction because of the inherent conflicts of interest.
• Form a special committee. Once the CEO tells you about the proposal, the Board of Directors should hold a meeting to form a special committee to review the transaction. The committee should be given broad authority to consider other proposals and to say “no” to any transaction.
• Select special committee members. The Board should consider who among them would be best to serve as special committee members. The members must be absolutely independent of the going private transaction and may not participate in the transaction (other than in the same manner as the other unaffiliated shareholders).
• Heightened review standard. Because going private transactions involve inherent conflicts of interest, courts generally review them with a heightened standard known as the “entire fairness” standard. However, in certain circumstances, a going private transaction will be reviewed under the business judgment standard.
• Advise the Board that there will be litigation. It is typical that one or more lawsuits will be filed within hours of the first public announcement of a going private proposal. These suits may name directors individually and allege various breaches of fiduciary duties regardless of merit.
• Consider the impact of business combination statutes, rights agreements and other change of control provisions. Granting exemptions under business combination statutes and rights agreements (also known as “poison pills”) early in the process may be critical depending on the facts. You should consider the impact of other contractual change of control provisions, especially in indentures which generally give the holders a put right following a change of control.
• Enhanced disclosure obligations. Going private transactions are subject to additional SEC disclosure requirements that do not apply in arms’ length transactions. It is important to understand this requirement at the beginning of the transaction to avoid having to file documents that might prove problematic in litigation.

For more information, please contact one of the following attorneys.