OPINONS Public acquisitions and going private transactions

BY GERALD T. NOWAK

eing a ain’t what it company exhibits any material flaws before surround the nature of the relationship after used to be. Between the additional closing. The seller would like the ability to the transaction, i.e., whether an officer, for Bregulatory burdens and liability accept a better offer if one comes along, but example, would hold a material amount of exposure, real or perceived, imposed on wants certainty of closure if one does not. the company’s securities, be on the board of U.S. public under Sarbanes- Thus, the negotiations in a public company directors or otherwise be in a position to Oxley and the, shall we say, less than robust acquisition surround conditions to closing direct the management and policies of the capital markets in the United States, public and "deal protection" measures, like break- company going forward. companies are increasingly deciding that the up fees and no-shop provisions. A public A going private transaction will also likely costs of being public outweigh the benefits. company acquisition can be structured as a trigger heightened duties under Delaware At the same time, and strate- merger, subject to a stockholder vote, or a , typically leading the board to gic are finding that the reduced . The principal advantage of a form an "independent" special committee of equity valuations extant in the public mar- merger is greater certainty of execution; the the board, with separate advisors, to consid- kets make some, though clearly not all, pub- principal advantage of a tender offer is er the transaction. lic companies a compelling value. These speed. The concern raised by a going private two dynamics combined are resulting in Under the U.S. federal securities laws, a transaction, under both SEC rules and people taking a hard look at various forms public company acquisition becomes a Delaware law, is that management, with all of "going private" transactions. "Going pri- "going private" transaction when an affiliate of its inside information and insight into the vate" in its broadest sense may be, for this of the company becomes sufficiently inter- company, will attempt to buy the company recessionary period, what "going public" was for the preceding boom – the emblem- atic transaction that captures the essence of Companies looking to effect a going private transaction the market’s current mood. "Going private" is both a descriptive term used to describe any transaction that results should not be deterred from doing so by the legal regime in the target company ceasing to be publicly held, and a technical term used in the United States to describe a subset of those transac- surrounding these types of transactions tions, towit, any transaction involving an affiliate of the company that results in the ested in the transaction as to trigger the from the public at a bargain price. The SEC, company ceasing to be an SEC reporting SEC’s "going private" rules. Those rules in its typical fashion, addresses this issue by company or, if it is an exchange-listed com- require expanded disclosure regarding such requiring additional disclosure. Delaware pany, ceasing to be so listed. In deference to a transaction, including the purposes of, rea- law addresses the issue in its typical fashion, my colleagues at bar, I will use "going pri- sons for and alternatives to the transaction, by imposing stricter scrutiny on the board’s vate" in its technical sense, and use the term whether the related party believes the trans- discharge of its fiduciary obligations. "public company acquisition" to describe action is fair to the unaffiliated stockholders In each case, companies looking to effect a the broader category. and how it reached that conclusion, whether going private transaction should not be Public company acquisitions are funda- the company or the related party has deterred from doing so by the legal regime mentally different animals from private received any reports or appraisals regarding surrounding these types of transactions. At company acquisitions. When acquiring a the transaction, a statement of plans or pro- the end of the day, such a transaction may be private company, much of the negotiations posals regarding the company’s structure or the right thing for the enterprise, a fair deal centre around indemnification issues, i.e., , including asset sales, post-transac- for the public and a compelling value for the who will indemnify whom, for what, how tion and, if material, pro forma information new owners. The legal regime does no more long, under what circumstances and in what for the company going forward. The SEC than ask the sponsor to make its case pub- amount. In a public company acquisition, reviews all going private transactions. licly and ask the directors to consider the however, there (typically) is no indemnity The definition of "affiliate" for purposes of matter fairly and thoroughly. because there (typically) is no one who can the going private rules is subject to the typi- indemnify. One can’t expect to go back to cal "controls, is controlled by, or is under "the public" to satisfy an indemnity obliga- common control with" test generally appli- Gerald T. Nowak is a tion. (One could theoretically get an indem- cable under U.S. federal securities law. The partner in Kirkland & Ellis' nity from a large stockholder, or place funds SEC has consistently taken the position that corporate practice. He can into escrow, but this is rare.) What buyers members of senior management are affili- be contacted on +1 (312) and sellers care about in a public company ates for this purpose. Whether an affiliate of 861 2075 or by email: acquisition is the certainty of closing. The the company has a sufficient interest in a [email protected] buyer would like the company to be irrevo- transaction to make it a technical "going pri- cably obligated to complete the transaction, vate" transaction is a matter of facts and cir- but wants the option to walk away if the cumstances. Factors typically examined www.financierworldwide.com FW May / June 2003 0