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GOING PRIVATE 2003 Practical Tips From the Trenches

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Title: GOING PRIVATE 2003 Practical Tips From the Trenches


1
GOING PRIVATE 2003 Practical Tips From the
Trenches
December 3, 2003 Presented By Sherman A.
Cohen Co-Chair Growth Companies and Private
Equity Group Arnall Golden Gregory LLP 2800 One
Atlantic Center 1201 West Peachtree
Street Atlanta, Georgia 30309-3450 404.873.8630 em
ail sherman.cohen_at_agg.com
2
What Is a Going Private Transaction?
For federal securities law purposes,going
private is the process by which a publicly
traded company is converted to private ownership
by affiliated persons
3
Why Are Going Private Transactions Regulated?
  • Elimination of public share ownership at
    propitious times by management or controlling
    shareholders
  • Transactions themselves may be coercive
  • Potential for overreaching of unaffiliated
    shareholders exists because of lack of arms-
    length bargaining between affiliates and the
    issuer

4
The Effects Necessary to Trigger SEC Rule 13e-3
Governing Going Private Transactions
  • Causing a class of Section 12(g) or 15(d) equity
    securities to be held by fewer than 300 record
    holders
  • or
  • Causing a class of equity securities not to be
    listed on a securities exchange or authorized to
    be quoted on an inter-dealer quotation system

5
Types of Transactions Covered by Rule 13e-3
  • Purchase of an equity security by issuer or
    affiliate of the issuer
  • Tender offer for an equity security by an issuer
    or affiliate of the issuer
  • Proxy solicitation subject to proxy rules
    covering merger, consolidation or recapitalization

6
Types of Transactions Covered by Rule
13e-3(contd)
  • A sale of substantially all of the assets of an
    issuer to its affiliate or group of affiliates
  • A reverse stock split of a class of equity
    securities involving the purchase of fractional
    interests

7
Definition of Affiliate
  • Person who controls, is controlled by, or is
    under common control with the issuer
  • According to the SEC, factors indicating such a
    control relationship include
  • common board membership between the acquiror and
    the issuer
  • significant management equity participation in
    the acquiror
  • generally more than 10

8
Definition of Affiliate(contd)
  • in the event of an acquisition by an unaffiliated
    entity where the issuers management will remain
    intact, relevant factors include
  • increases in consideration to be received by
    management
  • alterations in managements executive agreements
    favorable to such management
  • the equity participation of management in the
    acquiror, and
  • the representation of management on the board of
    the acquiror

9
Definition of Affiliate(contd)
  • SEC staff will not issue a no action letter with
    respect to whether a person is an affiliate

10
Contractual Considerations in Going Private
Transactions
  • Does the company have any contractual obligations
    to maintain SEC reporting?
  • registration rights agreements
  • prior merger agreements
  • warrants
  • bond or loan transactions
  • Usually these restrictions can be handled by
    obtaining waivers from the affected parties

11
Typical Going Private Transactions Advantages
and Disadvantages
  • Reverse Split
  • In a reverse split, the total number of shares
    is reduced on a pro rata basis, and those
    shareholders who wind up owning only a fraction
    of a share receive cash in lieu of the fractional
    share

12
Typical Going Private Transactions Advantages
and Disadvantages(contd)
  • Advantages
  • Relatively simple from a legal perspective
  • no third party agreement and negotiation with
    outside parties required
  • No appraisal rights available to dissenters under
    Delaware law
  • but dissenters rights are available under
    Georgia law

13
Typical Going Private Transactions Advantages
and Disadvantages(contd)
  • Disadvantages
  • Requires shareholder approval
  • which may present a challenge for some companies
    where control is not sufficiently concentrated to
    ensure approval

14
Typical Going Private Transactions Advantages
and Disadvantages(contd)
  • Disadvantages (contd)
  • Subject to corporate law restrictions on payments
    of distributions to shareholders
  • not available if company has negative
    stockholders equity
  • Absence of appraisal rights (under Delaware law)
    may subject a reverse stock split to greater SEC
    scrutiny than other forms of going private
    transactions

15
Typical Going Private Transactions Advantages
and Disadvantages(contd)
  • Disadvantages (contd)
  • Less flexibility than a merger transaction as to
    who the shareholders of the post-transaction
    company (the continuing shareholders) will be

16
Typical Going Private Transactions Advantages
and Disadvantages(contd)
  • Tender Offer Followed by a Second-Step Merger
  • In a cash tender offer, the public shares of the
    target company are acquired for cash
  • If the cash tender offer results in 90 ownership
    by the acquiror, a second-step short form
    merger can be performed, which can be
    accomplished rapidly since no shareholders
    meeting or proxy solicitation will be required
  • Transaction is subject to the tender offer rules
    as well as the going private rules

17
Typical Going Private Transactions Advantages
and Disadvantages(contd)
  • Advantages
  • Speed of the transaction if 90 of the shares of
    each class of stock are successfully tendered
  • Entire fairness test under Delaware law (which
    requires that the directors of a corporation
    going private engage in fair dealing and obtain a
    fair price) is generally not required if
  • acquiror obtains a non-waivable majority of the
    minority tender

18
Typical Going Private Transactions Advantages
and Disadvantages(contd)
  • Advantages (contd)
  • the price paid in the short-form merger to the
    non-tendering shareholders is the same as the
    tender price, and
  • the controlling stockholder/acquiror has made no
    retributive threats
  • Perceived to be less coercive than merger or
    reverse stock split on the front end
  • becomes coercive if 90 approval is obtained and
    is followed by squeeze out merger

19
Typical Going Private Transactions Advantages
and Disadvantages(contd)
  • Disadvantages
  • Difficulty in obtaining 90-plus shareholder
    approval and difficulty of obtaining a majority
    of the minority
  • Additional expenses and delay if tender is not
    successful, since tender will need to be followed
    with negotiated merger and proxy statement

20
Typical Going Private Transactions Advantages
and Disadvantages(contd)
Negotiated Merger Transaction with a
Newly-Created Shell Corporation
  • Some corporate statutes permit companies to
    differentiate among shareholders with respect to
    what they receive in a merger, thereby
    facilitating a merger in which some shareholders
    receive stock in the surviving company while
    others receive cash

21
Typical Going Private Transactions Advantages
and Disadvantages(contd)
Advantages
  • Fairly typical structure
  • More control over who will have equity in the
    surviving company after the transaction
  • Possible differentiation of merger consideration
    among shareholders as described above

22
Typical Going Private Transactions Advantages
and Disadvantages(contd)
Disadvantages
  • Subject to Delawares entire fairness standard,
    including the requirements of fair dealing and a
    fair price
  • However, Delaware law also provides that the use
    of a properly functioning independent committee
    of directors (i.e. exercising due care) in
    arms-length negotiations with third parties or
    management shifts to the plaintiff the burden to
    disprove fairness

23
Best Practices in NegotiatedGoing Private
Transactions
  • Formation of a special committee of the board of
    directors in order to negotiate and/or approve a
    transaction between the issuer and the majority
    or controlling stockholder
  • Inclusion of certain key provisions in the
    definitive merger agreement

24
Best Practices in NegotiatedGoing Private
Transactions(contd)
  • Obtaining an independent fairness opinion from a
    financial advisor to support the final price
    being paid to the issuers shareholders as a
    fair price
  • Having the financial advisor conduct an extensive
    market check before and after the signing of the
    acquisition agreement to verify the market value
    of the issuer

25
Special CommitteeBest Practices
  • Independence and disinterest of all special
    committee members
  • Prompt formation of the special committee as soon
    as it is determined that a majority or
    controlling stockholder stands on both sides of
    the transaction
  • A record of informed, deliberate and careful
    deliberations

26
Special CommitteeBest Practices(contd)
  • A record demonstrating that the special committee
    was advised by legal counsel of its duties and
    responsibilities
  • separate from the issuers counsel
  • A real ability of the special committee to just
    say no if the price offered by the acquiror is
    not fair and best under the circumstances

27
Special CommitteeBest Practices(contd)
  • The absence of take it or leave it or other
    coercive behavior by the acquiror, whether in
    negotiations or otherwise
  • The payment to the committee member of a fixed
    fee that is not excessive and is determined in
    advance

28
Recommended MergerAgreement Provisions
  • If feasible, a majority of the minority
    provision
  • The ability to entertain other offers without
    incurring a breakup fee
  • A nominal breakup fee
  • The ability to easily exercise a fiduciary out

29
Mandated SEC DisclosureRequirements inGoing
Private Transactions
SEC Rule 13e-3 require a discussion of the
following aspects of a going private transaction,
among others
  • The acquirors purpose for effecting the going
    private transaction
  • The acquirors opinion as to the fairness of the
    transaction to the issuers shareholders
  • if the merger consideration is differentiated
    among shareholders, the disclosure must address
    the fairness as to each group of shareholders

30
Mandated SEC DisclosureRequirements inGoing
Private Transactions(contd)
  • All reports, opinions or approvals from outside
    parties
  • Any discussions during the two years prior to the
    filing of the Schedule 13E-3 concerning
    transactions between the issuer and its affiliates

31
Mandated SEC DisclosureRequirements inGoing
Private Transactions(contd)
  • Information regarding contacts or negotiations
    during the same period between the issuer and
    other parties with respect to a possible merger,
    acquisition or tender offer
  • Certain financial statements
  • Pro forma financial statements
  • Financial projections

32
SEC Hot Buttons
  • SEC generally will review all of the companys
    reports (10-Qs, 10-Ks and proxy statements) in
    addition to the going private transaction
  • SEC will give particular scrutiny to
  • analysis of fair price
  • procedural fairness to all groups of shareholders
  • history of negotiations and board deliberations

33
Post-Closing Issues
  • Policing the 300 shareholder limit
  • if the company creeps back over 300 stockholders,
    SEC reporting requirements spring back into
    effect
  • former street holders will start becoming
    record holders
  • Employee stock plans how to maintain compliance

34
Post-Closing Issues (contd)
  • Keeping investors informed
  • annual/quarterly reports?
  • try to stay on pink sheets?
  • still subject to 10b-5 fraud liability
  • Insiders still subject to Section 16 reporting
    and short-swing profits liability for 90 days
    after closing the transaction

35
SHERMAN A. COHEN Sherman Cohen is a partner with
the Atlanta law firm of Arnall Golden Gregory LLP
and co-chair of its Growth Companies/Private
Equity practice group. He specializes in
representing growing companies in a wide variety
of financing and strategic transactions,
including mergers and acquisitions, joint
ventures, equity offerings and debt financings
and venture capital transactions. Clients of Mr.
Cohen include publicly-held and private companies
in the technology, healthcare, and distribution
industries. Cohen is actively involved in
business and civic organizations, and currently
serves as an officer and member of the Board of
Directors and Executive Committee of the
American-Israel Chamber of Commerce, Southeast
Region.
36
SHERMAN A. COHEN (contd) He also is an active
member of the Atlanta Venture Forum and The
Technology Association of Georgia, and serves as
a sponsor of the Atlanta chapter of the Young
Entrepreneurs Organization. Cohen has lectured
on a variety of topics, including going private
transactions, the effects of Sarbanes-Oxley on
private companies and the legal aspects of
venture capital transactions. A native of
Atlanta, Cohen received his undergraduate degree
from the Wharton School of the University of
Pennsylvania (cum laude), with majors in
accounting and finance and graduated from
Columbia University School of Law, where he was a
Harlan Fiske Stone Scholar.
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