Understanding the Process of Taking a Public Company Private and Its Implications
In recent months, the statement by Elon Musk to acquire Twitter privately has sparked renewed interest in the topic of how a public company can be taken private. This move brings to light the complexities and benefits of shifting a publicly traded company to a private entity. Let's explore the advantages and steps involved in this process.
Advantages of Going Private
Going private offers several significant advantages for a company. These benefits can be summarized as follows:
Total Control and Reduced Interference
Once a company becomes private, it eliminates the interference from shareholders, providing the founders or management team with greater control over decision-making processes. This freedom can be crucial for strategic initiatives and long-term planning without the constraints of public opinion or shareholder demands.
Reduced Regulatory Burden
Private companies are exempt from stringent regulatory requirements imposed by regulatory bodies such as the Securities and Exchange Commission (SEC) in the United States or SEBI in India. This reduces compliance costs and allows for more focused financial resources allocation.
Flexible Earnings Expectations
Public companies are subject to quarterly earnings reports, which can heavily affect their stock prices and reputation. Private companies can avoid these pressures, allowing for a more relaxed and strategic approach to financial performance.
Enhanced Research and Development
Private companies can allocate more resources towards research and development and capital expenditures without the need to distribute dividends. This extra funding can drive innovation and growth, giving the company a competitive edge in its industry.
How to Take a Public Company Private
The process of taking a public company private involves several strategic and legal steps. Here are the key steps:
Acquisition of Maximum Shares
The first step involves acquiring a significant portion of the company's shares, often at a premium. For instance, when Elon Musk offered a 20% premium to take Twitter private, he demonstrated buying power and commitment. This step aims to achieve a controlling stake or gain enough influence to initiate the process.
Board Approval and Shareholder Vote
After acquiring a controlling interest, the next step is securing board approval and obtaining shareholder consent. For a large company like Dell, specific rules apply based on the company's state of incorporation. For most Delaware-based companies, a merger agreement is typically used, where the acquiring party negotiates with the target company's board. Once the deal is approved, a Proxy Form must be filed with the SEC, and a shareholder vote is scheduled. Attaining at least 51% of the shares is necessary, as non-voting counts as a negative vote.
Evaluate Regulatory Requirements
Depending on the company's state of incorporation and the type of acquisition (merger agreement or tender offer), specific regulatory requirements must be met. These include securing central government approval, obtaining creditor and debenture holder consent, and ensuring compliance with relevant laws and regulations.
Evaluation of the Secondary Process
In certain cases, a tender offer is used, where the acquiring party files a form 14D-9 with the SEC, listing the purchase price and the number of shares the buyer is willing to acquire. Mutual funds generally follow the board's recommendation, making it challenging to win a tender offer. However, if the acquiring party successfully obtains a controlling interest, they can then proceed to file a merger agreement, effectively throwing out the board and securing the deal's acceptance.
Forced Takeover at 90% Shares
Once a majority interest is acquired, under Delaware law, the acquiring party can force minority shareholders to accept the deal at a predetermined price, provided that 90% of the shares have been acquired.
Conclusion
Going private involves careful planning, significant resources, and adherence to stringent legal protocols. The advantages, while compelling, come with responsibilities and challenges. Whether driven by strategic, financial, or other motives, the process of transforming a public company into a private entity is a complex journey that requires a deep understanding of regulatory landscapes and stakeholder dynamics.