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Today, many in-house counsel face an environment in which their companies’ public equity trades at a low price in a thin trading market with little or no analyst coverage. These companies are unable to take advantage of the benefits available to public companies with established markets for their securities, such as access to capital. At the same time, these companies bear the costs affiliated with having publicly traded securities and a heightened regulatory environment. In this environment, companies may consider engaging in a “going private” transaction, which will allow them to terminate their public filings and other obligations applicable to publicly held entities. Parties contemplating a going-private transaction should take into account structural and procedural considerations, as well as the disclosure and filing requirements under the Securities Exchange Act of 1934. Going-private transactions are complex. Each going-private transaction involves unique facts, circumstances and considerations. This article identifies commonly encountered issues, but does not purport to discuss all the issues that should be considered in an individual going-private transaction. � Structural considerations: A public company may terminate its public filing obligations if its publicly held securities are held of record by less than 300 people, or less than 500 people if the total assets of the company have not exceeded $10 million on the last day of each of the company’s most recent three fiscal years. Common transaction structures to affect going-private transactions include reverse stock splits, issuer or third-party tender offers, short-form mergers and third-party “cash-out” mergers. There are several factors that affect the choice of structure, including the source of funds to finance the “cash-out” portion of the transaction and whether stockholder approval is required. � Procedural considerations: Going-private transactions often take place at a time when the subject company’s stock price is suppressed. Minority stockholders may believe that they are receiving an artificially low price for their equity, with the upside being reserved for management or principal stockholders who will remain holders of equity in the subject company. The board of directors will want to demonstrate that the value paid to minority stockholders is fair. Often, one or more board members are “interested” in the proposed transaction, meaning that the board member is a member of management or a principal stockholder who will continue to hold equity on a post-transaction basis and will, therefore, be treated differently than the minority stockholders in connection with the proposed transaction. If the decision of an interested director is challenged, that director will have the burden of establishing that the decision made by the interested directors is fair and that the directors have satisfied the duty of loyalty. In many instances, the board appoints a special committee of independent directors to evaluate, and often negotiate, the terms of the proposed transaction. The special committee typically will engage its own counsel and financial advisers, and moving forward with the proposed transaction is based on the approval of the special committee. In some, but not many, going-private transactions, consummation of the transaction is conditioned upon approval of holders of a majority of the voting shares held by unaffiliated stockholders or the tender of a majority of the shares held by unaffiliated stockholders. The use of these types of approval procedures work to shield the board from the burden of establishing that the terms of the transaction are fair. However, these approval procedures often also make more difficult the consummation of the transaction. Therefore, use of these approval procedures most often is reserved for situations in which formation of a special committee of disinterested directors is not practicable. ESTABLISH FAIRNESS In any going-private transaction, establishing the fairness of the consideration to be received by the minority or unaffiliated stockholders is of paramount importance. In most cases, the board of directors or special committee retains an outside financial advisor to render a fairness opinion regarding the consideration proposed to be paid to the subject company’s minority or unaffiliated stockholders. The party retained to provide the fairness opinion delivers the opinion to the board or special committee along with a detailed report that includes the analysis and assumptions on which the conclusions expressed in the fairness opinion are based. To satisfy its duty of care, the board or special committee must have adequate time to review and question the fairness opinion and related report. Finally, the announcement of a going-private transaction may result in competing proposals. Generally speaking, directors will have a duty to consider seriously the relative benefits of competing proposals. This duty does not require that the directors obtain the highest price, but instead requires that the directors use their best efforts to obtain the best available price. This may include an organized effort by a board or special committee to seek out interested bidders and to conduct a competition, if possible, designed to maximize stockholder benefit. Disclosure documents delivered to stockholders in connection with a going-private transaction are required to include the disclosures required by Schedule 13E-3 and Regulation M-A. Experience indicates that companies filing with the U.S. Securities and Exchange Commission disclosure documents related to a going-private transaction should anticipate a detailed review by the SEC staff. Careful attention to the disclosure requirements of Schedule 13E-3 and Regulation M-A is necessary. Many of the disclosure requirements set forth in Schedule 13E-3 and Regulation M-A relate to the process that the subject company and its affiliates undertake in structuring the transaction and are designed to help unaffiliated stockholders make an evaluation of the fairness of the proposed transaction. Knowledge of these disclosure requirements can assist with developing transaction structures and determining appropriate procedures to be selected to help assure fairness to unaffiliated stockholders. Given the current public company environment, engaging in a going-private transaction is an alternative that may be considered by many companies. An understanding of structural, procedural and disclosure considerations is important for board members, members of management and majority stockholders to assess this alternative. James S. Ryan III is a partner in the business transactions and health care sections of Jackson Walker (www.jacksonwalker.com)in Dallas. He represents a variety of clients in transactional matters, including acquisitions, divestitures, and private and public securities offerings. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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