Any small public company with thinly traded or undervalued stock should re-evaluate the benefits and burdens of being a public company and consider going private.
Being a public company generally provides investment liquidity for stockholders, easier access to capital, the option to use company stock as capital in an acquisition and an enhanced corporate image. While these benefits often justify the additional accounting, legal and other costs of being a public company, their availability depends upon active trading of the company’s stock and a market price that does not undervalue the company.
As a result of the Sarbanes-Oxley Act and other reforms, accounting, legal and other costs of being public will increase significantly in 2004 — more than doubling for some companies — and even with an improving economy, the typical small public company’s stock does not actively trade and its market price does not fairly reflect the company’s value. Why stay public?
A private company does not have to implement complex and costly internal controls or satisfy most other requirements of Sarbanes-Oxley, file reports with the SEC or comply with the corporate governance rules and onerous disclosure requirements of the SEC, the exchanges and NASDAQ. Thus, a private company’s costs are much lower, its management can focus on long-term goals and values rather than on each quarter’s financial results and the attendant market reaction, and the risk of stockholder litigation is reduced.
In addition, the company and management are not subject to severe civil and criminal penalties imposed by Sarbanes-Oxley.
Going private can be accomplished by following SEC rules to reduce the number of the company’s stockholders to fewer than 300 through a negotiated merger, a tender offer followed by a clean-up merger to acquire the nontendered shares or a reverse stock split, in which an appropriate number of shares is exchanged for one share. For example, in a 1,000-to-one reverse split, each 1,000 outstanding shares become one share, and any resulting fractional share is redeemed for cash.
Completing any of these going-private transactions permits the company to apply to the SEC to terminate its status as a public company and end its reporting obligations.
There are several important factors to consider when selecting the appropriate going-private method, such as the percentage of outstanding shares held in large blocks, the merger alternatives and requirements of the company’s place of incorporation, and the interest of management and controlling stockholders in continuing to be involved with the company as a private company. Whatever method is employed, management must ensure a fair price and process to avoid stockholder litigation.
The company’s board of directors should appoint a committee of independent directors to consider the price and procedures; the committee should be represented by its own financial advisers and legal counsel, none of whom should represent any other participant in the transaction; and the committee should obtain a fairness opinion.
Accounting and legal costs, as well as management’s time and effort, can be significant in a going-private transaction, but for the typical small public company, today’s economic and regulatory climate and the attendant costs of being public just might tip the scales in favor of going private. Stanley E. Everett ([email protected]) is a partner at the law firm of Brouse McDowell. Reach him at (330) 535-5711.
