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Take Private Transactions and Rule 13e-3 of the Exchange Act

A “take private” transaction describes a transaction in which a publicly-traded company returns to being a private company and its shares are delisted from the applicable stock exchange. Common types of take private transactions include private equity buyouts, management buyouts, and tender offers.

Parties contemplating a take private deal should take into consideration a number of strategic and legal factors. Take private transactions are subject to onerous disclosure requirements under U.S. federal securities law and may be closely reviewed by the staff at the Securities and Exchange Commission (SEC). Such transactions may also be scrutinized for potential conflicts of interest, especially if they involve a company affiliate as an acquiring party or management is leading the buyout effort. As a result of the heightened litigation risk, there can be a longer time period between the signing and closing in a “going private” transaction relative to other types of M&A transactions.

There are two main types of take-private deal structures. Going private transactions may be structured as a one step merger. A one-step merger process typically requires the target company’s stockholder to vote on the merger proposal at a stockholder meeting. Alternatively, such transactions may be structured as a two-step tender offer. The first step involves a tender offer to buy most or all of the target company’s shares. This step is followed by a “squeeze-out” merger to acquire all the remaining shares of the target company.

Rule 13e-3 of the Securities Exchange Act of 1934 (the Exchange Act) imposes detailed disclosure obligations on potential bidders. It also requires disclosures to be made to stockholders at least 20 calendar days in advance of completing a take private transaction.

Rule 13e-3 applies to going private transactions by the company or certain of its affiliates. An affiliate is defined as a person that directly or indirectly controls, is controlled by, or is under common control with the company. Control is defined to encompass the power to direct the decision-making or management of the company in a significant way. It is important to note that under Rule 13e-3 the company or its affiliate does not actually need to be party to the transaction in order to be deemed “engaged in” a going private transaction.

In addition, going private transactions may result in filing obligations under Section 13(d) of the Exchange Act for a potential bidder. In particular, the potential bidder may be required to disclose its purpose in acquiring the target company’s stock and whether it has a control intent. Item 4 of the Schedule 13D filing requires disclosure of any plans or proposals that the company has with respect to the acquisition of the target company’s stock. A key question is when such “plans” become sufficiently concrete to require disclosure on a Schedule 13D.

Once a company goes private, it will no longer be subject to periodic reporting obligations under the Exchange Act such as 10-K and 10-Q filings. It will also no longer be subject to the costly regularly requirements of the Sarbanes Oxley Act.

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