The SEC adopted Rule 13e-3 of the Securities Exchange Act of 1934 to govern so-called “going-private” transactions. Rule 13e-3 applies to an acquisition of a public company by a controlling stockholder or other affiliate of the company, or an acquisition of a public company by a financial buyer that raises potential conflicts of interests. Extensive disclosures are required under Rule 13e-3.

An ”affiliate” for purposes of Rule 13e-3 is defined as a “person that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with such issuer.” Members of the target company’s senior management are considered to be affiliates. Additionally, owners of at least 10% of the target company’s shares or shareholders with director appointment rights may be considered affiliates. When a private equity firm or other financial buyer is involved, they may be deemed to have affiliate status if the target company’s management is involved.

When a going-private transaction is concerned, the target company must typically file a Schedule 13E-3 with the Securities and Exchange Commission (SEC). The filing usually occurs around the same time that the target company files its preliminary merger proxy statement with the SEC. The Schedule 13E-3 contains a number of cross-references to Regulation M-A, a comprehensive set of SEC regulations pertaining to mergers and acquisitions. The Schedule 13E-3 Transaction Statement consists of the following sections:

• Item 1: Summary Term Sheet
• Item 2: Subject Company Information
• Item 3: Identity and Background of Filing Persons
• Item 4: Terms of the Transaction
• Item 5: Past Contacts, Transactions, Negotiations and Agreements
• Item 6: Purposes of the Transaction and Plans or Proposals
• Item 7: Purposes, Alternatives, Reasons and Effects
• Item 8: Fairness of the Transaction
• Item 9: Reports, Opinions, Appraisals and Negotiations
• Item 10: Source and Amounts of Funds or Other Consideration
• Item 11: Interest in Securities of the Subject Company
• Item 12: The Solicitation or Recommendation
• Item 13: Financial Statements
• Item 14: Persons/Assets, Retained, Employed, Compensated or Used
• Item 15: Additional Information
• Item 16: Exhibits

In particular, the requirement that the Schedule 13E-3 contain a description of all reports, opinions and appraisals from outside advisors that are materially related to the transaction can be burdensome. The SEC has an expansive interpretation of what reports need to be described and filed as exhibits with the SEC. It includes oral reports, banker board presentations and other preliminary materials related to the price or fairness of the transaction.

Each affiliate must provide an affirmative statement about whether they believe the acquisition is substantively and procedurally fair to the target company’s unaffiliated shareholders. This description should summarize the material factors underlying this belief and also mention whether or not the transaction requires approval of minority shareholders.

The Schedule 13E-3 also requires disclosure of any contracts, negotiations or transactions relating to an acquisition that have been entered into during the preceding two full fiscal years between the target company and the acquirer.

Throughout the course of the transaction, careful attention should be given to any written materials concerning valuation analysis and term sheets. In a 13e-3 going-private transaction, such documents could end up being subject to public disclosure. All written and email communications in going-private transactions should be treated as if they could be made public, as such transactions are associated with a heightened risk of litigation.