» Stock Investment Risk » What Happens When a Public Company Goes Private

What Happens When a Public Company Goes Private

That's right, a public company can go private or become a private company. Public companies may prefer private company status because of the less stringent reporting requirements that apply to private companies. Unlike a public company (i.e. publicly owned, publicly traded), a privately owned company is generally not subject to SEC's reporting requirements.

Converting a Public company to a Private Company

Basically, a private company has fewer than 300 shareholders. Therefore, if a public company were to be reclassified, it has to be restructured in such a way so it will have 299 or fewer shareholders.

Publicly held companies that want to become private companies typically do one of three things to accomplish this conversion:

  1. Reverse Stock Split

    This pertains to reconfiguring the company's share distribution and structure. Under this method, shares become part of a block, and each block becomes equivalent to 1 share. For instance, 1,000 shares are lumped and converted to only 1 share. Thus, this method leads to a reduction in the company's total number of shares.

    A reverse stock split also leads to a reduction in the total number of shareholders. Shareholders who do not own enough shares to form a block of shares can no longer become shareholders in the newly restructured company. These shareholders are paid cash for their shares, using the current going rate for the company's stocks.

    Of course, these shareholders can also bond with other minor shareholders and form a block of their own. Even in this case, though, the number of shareholders is still successfully reduced.

  2. Straightforward Sale of Shares

    The easiest way to reduce the number of shareholders is to increase specific individual shareholders' stake in the company. In other words, if one or more of the shareholders buy the shares of other shareholders, company ownership becomes concentrated into the hands of a fewer number of people.

  3. Company Sale or Merger

    This is just similar to the 2nd method. In this case, though, another, bigger company buys the shares from the shareholders, therefore concentrating ownership into the hands of only one entity (the purchasing company).

Affiliate-Initiated Conversion

The above transactions can lead to a company's conversion from a public company to a private company. Thus, a company or its affiliates may use the above methods if they want to convert their company to a private one. Affiliates are directors and officers as well as major stockholders that control the company, are controlled by the company, or are in a controlling position together with the company issuer.

Thus, in case the company issuer or its affiliates initiate any of these transactions, this company or these affiliates must report the transaction to the SEC by means of the Schedule 13E-3.

Schedule 13E-3 and the Shareholders

The Schedule 13E-3 is meant to inform the rest of the company's shareholders about the company- or affiliate-initiated transaction that may change the company's status from a public company to a private company. It also tells the shareholders about the purpose of the transaction, the fairness of the company's or the affiliates' move, and the votes for or against that the move gained from the company's directors.

In other words, the Schedule 13E-3 filing requirement is meant to protect the interests of the company's shareholders.

When a public company becomes private, it is subject to less rigorous reporting requirements and its shareholders may find it harder to keep track of their investments. The conversion, moreover, may make the shareholders unable to sell their shares in the public marketplaces and this can affect their liquidity, among other things.

Rate this article : Low
  • Currently 3/5 Stars
  • 1
  • 2
  • 3
  • 4
  • 5