LEGALMANAGER
03 2010
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Are you gaining anything by being a publicly held company?
JUST BETWEEN US
SELDOM IS THE BOARD OF DIRECTORS OF
a public company faced with the decision to remain public or not. After all,
“going public” has been the ultimate
goal of many small businesses, given
the benefits of stock liquidity and a
new “currency” for employee benefits
and acquisitions. These are considered
to outweigh the negatives of full public
disclosure and increased administrative
expense. However, present economic
and regulatory conditions have coincided to force more than one board of
directors to conduct a new kind of cost/
benefit analysis.
For many small public companies,
“going private” can be an attractive
alternative to the expense, wasted management time, excessive regulations,
and exposure of being publicly owned.
That is particularly true for companies that cannot enjoy the benefits of
public ownership, a liquid market for
their shares, and access to public capital sources. Although a going-private
transaction is usually long, complex,
and expensive, in some cases that
expense can be less than the cost of a
public company’s reporting requirements for a single year.
In general, a going-private transaction must comply with the Securities
Exchange Act of 1934, as amended,
which requires detailed disclosures
regarding the transaction. These disclosures include: all current information
about the company, the group taking
over, and the fair value analysis, among
others. Each state will also have statutory requirements, and some states, in
addition to the state of incorporation
of a company, may also require statutory compliance. Florida, for example,
imposes certain limitations if 10 percent
of the shareholders reside in that state.
After board authorization, a preliminary proxy statement (or an information statement if a solicitation of proxies
is not necessary) describing all aspects
of the transaction must be submitted to
the Securities and Exchange Commission for review. This preliminary proxy
statement also contains as exhibits: the
fairness opinion; any relevant statutory
sections regarding appraisal rights; a
form of demand for payment of fair
value; and a form of proxy for the shareholder vote, and any other information
deemed material.
THE boArd oF dIrECTorS oF Edd
Helms Group, Inc. (“Helms”), a Florida
corporation, faced the public-versus-private issue in 2009. Concluding that
the costs of staying public outweighed
its benefits, the company voted to go
private. Although Helms was a small
public company, with approximately
$25 million in annual revenues, it had
additional expenses of roughly $250,000
because of the costs of compliance with
SEC rules, complicated by the Sarbanes-oxley Act, not including management
and administrative time. For Helms, the
future expenses of being a private company were lower than they would be as
a public company.
Helms went private by effecting
a one-for- 2,000 reverse stock split. A
reverse stock split is an unusual means
of going private. The elimination of
shareholders holding fewer than 2,000
shares reduced the number of shareholders to fewer than 300 from more
than 1,000, eliminating the SEC reporting requirements. Shareholders with
fewer than 2,000 shares were paid fair
value for their shares. In Helms’s case,
unique factors made the reverse stock
split possible. Typically, companies
eliminate shareholders by merger or
by a tender offer to shareholders. All
of these methods of “going private”
are highly regulated by state law and
the SEC.
The Helms deal was an “affiliated”
