Going-Private Transaction

A going-private transaction removes a public company from the regulated public market, eliminating the ongoing costs of SEC reporting, SOX compliance, and public shareholder obligations. The transaction is typically structured as a merger in which public shareholders receive cash for their shares; the resulting private company is no longer listed on an exchange and has no public reporting obligations.

**Why companies go private:** The annual cost of being a public company — SEC reporting, SOX 404 compliance, D&O insurance, investor relations — can exceed $3-5M for a small-cap company. When a company's market capitalization is too small for institutional investor attention ('micro-cap hell'), the public listing provides little capital-raising benefit while imposing significant compliance burdens. Private equity sponsors also use going-private transactions to acquire undervalued public companies where they believe the public market underprices the company's intrinsic value, and restructure operations outside the quarterly earnings pressure of public markets.

**SEC Rule 13e-3 — the affiliate going-private rule:** When a going-private transaction is conducted by an affiliate of the issuer (controlling shareholder, management buyout, or any entity with a relationship to the company), SEC Rule 13e-3 (17 CFR § 240.13e-3) applies. The rule requires the filing of Schedule 13E-3 — a disclosure document that must include: (1) the purpose of the transaction; (2) whether the transaction is fair to unaffiliated shareholders (the 'substantive fairness' analysis); (3) the basis for the fairness opinion; (4) financial information and projections; (5) any alternatives considered; and (6) voting and dissenters' rights. The SEC's 2023 amendments (Release No. 34-98296, see sec.gov/rules/final/2023/34-98296.htm) enhanced Schedule 13E-3 disclosure requirements for SPAC going-private transactions and strengthened protections for minority shareholders.

**Financing structure:** Going-private transactions are typically financed with a combination of (1) equity from the private equity sponsor (typically 30-40% of total capitalization); (2) senior secured debt (first-lien term loans and revolving credit facilities, typically 50-60% of total capitalization); and (3) mezzanine or second-lien debt (10-20%). The resulting private company carries substantial leverage — going-private LBOs are among the most leveraged structures in corporate finance. Debt incurred in the going-private transaction is typically secured by all assets of the company and guaranteed by all subsidiaries.

**Deregistration and reporting termination:** After the going-private merger closes, the surviving private company files Form 15 (Certification and Notice of Termination of Registration) with the SEC to deregister its shares under Section 12 of the Exchange Act. Section 15(d) reporting obligations (for companies that went public via registration statement) are also suspended when the company has fewer than 300 holders of record. See sec.gov/cgi-bin/browse-edgar for Form 15 filings and the SEC's guidance on deregistration procedures.

**Minority shareholder protections:** State corporate law (especially Delaware) and SEC rules provide minority shareholder protections in going-private transactions. Protections include: (1) special committee approval — the board forms an independent committee of disinterested directors to negotiate the transaction; (2) majority-of-the-minority vote — approval by a majority of non-affiliated shareholders; (3) fairness opinion from an independent investment bank; (4) appraisal rights — dissenting shareholders can demand judicial valuation of their shares under Delaware § 262. These protections are designed to prevent controlling shareholders from cashing out minority shareholders at unfair prices.