To Go Private or To Go Dark? That Is the Question!
There are more than 18,000 publicly traded companies, many of which receive little benefit from their public statuses. In recent times, the motivation for going public, even for venture capitalist-backed entities, is often simply to provide liquidity and has little to do with maximizing value for the company’s shareholders.
In light of increasingly turbulent conditions facing publicly-traded companies today, going private may be a rational option, even for companies that just recently became public. In fact, the simple elimination of the growing regulatory costs imposed on public companies may be reason enough.
How “Going Private” Differs from Going Dark
Going dark and going private are sometimes confused with one another. Going dark has no actual transaction to complete, and the process is generally more time efficient and less costly than going private.
In contrast to going dark, “going private” requires an active “purchase” transaction to bring the shareholders of record below the 300/500 shareholders level as defined in Rule 13e-3 of the Securities Exchange Act of 1934.
A shareholder can, and often does, argue that going dark is a breach of fiduciary duty because he or she assumed the company’s stock would have greater liquidity and that the company in some way encouraged this expectation.
It is recommended that an issuer choosing to go dark consider issuing a press release, providing its stockholders with the opportunity to sell the company’s shares through an exchange prior to the delisting.
The principal risk of going private transactions arises from the fact that there is an active plaintiff’s Bar that opposes most going private transactions, making litigation more likely to occur. When and if litigation ensues, the board will have to meet this higher standard in defending both its decision to go private and the method by which it did so.
Still, the burden of proof remains on the plaintiff, and the standard used is the preponderance of the evidence. Therefore, it has been difficult for minority shareholders to obtain judgments in their favor. It’s not easy to prove a malicious intent to defraud shareholders, or to prove a coercive intent behind the company’s decision to go dark or private, especially since there are obviously sound economic reasons for many small-to-mid-cap issuers to become private. But a costly and time-consuming dispute may arise regardless. Make the Decision to Go Dark or to Go Private with Deliberation and Caution I recommend that the decision to go dark or private be carefully considered; it’s more complex than it seems, and it is important to retain proper legal and accounting professionals early on in the process. Primary among concerns should be a weighing of the benefits of remaining public against the benefits from going dark or going private. Important factors such as share price, company performance, public float, and the SEC costs of compliance should be weighed against the company’s need to have publicly traded stock as acquisition currency. How prepared are you for the challenges associated with going private or going dark?
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