Rejecting the Tender Offer of a Newly Private Company

Going public can offer companies many advantages. It gives them access to money to fund research and investments and gives them the ability to market their products and services. But what happens in the reverse situation and a company chooses to become private after being publicly traded?

If you're a shareholder in a company that is going private, there are a few things you should know. Below, we describe how public companies become private and what happens if you reject the tender offer for acquisition of your stock.

Since the passing of the Sarbanes-Oxley Act, a significant number of public companies have chosen to go private. The reasons why companies make this choice are as varied as the companies themselves.

A company's management or a private equity firm may decide to buy the company. During the plans, the new heads of the company may decide to delist it and make it private. Others may feel going private is the best way to pursue growth and larger profits. In other cases, it may be a way to get away from certain shareholders, including those who are activists.

In most cases, going private means saving money. The cost of being publicly traded and having to comply with SEC regulations is often cited as a reason for privatization. Private companies don't have to pay for accountants who are required to file regular paperwork with the SEC.

Tender offers are usually made to buy some or all of a company's shareholders' shares. These offers usually come at a premium from current share prices. If you're a shareholder in a company that is going private and there's a tender offer out on your stock, you may stand to gain substantially by selling the stock.

Although there isn't a set premium acquirers hoping to take a company private are required to pay, shareholders can reasonably expect to get a 10% premium over the market price by selling their stock to offerers. Sometimes it can be much more.

Unless you hold a substantial block of shares of a prospective private company's stock, rejecting a tender offer is probably not a smart move. Without a substantial block of shares, your influence on management is insignificant, to say the least.

Furthermore, your shares will become less liquid as the market for trading the company's stock becomes thinner. The effect on you, as a single shareholder with a relatively small position, will almost certainly be difficulty in selling the stock.

Eventually, the stock may become so illiquid that you could end up taking any offer at all to sell your stock after fighting to receive a higher price when the tender offer was made.

If you're really upset that the company in which you've invested is going private, you may elect to challenge the proposed transaction in court. But you must have reasonable grounds for the challenge. Of course, the financial burden of bringing a challenge to court rests on the dissenting shareholder. If the company's lawyers see they can make the challenge economically difficult for a dissenter, they may choose to drag the challenge out in court. Remember, corporate lawyers and corporate accountants, command very high fees for their time.

There's also this scenario. Even if you reject the offer, the acquirer may still have some leverage. If the acquirer also manages to buy a larger portion of the outstanding stock, it can force the rest of the shareholders to sell whatever they own and take the company private. So the fruits of your labor may not be so grand.

It isn't uncommon for publicly traded companies to go private. But you should know what your rights are as a shareholder. You have the right to accept or reject the offer—as long as you know what the consequences are. Most people don't own enough shares to viably reject an offer, and therefore, won't have a big effect on how the company's management will react. In the end, you may even be forced to sell your shares. But remember, check with your financial advisor or broker to see how your specific situation applies in a case like this, and what your best options are.