Going Private
How Going-Private Transactions Work
A going-private transaction concentrates ownership in a small group by buying out all public shareholders. The most common structure is a leveraged buyout (LBO), where a private equity firm acquires the company using a combination of equity capital and significant debt financing secured by the target’s own assets and cash flows.
The process starts with a bid — either from an external PE sponsor or from the company’s own management (a management buyout). The board forms a special committee of independent directors to evaluate the offer and negotiate on behalf of public shareholders. If the committee agrees to the deal, it is put to a shareholder vote. Under most state laws, the transaction requires approval by a majority of outstanding shares.
After the vote, the acquirer completes a short-form or long-form merger that forces remaining shareholders to sell at the agreed price (a “squeeze-out”). The company then files a Form 15 with the SEC to deregister its securities and delists from the exchange.
Why Companies Go Private
Escape the public market short-termism. Public companies face quarterly earnings pressure, analyst expectations, and stock price volatility. Going private allows management to focus on long-term value creation without worrying about the next earnings call or activist campaign.
Reduce compliance costs. Public company obligations — Sarbanes-Oxley compliance, SEC filings, audit requirements, proxy statements, and investor relations — cost millions annually. For smaller companies, these expenses consume a disproportionate share of resources. Eliminating them frees capital for operations.
Operational flexibility. Private companies can make bold strategic moves — restructuring, acquiring, divesting, investing heavily in R&D — without public scrutiny, market reactions, or the risk of a shareholder activist campaign derailing the plan.
Undervaluation. If the stock consistently trades below what management or a PE sponsor believes the business is worth, going private captures that value gap. The acquirer buys at the market price (plus a premium) and benefits from the eventual realization of intrinsic value.
Common Going-Private Structures
| Structure | Who Acquires | Key Characteristics |
|---|---|---|
| Leveraged Buyout (LBO) | Private equity firm | 60–70% debt-financed; PE firm controls the board post-close |
| Management Buyout (MBO) | Existing management team (often PE-backed) | Management retains operational control; PE provides capital |
| Controlling Shareholder Buyout | Founder or majority owner | Squeeze-out of minority holders; heightened fiduciary duty scrutiny |
| Tender Offer + Merger | Any acquirer | Two-step: tender for majority, then merge to squeeze out remaining holders |
The Special Committee’s Role
Because going-private transactions inherently involve conflicts of interest — management may be on the buying side — Delaware law and SEC rules require robust protections for public shareholders. The board typically forms a special committee composed entirely of independent directors (no members with any financial interest in the acquirer). This committee hires its own financial advisor and legal counsel, independently evaluates the offer, negotiates the price, and has the authority to reject the deal.
The special committee’s work is critical for legal protection. Under the MFW framework (In re MFW Shareholders Litigation), a controlling-shareholder going-private transaction receives the more favorable “business judgment” review (instead of “entire fairness” review) only if both an independent special committee and a majority-of-the-minority shareholder vote were conditions from the outset.
SEC Rule 13e-3
Going-private transactions are regulated under SEC Rule 13e-3, which requires the filing of Schedule 13E-3. This disclosure document must include the purpose of the transaction, the terms and source of financing, reports and opinions from financial advisors (including fairness opinions), any alternatives considered, and a statement on whether the filing persons believe the transaction is fair to unaffiliated shareholders. The heightened disclosure requirements reflect the SEC’s concern about potential abuse in transactions where insiders buy out public shareholders.
What Happens to Shareholders
Public shareholders receive the agreed-upon cash price per share — or in some cases, a mix of cash and securities in the new private entity. Shareholders who don’t tender or who vote against the deal are eventually squeezed out in the back-end merger and receive the same per-share consideration. In Delaware, dissenting shareholders can exercise appraisal rights — petitioning the court for a judicial determination of “fair value,” which may be higher or lower than the deal price.
Risks of Going Private
For the new private owners, the primary risk is the debt load. LBOs typically finance 60–70% of the purchase price with debt, leaving little margin for error if the business underperforms. If cash flows decline, the company may struggle to service its debt, potentially leading to restructuring or bankruptcy.
For public shareholders, the risk is selling too cheap. Management or a controlling shareholder has asymmetric information about the company’s true value and prospects. This is why the special committee process, fairness opinions, and the majority-of-the-minority vote are so important — they are the guardrails against self-dealing.
Key Takeaways
- Going private removes a company from public markets through an LBO, MBO, or controlling-shareholder buyout.
- Companies go private to escape quarterly pressure, reduce compliance costs, and pursue long-term strategies without public scrutiny.
- An independent special committee and majority-of-the-minority vote are essential protections for public shareholders.
- SEC Rule 13e-3 (Schedule 13E-3) imposes heightened disclosure requirements on going-private transactions.
- Dissenting shareholders can exercise appraisal rights in Delaware for a court-determined fair value.
Frequently Asked Questions
What is the difference between going private and delisting?
Going private is the broader transaction — buying out all public shareholders and eliminating SEC reporting obligations. Delisting simply removes the stock from an exchange. A company can be delisted (involuntarily, for failing exchange listing requirements) without going private — its shares would still trade over-the-counter, and SEC obligations would remain unless the company also deregisters.
Can I keep my shares if a company goes private?
No. In a going-private merger, all remaining public shareholders are cashed out at the deal price through the squeeze-out merger. You can exercise appraisal rights to challenge the price in court, but you cannot continue holding shares in the now-private company unless you are part of the acquiring group.
How are going-private transactions financed?
Most going-private deals are financed with a mix of equity from the acquiring group (30–40%) and debt (60–70%). The debt is typically a combination of senior secured loans (from banks) and high-yield bonds or mezzanine financing. The target company’s own assets and cash flows serve as collateral and the primary source of debt repayment.
What happens after a company goes private?
The new owners restructure operations, optimize the capital structure, and work to increase the company’s value over a 3–7 year holding period. The end goal is usually an exit — either an IPO (re-listing the company), a sale to another PE firm (secondary buyout), or a sale to a strategic acquirer — at a significant profit over the original purchase price.