Understanding the key differences between a public company take-private transaction and a private company sale is significant given at least 85% of closed take-private deals announced in 2015 or 2016 valued over $100 million resulted in litigation.
Many buyers, particularly private equity fund buyers, seek to form a relationship over a period of time with a potential target company’s owners and management before ultimately making an offer to buy that company. One of the objectives of this approach is to afford no opportunity for other potential buyers to make a competing bid.
To minimize the risk of leaks a public company pre-signing process will often proceed more quickly than a private company sales process. This faster pace has the potential of favoring private equity fund buyers who are often better able to move more quickly than many strategic buyers.
In order to minimize the risk of conflicts of interest litigation, target management in the public company context are often excluded from negotiations relating to the potential transaction—an approach that may be viewed as impracticable by many private equity buyers who seek to team with management before transaction documents are signed.
Any gap between signing and closing provides for added deal risk. Accordingly, many private company deals are now “concurrent sign and close” transactions. Public company deals, on the other hand, will always have a gap between signing and closing.
With the exception of a stock-for-stock merger with a strategic buyer—which is unavailable to a private equity buyer—public company deals often provide for all cash consideration to be paid to the target shareholders in full at, or shortly following, the closing.
In private company transactions, contractual confidentiality obligations provide the deal participants with flexibility in negotiations, paving the way for crafting unique contract terms. The material terms of public company transactions, by contrast, will ultimately become public. As a result, those deal terms are much more market driven with less variation among deals.
Unlike the concurrent signing and closing found in many private deals, public company transactions operate differently; fairly customary market standards have developed that would allow for deal termination in a public company sale between signing and closing.
The level of required public disclosure in a public company transaction can come as a surprise to private equity fund buyers who are accustomed to keeping deal terms private, particularly from competing private equity funds.