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, but the cost of being publicly traded and having to comply with SEC regulations is often cited as a reason for privatization. (For further reading, see Policing The Securities Market: An Overview Of The SEC.) If you're a shareholder in a company that is going private, there are a few things you should know before you think about rejecting the tender offer.

Tender offers are usually made to shareholders 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. Though there isn't a set premium that 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 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 and 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 that they can make the challenge economically difficult for a dissenter, they may choose to drag the challenge out in court. Remember that corporate lawyers and corporate accountants command very high fees for their time.

To learn more, see How does privatization affect a company's shareholders?

  1. What happens to the shares of stock purchased in a tender offer?

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  2. Why would it be in the interest of shareholders to accept a tender offer?

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  3. How does privatization affect a company's shareholders?

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  4. What usually happens to the price of a stock when a tender offer for shares of the ...

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