A:

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?

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

    Learn what a tender offer is, whether it is a good idea to accept a tender offer and what happens to the shares of stock ... Read Answer >>
  2. Why would it be in the interest of shareholders to accept a tender offer?

    Learn when it is in the best interests of shareholders to accept a tender offer. A tender offer is a bid to buy a large portion ... Read Answer >>
  3. How is a tender offer used by an individual, group or company seeking to purchase ...

    Learn how tender offers are used in takeover attempts, and understand the difference between a hostile takeover and a friendly ... Read Answer >>
  4. How does privatization affect a company's shareholders?

    The most recognized transition between the private and public markets is an initial public offering (IPO). Through an IPO, ... Read Answer >>
Related Articles
  1. Small Business

    Explaining Tender Offers

    A tender offer is a broad public offer made by a person or company to purchase all or a portion of the shares of a publicly traded company.
  2. Small Business

    What is a Private Company?

    A private company is any corporation that does not have shares publicly traded in the equity markets.
  3. Small Business

    Why Companies Stay Private

    Many private companies prefer to stay private and find alternate sources of capital. Find out what firms have to gain by eschewing the windfall from a flashy IPO.
  4. Small Business

    How To Invest In Private Companies

    Owning a private firm means sharing more directly in the underlying firm’s profits.
  5. Investing

    Explaining Privatization

    For a publicly traded company, privatization is the act of transitioning the company to ownership by private individuals.
  6. Investing

    Why Public Companies Go Private

    Privatization can give management more time to make money for investors, but at what cost?
  7. Managing Wealth

    3 Benefits of a Successful Tender Offer: Cliffs Natural (CLF)

    Learn about the potential benefits that the debt tender offer by Cliffs Natural Resources had for the company's balance sheet and income statement.
  8. Investing

    What is a Public Company?

    A public company has sold stock to the public through an initial public offering (IPO) and that stock is currently traded on a public stock exchange.
RELATED TERMS
  1. Going Private

    A transaction or a series of transactions that convert a publicly ...
  2. Private Company

    A company whose ownership is private. As a result, it does not ...
  3. Privatization

    1. The transfer of ownership of property or businesses from a ...
  4. Tender

    To invite bids for a project, or to accept a formal offer such ...
  5. Schedule TO-I

    This schedule is known as an "issuer tender offer statement." ...
  6. Saturday Night Special

    An obsolete takeover strategy where one company attempted a takeover ...
Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  5. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  6. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
Trading Center