What Is SEC Schedule 13E-3?

SEC Schedule 13E-3 is a form that a publicly traded company or an affiliate must file with the Securities and Exchange Commission (SEC) when that company "goes private." Becoming private means the company's shares no longer trade publicly, and so the company is de-listed from a securities exchange. Qualifying events for going private, and needing to file Schedule 13E-3, may include a merger, tender offer, a sale of assets, or a reverse stock split.

key takeaways

  • SEC Schedule 13E-3 is a form that a publicly traded company or an affiliate must file with the SEC when it "goes private."
  • After filing Schedule 13E-3, the company's shares no longer trade on the open public marketplace, and the company is de-listed from the stock exchange.

Understanding SEC Schedule 13E-3

A company must file Schedule 13E-3 in the event that it becomes private and has securities registered under Section 12 of the Securities Exchange Act of 1934; technically, it is applying to go private under rule 13e-3 of the Securities Exchange Act. This act governs securities that have already been issued and the markets in which they trade, in contrast with the Securities Act of 1933, which governs new issues.

The main goal of both Securities Acts is to prevent fraud. Under the 1934 act, the following activities are criminal:

  • Abusing discretionary authority and exercising discretion without authority
  • Churning, or trading excessively for the sake of making commissions
  • Insider trading, or trading on "material inside information"

An individual or group of people may purchase a company's stock in order to take it private because it feels that the market is undervaluing the shares. When a firm goes private, its stock is no longer available for sale through open markets.

According to the SEC, "Schedule 13E-3 requires a discussion of the purposes of the transaction, any alternatives that the company considered, and whether the transaction is fair to unaffiliated shareholders. The company also must disclose whether and why any of its directors disagreed with the transaction or abstained from voting on the transaction and whether a majority of directors who are not company employees approved the transaction."

Events That Trigger SEC Schedule 13E-3

Private equity firms will often purchase a struggling company, turn it into a private entity, reorganize its capital structure, and issue stocks once a profit can once again be realized. Two methods that private equity firms or powerful individuals take companies private include a leveraged buyout (LBO) and management buyout (MBO).

In an leveraged buyout or LBO, one company will acquire another using a significant amount of borrowed money, called leverage, to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. Leveraged buyouts allow companies to make larger acquisitions than they normally would as they don’t have to commit as much capital up front.

In a management buyout or MBO, a company’s management team purchases the assets and operations of the business they manage. This often appeals to professional managers because of the greater potential rewards from being owners of the business rather than employees.

Either way, the number of shareholders in the company decreases to the point that the company is no longer required to file reports with the SEC like an annual 10-K or quarterly 10-Q, along with an 8-K for material changes outside of a regular reporting period.