Understanding and Navigating the Process of Rejecting a Tender Offer from a Newly Private Company

Rejecting the Tender Offer of a Newly Private Company

Going public can provide numerous advantages for companies, but what happens when a company decides to go private after being publicly traded? As a shareholder in a company undergoing privatization, it’s important to understand the process and implications of rejecting a tender offer for the acquisition of your stock. This article provides insights into the reasons companies go private, the concept of tender offers, and the considerations involved in rejecting such offers.

Key Takeaways:

  • Sometimes, public companies choose to go private to increase profitability or regain corporate control.
  • Privatization involves the company buying back outstanding shares through a tender offer.
  • Rejecting a tender offer as a small shareholder is often ineffective since majority votes are required for corporate actions.
  • Large shareholders rejecting a tender offer may prevent privatization but may also trigger legal action.

When Public Companies Go Private:

  • The Sarbanes-Oxley Act has prompted many public companies to opt for privatization.
  • Reasons for going private vary, including management or private equity firm buyouts, pursuit of growth and higher profits, or disengagement from specific shareholders.
  • Privatization often saves costs associated with being publicly traded and complying with SEC regulations.

Understanding Tender Offers:

  • Tender offers are made to buy some or all of a company’s shareholders’ shares, typically at a premium.
  • Shareholders stand to gain by selling their stock if a tender offer is available.
  • While there’s no set premium, shareholders can expect around a 10% premium over market price in many cases.

Rejecting the Offer:

  • Rejecting a tender offer without a substantial block of shares is unlikely to have an impact on management decisions.
  • Holding illiquid stock can make selling more difficult as the market becomes thinner.
  • Challenging a proposed transaction in court requires reasonable grounds and financial burden rests on the dissenting shareholder.
  • Acquirers with a larger portion of outstanding stock can still force other shareholders to sell their shares.

The Bottom Line:

  • Going private is not uncommon, and shareholders have the right to accept or reject tender offers, understanding the consequences.
  • Most shareholders lack the influence to viably reject offers and may be forced to sell their shares.
  • Consulting a financial advisor or broker for guidance on specific situations is recommended.

Note: The Sarbanes-Oxley Act is not directly applicable to rejecting tender offers, but it has influenced public companies’ decisions to go private.

Websites and Online Resources:

  1. Investopedia – An authoritative source that provides comprehensive information on various financial topics, including tender offers and going private transactions. Link to Investopedia
  2. Securities and Exchange Commission (SEC) – The official website of the SEC, which offers regulatory information and resources on securities transactions, including tender offers and going private transactions. Link to SEC


  1. “Mergers, Acquisitions, and Other Restructuring Activities” by Donald DePamphilis – A comprehensive book that covers various aspects of mergers, acquisitions, and restructuring, including tender offers and going private transactions. Link to book
  2. “Tender Offers: A Guide to Buying and Selling Securities” by Dennis E. Block and William M. Savitt – This book provides insights into the legal and practical aspects of tender offers, including strategies and considerations for shareholders. Link to book

Academic Journals and Research Papers:

  1. “The Economics of Tender Offers” by Michael A. Fishman and Kathleen M. Hagerty – A research paper published in The Journal of Finance that explores the economic implications of tender offers and provides insights into shareholder decision-making. Link to paper
  2. “Going-Private Decisions and the Sarbanes-Oxley Act of 2002: A Cross-Country Analysis” by Ettore Croci and Bruno Manaresi – A scholarly article that examines the impact of the Sarbanes-Oxley Act on going-private decisions of public companies. Link to article

Reports and Studies:

  1. “Going Private and Public-to-Private Transactions: A Review of the Literature” by Meziane Lasfer – A comprehensive review of academic research and studies on going private transactions, including tender offers, providing a deeper understanding of the phenomenon. Link to report
  2. “Tender Offers in the Context of Mergers and Acquisitions” by Harvard Law School Forum on Corporate Governance and Financial Regulation – A report that discusses the legal and regulatory aspects of tender offers and their significance in the context of mergers and acquisitions. Link to report

Professional Organizations and Associations:

  1. American Bar Association (ABA) – Business Law Section – The Business Law Section of the ABA offers resources, publications, and updates related to various corporate transactions, including tender offers and going private transactions. Link to ABA Business Law Section
  2. National Association of Corporate Directors (NACD) – An organization that provides resources and guidance on corporate governance, including insights into shareholder rights and considerations in tender offer situations. Link to NACD

Going Private: Exploring the Implications and Advantages of Privatization for Public Companies

Why Public Companies Go Private: Exploring the Decision-Making Process


Public companies sometimes choose to go private due to various reasons, weighing the advantages and disadvantages associated with this decision. Going private entails freedom from costly and time-consuming regulatory requirements, such as the Sarbanes-Oxley Act of 2002 (SOX). This article delves into the factors that companies consider before going private and provides insights into the implications of such a transition.

The Benefits and Challenges of Being a Public Company

Advantages of Public Companies:

  • Liquidity: The buying and selling of public company shares offer investors a liquid asset.
  • Prestige: Being publicly traded implies operational and financial size and success, especially on major stock exchanges like the New York Stock Exchange.

Challenges of Public Companies:

  • Regulatory Compliance: Public companies are subject to numerous regulatory, administrative, financial reporting, and corporate governance bylaws, shifting management’s focus away from core operations.
  • Sarbanes-Oxley Act of 2002: SOX, enacted in response to corporate failures like Enron and Worldcom, imposes compliance and administrative rules on publicly traded companies. Section 404, in particular, requires the implementation and testing of internal controls over financial reporting at all levels of the organization.
  • Quarterly Earnings Expectations: Public companies must meet Wall Street’s quarterly earnings expectations, potentially diverting attention from long-term functions such as research and development, capital expenditures, and pension funding.
  • Pension Fund Issues: Some public companies have manipulated financial statements, compromising employees’ pension funds by projecting overly optimistic anticipated returns.

Understanding the Transition: Going Private

Definition of “Take-Private” Transaction:

  • In a “take-private” transaction, a private-equity group or consortium acquires the stock of a publicly traded corporation.
  • Due to the substantial size of most public companies, acquiring companies often require financing from investment banks or lenders to facilitate the purchase.
  • The acquiring private-equity group uses the target company’s operating cash flow to repay the debt incurred during the acquisition.

Benefits of Going Private:

  • Reduced Regulatory Burden: Private companies are relieved from the costly and time-consuming requirements of regulatory frameworks such as SOX.
  • Resource Allocation: Private companies can allocate more resources to research and development, capital expenditures, and pension funding, as they face fewer external reporting obligations.

The Role of Private Equity Groups:

  • Financing and Returns: Private equity groups secure financing from banks or lenders and aim to provide sufficient returns for their shareholders.
  • Leveraging: Leveraging the acquired company reduces the amount of equity needed for the acquisition, enhancing capital gains for investors.
  • Business Plan: After the acquisition, management outlines a business plan that demonstrates how the company will generate returns for its investors.

Factors Influencing the Decision to Go Private:

  • Relationships with Private Equity Firms: Investment banks, financial intermediaries, and senior management build relationships with private equity firms to explore partnership opportunities.
  • Premium Over Stock Price: Acquirers typically offer a premium of 20% to 40% over the current stock price, attracting CEOs and managers of public companies who are incentivized by stock appreciation.
  • Shareholder Pressure: Shareholders, particularly those with voting rights, often urge the board of directors and senior management to complete a deal that increases the value of their equity holdings.
  • Long-Term Outlook: Management must balance short-term considerations with the company’s future prospects, assessing factors such as the financial partner’s compatibility, leverage, and cash flow sustainability.
  • Acquirer Evaluation: Scrutinizing the acquirer’s track record is crucial, considering factors like leverage practices, industry familiarity, sound projections, level of involvement in company stewardship, and exit strategies.

Market Conditions and Going Private:

  • Credit Availability: The ease of borrowing funds for acquisitions depends on market conditions. In favorable credit markets, more private-equity firms can acquire public companies, while tightening credit markets make debt more expensive and lead to fewer take-private transactions.


The decision for a public company to go private involves weighing the advantages and challenges associated with regulatory compliance, earnings expectations, and other factors. Going private relieves companies from burdensome regulatory requirements like the Sarbanes-Oxley Act of 2002, allowing them to allocate resources more efficiently. Acquiring private-equity groups play a vital role in financing and implementing business plans, while management must carefully evaluate the potential acquirer’s track record. Ultimately, the decision to go private requires a thorough assessment of the company’s long-term outlook and market conditions.

Advantages and Drawbacks of Privatization: Understanding the Implications

Advantages of Privatization:

  1. Focus on Business Operations: Going private allows management to concentrate on running and growing the business without the burden of complying with regulatory requirements like the Sarbanes-Oxley Act of 2002 (SOX). This enables the senior leadership team to enhance the company’s competitive positioning in the market.
  2. Flexible Reporting Requirements: Private companies can tailor reporting obligations to meet the needs of private investors, allowing internal and external assurance, legal professionals, and consulting professionals to focus on relevant reporting requirements.
  3. Long-Term Focus: Privatization frees management from the pressure of meeting quarterly earnings expectations. This longer-term horizon allows management to prioritize activities that create sustainable shareholder wealth, such as implementing process improvement initiatives and investing in sales staff training.
  4. Utilization of Resources: Private companies have more time and financial resources at their disposal, which can be allocated to initiatives like process improvements, research and development, and capital expenditures.

Drawbacks of Privatization:

  1. Excessive Leverage Risks: Private equity firms that employ excessive leverage to fund acquisitions can expose the company to financial risks. Economic downturns, increased competition, or missed revenue milestones can severely impact the organization’s ability to service its debt.
  2. Capital Constraints: If a privatized company struggles to service its debt, its bonds may be downgraded to junk status. This makes it challenging to raise debt or equity capital for vital investments in capital expenditures, expansion, or research and development, hindering long-term success and competitive differentiation.
  3. Limited Liquidity: Shares of private companies do not trade on public exchanges, resulting in reduced liquidity for investors. The availability of buyers for equity stakes can vary, making it more difficult to sell investments, especially if exit dates are specified in the privacy covenants.


Going private offers several advantages for public companies, including reduced regulatory obligations, increased flexibility in reporting, and the ability to focus on long-term goals. However, the drawbacks of excessive leverage, capital constraints, and limited liquidity need to be carefully managed. By maintaining reasonable debt levels, preserving free cash flow, and utilizing resources effectively, privatized companies can benefit from the freedom to prioritize strategic initiatives and create sustainable value for shareholders in the long run.

Additional Resources:

Websites and Online Resources:

  1. U.S. Congress. “H.R.3763 – Sarbanes-Oxley Act of 2002” – Link
  2. U.S. Securities and Exchange Commission. “Study of the Sarbanes-Oxley Act of 2002, Section 404, Internal Control Over Financial Reporting Requirements” – Link


  1. “The Sarbanes-Oxley Act: A Brief Introduction” by Guy L. Fardone
  2. “Sarbanes-Oxley For Dummies” by Jill Gilbert Welytok and Mark R. Williams

Academic Journals and Research Papers:

  1. Hope, Ole-Kristian, and Wayne B. Thomas. “Managerial Empire Building and Firm Disclosure.” Journal of Accounting Research 49, no. 5 (2011): 1091-1123.
  2. Carcello, Joseph V., and Terry L. Neal. “Audit Committee Composition and Auditor Reporting.” The Accounting Review 81, no. 3 (2006): 823-849.

Reports and Studies:

  1. Ernst & Young. “Sarbanes-Oxley Section 404: A Guide for Management by Internal Controls Practitioners.” (2018) – Link
  2. PricewaterhouseCoopers. “Going private: Unlocking value in a changing business environment.” (2017) – Link

Professional Organizations and Associations:

  1. Financial Executives International (FEI) – Link
  2. National Association of Corporate Directors (NACD) – Link

These resources offer authoritative information and valuable insights for readers seeking further information on the topic of going private, the Sarbanes-Oxley Act, and related considerations.