The trend of publicly traded companies returning to private ownership is growing around the world. In recent years companies like WestJet and H.J Heinz have gone private. So, why is this trend happening?
“The first reason is the boom in private equity. Private markets have been particularly attractive to investors seeking high yields,” Armand Capisciolto, National Accounting Standards Partner, BDO Canada explains. “And secondly, the significant volatility in the public markets. It's difficult for companies to raise money when markets are down.” For example, A 2020 Morgan Stanley report found that U.S. companies that stayed private raised more money than those whose securities traded in public markets every year since 2009.
If you are weighing the pros and cons of taking a company private again, there are many factors to consider. In this article, we summarize of the benefits of going private and give an overview of how a public company incorporated in Canada may execute a going private transaction.
What does it mean when a public company goes private?
In general, going private involves a transaction which has the effect of converting a public company into a private company. In practical terms, the process entails:
- The transfer of a public company's voting or equity securities from the hands of public shareholders to the hands of one or few shareholders
- A delisting of the company's securities on a public market
- The company ceasing to be a “reporting issuer” (as defined in the applicable provincial securities laws) in Canada
What are the benefits of going private?
Many business owners underestimate what it takes to operate as a public company. There is significant, costly, and time-consuming regulatory financial reporting, corporate governance, and public disclosure requirements. Read more details on the regulatory and financial reporting requirements of public companies here.
At the same time, market participants now more clearly understand the advantages of being a private company. Going private can enable struggling companies to restructure, institute operational changes, and turn things around—possibly returning to the public markets in the future. 5 key reasons why public companies should go private:
- Easier access to capital
- More flexibility to focus on long term results
- Less investor interest in small-cap stocks
- Deals close faster and more efficiently with lower risk
- Reduced costs and time spent on compliance and reporting
In addition to these five reasons, going private also reduces or eliminates certain risks inherent in the operation of a public company, including:
Hostile takeover threats. In the current public market, the share price of many companies (especially in the tech industry) is trading at prices far below their initial listing price. A depressed market price for a company's voting securities (as compared to the value of the company's assets) provides an opportunity for a hostile take-over of the company.
Public disclosure of competitive information. Canadian public companies are subject to continuous disclosure and filing obligations imposed by Canadian securities laws and exchange rules. Such disclosure may include research and development plans, material contracts, growth and acquisition strategies, and key pieces of financial information. Disclosure of this information is useful to a public company's competitors and enables them to react at an early stage to this information. For example, if a company discloses that it derives high profits from a particular market segment, this can motivate other companies to enter the market.
Shareholder lawsuits. Securities litigation in Canada primarily consists of class actions brought by investors alleging a misrepresentation in an issuer's continuous disclosure record or a failure to make timely disclosure of a material change in the affairs of the issuer. Responding to these allegations is a costly and time-consuming process, which often diverts attention and resources away from the operations of the business. Privately held companies do not have the same obligations that result in such litigation.
How can public companies go private?
A Canadian incorporated company may structure a transaction to go private in a few different ways; the three most common are as follows:
A plan of arrangement is a court-supervised restructuring process carried out by the target public company's governing corporate statute. A plan of arrangement is typically negotiated between the prospective purchaser and a target public company's board of directors. Shareholder approval is required as well as court approval, which requires the court to determine that the terms of the arrangement are “fair and reasonable” to the shareholders of the target company.
A take-over bid is an offer to acquire the voting or equity securities of a target company made to shareholders in a Canadian jurisdiction provided that, prior to the bid, the bidder and any person acting jointly or in concert with the bidder own or control 20% or more of the outstanding class of securities on a partially diluted basis. Take-over bids are regulated by the securities laws of the provinces and territories where the holders of securities of the relevant class are located. Securities regulators have harmonized the take-over bid regime across all of the jurisdictions within Canada.
An amalgamation is a statutory means under corporate legislation of combining two or more companies into a single successor company. An amalgamation may be structured in a number of ways. Typically, upon amalgamation, the purchaser receives all the voting shares of the amalgamated company in exchange for its shares in the target company and all the shareholders of the target receive either cash or, more commonly, redeemable shares in the amalgamated company. When the transaction is completed, the redeemable shares of the amalgamated company are immediately redeemed for cash. The result is that the purchaser becomes the sole shareholder of the amalgamated company. To approve the amalgamation, a shareholders meeting of the purchaser and target company is called. The shareholders of both companies must approve the amalgamation by passing resolutions. Under corporate law, the amalgamation must be approved by holders of two-thirds of the shares of the target company represented at the meeting, in person or by proxy.
The decision to choose one type of structure over another generally depends on the timing, regulatory considerations, financing requirements, and other strategic considerations of the parties involved.
Delisting a public company
To delist the issuer's securities from the public market and apply to cease being a reporting issuer in Canada, the issuer is required to:
- Submit a written request to the Canadian stock exchange where its securities are listed for a delisting of its securities as per the policies of that exchange
- File an application with its principal regulator for an order that it has ceased to be a reporting issuer in all jurisdictions of Canada which it is a reporting issuer pursuant to National Policy 11-206 Process for Cease to be a Reporting Issuer Application.
Considering going private? BDO can help
Given the economic realities we are facing, more and more companies will likely choose to go private. Investors increasingly expect public companies to deliver strong results quarter over quarter. Going private can provide relief from pressures of quarterly reporting, regulatory requirements, and provide time for management to take a longer-term view of the company and its strategy. Our team can help your business every step of the way when you choose to go private. We've helped dozens of small-cap public companies go private by providing corporate finance, valuations, fairness opinions, business modelling, and accounting advisory services.