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.
"Private markets have been particularly attractive to investors seeking high yields."
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.