What Happens to My Shares If a Company Goes Private?

When a company transitions from being publicly traded to private ownership, it undergoes a process known as “going private.” This means the company’s shares are no longer listed or traded on a public stock exchange. The decision to go private often stems from a desire to reduce regulatory burdens, gain operational flexibility, and save on costs associated with public reporting.

This shift alters the status of existing public shareholders. Unlike publicly traded shares that can be freely bought and sold on exchanges, private company shares lack liquidity. Understanding how these transactions affect your shares is important for any investor.

Methods of Going Private and Share Treatment

Several methods facilitate a company’s transition from public to private, each with implications for shares. The most common approaches involve tender offers, cash-out mergers, and short-form mergers. These methods determine how public shareholders will dispose of their equity.

Tender Offers

A tender offer occurs when an acquiring entity makes a public offer to buy shares directly from public shareholders at a specified price. This offered price is set at a premium above the current market value to encourage shareholders to sell their holdings. Shareholders tender their shares in exchange for cash, and if enough shares are acquired, the company can proceed with delisting.

Shares are exchanged for cash, and once the transaction closes, shareholders no longer own equity in the company. While shareholders have the option to accept or reject the tender offer, a successful offer where the acquirer gains a controlling interest often leads to subsequent steps that can force remaining shareholders to sell. This ensures the acquiring entity can take full control and delist the company from public exchanges.

Cash-Out Mergers

A cash-out merger involves a formal merger where the public company is merged into a private entity. As part of this merger, public shareholders’ shares are automatically converted into the right to receive cash. This is a forced transaction for shareholders, as their shares are cancelled and converted into a right to receive payment.

This merger eliminates all public shareholders, terminating their ownership stake upon completion. The consideration received is typically cash, though in some instances, it might involve other forms of payment.

Short-Form Mergers

A short-form merger, also known as a “squeeze-out,” is a simplified merger process available when an acquirer already owns a very high percentage of the target company’s shares, typically 90% or more. In this situation, the remaining minority shareholders are “squeezed out,” and their shares are converted into cash without requiring a shareholder vote. This mechanism allows the majority owner to consolidate complete control efficiently.

The shares held by these minority shareholders are converted into cash at the merger price. This type of transaction is designed to eliminate all public shareholders and complete the transition to private ownership.

Shareholder Rights and Remedies

When a company goes private, shareholders have legal rights and remedies to protect their interests. These rights ensure fair treatment, especially when the transaction is not voluntary for all shareholders. Understanding these options is important for affected investors.

Appraisal Rights

Appraisal rights allow dissenting shareholders to demand a judicial determination of the fair value of their shares. This right is available in cash-out mergers. The purpose of appraisal rights is to protect minority shareholders from being compelled to sell their shares at an unfair price.

Process for Appraisal Rights

To exercise appraisal rights, shareholders must follow a specific process, which involves providing written notice of their intent to dissent from the proposed transaction. This notice must be given before the shareholder vote on the merger, and the shares must not be voted in favor of the transaction. If the company and the dissenting shareholder cannot agree on a fair value, the matter may proceed to court for a judicial valuation.

The process provides an avenue for shareholders to seek what a court deems to be the fair value of their shares, which may differ from the offer price. The court determines the fair value of the shares immediately before the corporate action. This ensures that the valuation is based on the company’s standalone worth, rather than the transaction’s impact.

Shareholder Voting Rights

Shareholder voting rights also play a role, depending on the method used to go private. Full mergers require a shareholder vote for approval. Shareholders have the opportunity to vote for or against the proposed transaction. If a shareholder votes against a proposed merger and the merger is still approved, they may then be eligible to exercise their appraisal rights.

However, not all go-private transactions require a shareholder vote. Tender offers do not involve a direct shareholder vote, as shareholders individually decide whether to tender their shares. Short-form mergers do not require a shareholder vote because the acquirer already holds a supermajority of shares. Even in these cases, the legal framework provides avenues like appraisal rights to protect the interests of minority shareholders.

Tax Consequences

Receiving cash for shares in a go-private transaction has tax implications for shareholders. Understanding these consequences is important for financial planning. The sale of shares is treated as a taxable event.

When shares are sold or converted into cash during a go-private transaction, the difference between the sale price and the adjusted cost basis results in a capital gain or capital loss. A capital gain occurs if the sale price exceeds the basis; a capital loss occurs if the sale price is less than the basis. This gain or loss is then subject to taxation.

Holding Period

The holding period of the shares determines whether the capital gain or loss is considered short-term or long-term. Shares held for one year or less result in short-term capital gains or losses. These short-term gains are taxed at the shareholder’s ordinary income tax rate.

Conversely, shares held for more than one year result in long-term capital gains or losses. Long-term capital gains receive preferential tax treatment, with lower tax rates. This distinction can impact the amount of tax owed on the proceeds from the transaction.

Basis

The “basis” of the shares is the original cost of acquiring them, plus any additional costs such as commissions. This basis is a factor in calculating the taxable gain or loss. For instance, if shares were purchased for $50 and sold for $100, the capital gain would be $50 per share, which is the amount subject to tax.

Tax situations can vary based on individual circumstances, the specific structure of the go-private transaction, and current tax laws. For advice regarding the tax implications of such a transaction, consulting with a qualified tax professional is recommended.