What is privatization?

The so-called privatization is a special type of mergers and acquisitions in the capital market. It is the biggest difference from other mergers and acquisitions. Its goal is to make the listed company be delisted and changed from a public company to a private company.  The essence is the takeover activity launched by the majority shareholder as the takeover suggester, the purpose is to buy back all the shares held by the minority shareholder, and eventually delist the company and become the private company of the majority shareholder.

Why privatize?

First, the adjustment and restructuring of the company's strategic structure.  Delisting would free the company from having to disclose its strategic intentions and financial data to the public; not only would it be able to avoid the pressure of disclosing financial reports that would affect its competitive strategy, but it would also be able to focus more on its business operations and free and independent management.

Second, it is necessary to circumvent regulations and improve efficiency.  The US stock market has strict legal standards for the governance structure and information disclosure of listed companies, and the operation needs high operating expenses.  Tighter regulations have also added to the burden on businesses.

Privatization process

The SEC of the United States has two main conditions for privatization: First, the initiator must be a takeover offer issued by the issuer or its affiliates.  Second, the acquisition of tradable shares must be carried out in cash.  Since you buy from the secondary market, you need a certain premium (above the market price) to the market price.  The privatization process is as follows:

1. The controller issues a privatization offer;

2. Submit the privatization proposal to the board of directors;

3. The company publicly announced the privatization offer and set up a special committee to evaluate the privatization offer;

4. The special committee approved the privatization offer;

5. Investment banks give opinions on fairness;

6. The board of directors approves the privatization offer;

7, to file a Form 13E-3 with the SEC and release the acquisition documents to shareholders at the same time

8. An extraordinary general meeting of shareholders was held to vote. If the approval is passed, the privatization will be successful and the shares will be delisted and stopped from trading.  If it isn't voted in, privatization fails.

Possible problems with privatization?

First of all, the privatization and delisting must be backed by deep capital escort.  According to the requirements of regulators in the United States, shareholders who propose to be privatized must purchase the floating shares in cash, and the acquirer must provide the minority shareholders with a premium based on the current stock price. In addition, the fixed fees such as legal consulting fees, audit fees, accounting fees, financial advisory fees, bank loans and financing fees will be added. Under the soaring financial pressure, if there is no financial capacity, the privatization and delisting is just a utopian.

Secondly, the opinion from the special committee may also act as a barrier to the de-listing of privatization.  Generally speaking, after a company's internal shareholders submit a non-binding privatization proposal to the company's board of directors in writing, the independent directors will form a separate committee and hire their own financial and legal advisers. If the independent directors raise objections, the company will face great difficulties in delisting.

Third, attacks from short sellers make the path to privatization and delisting perilous.  The short selling mechanism in the US capital market is well developed, and there are many short sellers who profit from short selling. The short sellers often caught the short sellers of Chinese concept stocks because of the poor communication with US investors, the lack of standardized and transparent financial reporting, and the difficult supervision of the VIE structure. Zhongtaifu Electric, which was among the first to be privatized and delisted in 2011, suffered short selling from Citron.


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