Corporate Governance and Valuation Fairness in Going-Private Transactions: Challenging Undervaluation and Procedural Bias

In the high-stakes arena of leveraged buyouts (LBOs), the interplay between corporate governance and valuation fairness has become a critical battleground for minority shareholders. As controlling shareholders increasingly pursue going-private transactions to capitalize on perceived undervaluation, the structural dynamics of these deals—shaped by market tailwinds, financial performance, and procedural opacity—often create mispricings that demand rigorous scrutiny. For investors, understanding how to identify and challenge these imbalances is not just a matter of ethics but a strategic imperative.

The Lure of Undervaluation: Market Tailwinds and Financial Misalignments

Going-private transactions thrive on the premise that public markets undervalue a company's intrinsic worth. This is particularly evident in sectors where macroeconomic volatility or geopolitical tensions distort valuations. For instance, U.S.-listed Chinese companies like Hollysys Automation Technologies (NASDAQ: HOLI) have faced declining stock prices due to regulatory scrutiny and geopolitical risks, despite strong operational performance. In 2024, Hollysys was taken private by Ascendent Capital Partners at a price that many analysts deemed a premium to its public valuation. Yet, the absence of management rollover in this deal—a rare deviation from the norm—raised questions about whether the controlling shareholders prioritized their own interests over those of minority stakeholders.

Structural market tailwinds, such as elevated private equity (PE) multiples, further complicate the valuation landscape. In 2024, North American and European PE firms paid an average of 11.9x and 12.1x EBITDA, respectively, for target companies. These record multiples create a fertile ground for controlling shareholders to argue that public markets are mispricing their assets. However, as illustrates, even companies with robust growth trajectories can become targets for going-private deals when public valuations dip below private equity benchmarks. The $8.4 billion buyout of Smartsheet by Vista Equity Partners and Blackstone in 2024 exemplifies this trend, with the acquirers citing undervaluation as a key rationale.

Procedural Bias: The Hidden Costs of Control

The most insidious risks in going-private transactions stem not from valuation disagreements but from procedural flaws that favor controlling shareholders. These flaws often manifest in three ways:

1. Information Asymmetry: Controlling shareholders, with access to non-public data, can structure deals to obscure a company's true value. For example, the SEC mandates extensive disclosures for going-private transactions, but the volume and timing of these disclosures can be manipulated to sway shareholder sentiment. A 2024 study found that while increased transparency correlates with higher deal success rates, it also intensifies shareholder litigation risks. This duality forces minority shareholders to act swiftly to challenge opaque terms.

2. Special Committee Independence: The appointment of independent special committees is a procedural safeguard designed to counteract controlling shareholder influence. However, as seen in the Hollysys case, even when such committees are formed, their effectiveness depends on the quality of their advisors and the rigor of their due diligence. If the committee's financial advisor lacks expertise in the target's industry or if the fairness opinion is based on flawed assumptions, the transaction's legitimacy is compromised.

3. Consortium Dynamics: In many going-private deals, controlling shareholders or management join the buyer consortium, creating conflicts of interest. This was evident in the 2023 privatization of a hypothetical Chinese tech firm, where the consortium's capital structure disproportionately favored insiders. Minority shareholders must scrutinize these arrangements to ensure that the deal's terms are not skewed by the consortium's internal power dynamics.

Why Minority Shareholders Must Act: Strategies for Demanding Value

For minority shareholders, the stakes in going-private transactions are existential. When a company is taken private, their ability to sell shares is extinguished, and their future returns depend entirely on the acquirer's ability to unlock value. To protect their interests, investors should:

1. Demand Robust Due Diligence: Minority shareholders must push for third-party valuations and stress-test the acquirer's assumptions. For example, in the Hollysys deal, the special committee retained independent advisors to evaluate the company's EBITDA growth potential and compare it to industry multiples. This process exposed discrepancies in the buyer's projections and led to a revised offer.

2. Leverage Legal and Regulatory Tools: Shareholders should file lawsuits or petition regulators if they suspect procedural bias. The SEC's Schedule 13E-3 filings, which require detailed disclosures, can be a powerful tool for uncovering mispricings. In 2024, a class-action lawsuit against a U.S.-listed Chinese company alleged that its going-private transaction undervalued intangible assets. The case was settled with a 15% premium for shareholders.

3. Monitor Post-Deal Performance: Even after a transaction is approved, minority shareholders should track the acquirer's performance. reveals that while PE firms often achieve higher returns, these gains are not always distributed fairly. Shareholders should advocate for transparent reporting on the private company's financials to ensure that the initial valuation justifications hold up.

Conclusion: Governance as a Competitive Advantage

The going-private landscape is fraught with opportunities and risks. For controlling shareholders, these transactions offer a path to restructure and optimize value. For minority shareholders, they represent a test of corporate governance and market fairness. As the Hollysys and Smartsheet cases demonstrate, undervaluation and procedural bias are not inevitable but are symptoms of a system that rewards opacity. By demanding transparency, challenging flawed processes, and leveraging regulatory frameworks, minority shareholders can turn these challenges into opportunities to demand their fair share of value.

In an era where private equity multiples are at record highs and geopolitical tensions continue to distort valuations, the ability to navigate these dynamics will define the success of both acquirers and investors. For those willing to act, the rewards are clear: a more equitable market where governance and fairness are not just ideals but actionable strategies.