Excerpts: “The Battle Over ‘Going Private'”

• When a public company goes private—that is, eliminates its outside stockholders by one of several means such as merger, reverse stock splits or buying back shares—who should regulate the substance of the transaction? Should it be the Federal Government, through the Securities & Exchange Commission which watches over the relationship between investors and management at public companies? Or should it be the states, which traditionally set the rules for the internal conduct of corporations?
• Last September, with the price of its stock at a low point of $5.50, the company offered shareholders the right to exchange their stock for $3 cash and $8 in a 10 per cent, 10 year debenture. The price was vouched as fair by White, Weld & Co., the underwriter that had taken the agency public and was helping slide it back to privacy.
• In November, Mr. Sommer delivered a speech at Notre Dame Law School excoriating the going‐private fad as unethical and possibly illegal. Although he mentioned no names, he described the Wells, Rich exchange offer precisely and alluded to the dominant shareholder in the example as “her.” In another speech last March, he referred to the issue as “being on the cutting edge in the development of Federal securities law.”
• One such contender is Arthur M. Borden, an associate professor at New York University School of Law. He has asserted that going private has become “a tempest in a teapot” though one which reveals “which way the winds are blowing” —namely in the direction of Federal control over substantive aspects of corporate transactions.
• Part of this, as he sketched the development of the law, was in response to a shift over the last century from the view of shareholder rights as fixed to one of flexibility (some would say permissiveness) for the corporation as long as those in control do not create unfair terms for the outside shareholders.
• As interpreted by most Federal courts, the securities exchange acts are primarily disclosure statutes. Rule 10b‐5, the knotty rule governing going public transactions (and presumably going private as well) inpose a duty to inform the buyer or seller of a security of everything he should know in order to make his decision and to keep him from being a victim of fraud deceit.
• Mr. Borden of N. Y. U. says, “Maybe we should have rules for the kinds of companies that can go public. That was a key part of the problem.” He decries the excesses of prior hot issue markets in which unseasoned speculative companies had unlimited access to public financing.
• They admit, however, that many such transactions are unfair either in price or coerciveness but say this can be mitigated with additional safeguards. Mr. Borden believes that generally, except for “shakedown” tender offers, the extra protection should be in state law.

Source: New York Times