Document Type

Article

Publication Date

2004

Abstract

Taking your company private has never been so appealing. The collapse of the tech bubble has left many companies whose stock prices bordered on the stratospheric now trading at small fractions of their historical highs. The spate of accounting scandals that followed the bursting of the bubble has taken some of the shine off the aura of being a public company-the glare of the spotlight from stock analysts and the business press looks much less inviting, notwithstanding the monitoring benefits that the spotlight purports to confer. Moreover, the regulatory backlash against those accounting scandals has made the costs of being a public company higher than ever. The passage of the Sarbanes-Oxley Act of 2002 has brought a host of costly new requirements for public companies affecting both disclosure and corporate governance. Securities fraud class actions are booming, and rates for D&O insurance are correspondingly skyrocketing. Auditors' fees have also spiked, reflecting the greater expectations imposed on accountants to ferret out corporate wrongdoing, and the commensurately greater risk of liability. Who needs it? As it happens, Delaware has a fire sale on going private for one group that might be particularly interested-controlling shareholders. In addition to the risks enumerated above, corporations with controlling stakes in subsidiaries have to worry about the risk of derivative litigation on behalf of minority shareholders. This risk arises from the fact that all of the controlling shareholder's transactions with their controlled subsidiary are potentially subject to the "entire fairness" standard, the most demanding regime in corporate law. That same standard makes it difficult for controlling shareholders to escape the risks of derivative lawsuits (and other costs of holding a control bloc in a public subsidiary) because Delaware courts impose the entire fairness standard on mergers between parent corporations and their subsidiaries. The result is that, until recently, freeze-out mergers to eliminate minority shareholders have been procedurally complicated, expensive and a target for litigation. The Article proceeds as follows: Part I sketches the "entire fairness" regime, Part II traces the development of the tender offer/short-form alternative and Part III addresses objections to that alternative. I summarize the main points in a brief conclusion.


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