Introduction
A lot has been said about the great advantages of an IPO of a private company: the possibility of significant fundraising, unlocking the value of the company securities, better possibilities for advertising the company and forming reputation, and much more. However, there is a variety of reasons according to which, making a public company private actually embodies significant advantages, and holders of controlling interests invest great financial and managerial resources in order to make public companies private, while purchasing the public holdings in such companies.
In this article we will review the main ways to turn a public company into a private one (Going Private), among others in the most significant and comprehensive judgment in the case of Atzmon vs. Osem Investments Ltd.[1] which was recently received at the District Court in Tel-Aviv (Economic Division).
The Advantages of “Going Private”
Apart from the great advantages of making a public offering, the very conversion of a company to a public one also carries many disadvantages. Firstly, the on-going costs of public companies continuously increase with time. In addition, the complexity of meeting current reports, both immediate and periodic (quarterly and annual) is not simple and takes great time and managerial resources from the company, and of course may expose data and information about the company which its management may prefer to keep confidential. Additionally, in many public conglomerates where there is more than one public company, there are often difficulties in making decisions between the group corporations, in light of questions of conflicts of interest. Moreover, in many cases discussed in the courts with regards to Going Private transactions, this is the main reason at the base of the attempt for which the holders of controlling interests decided to purchase the public holdings in the relevant corporation and make it private (for this matter, refer to the case of Naftali Shani vs. Malam Systems Ltd.[2]).
In this regard, it is worth noting that in conglomerates which include a number of public corporations, after Going pPivate, the process of decision-making in the company is naturally more trivial and simple in a way which simplifies the entire work process vis-à-vis additional companies in the conglomerate.
A Complete Tender Offer compared with a Reverse Triangular Merger
Even before we delve into the Atzmon vs. Osem Case, it is important to note that one of the main arguments with regards to Going Private transactions relates to the very structure of the transaction. Upon the Companies Law, 5759-1999 (the “Companies Act“) entering into effect approximately two decades ago, a basic mechanism was set for purchasing public holdings and Going Private transactions in the framework of a Complete Tender Offer (Articles 336-340 of the Companies Law).
It is important to note that alongside the route of a complete tender offer, it is possible to perform transactions of Going Private in the route of a reverse triangular merger, in the framework of which the purchasing company establishes a private subsidiary (empty of activity), which, in turn, merges with the public target company and, in fact, makes it private, as a subsidiary of the purchasing company (in parentheses we will add that this is the outline of the transaction which was actually applied in the case of Atzmon vs. Osem Investments).
In a number of rulings which have been discussed in recent years, arguments have been raised by minority shareholders in public companies, according to which, upon the legislation of the Companies Law the exclusive route for performing a Going Private transaction is in the route of a complete tender offer, but it is important to note that these arguments have consistently been denied by the courts. The courts have ruled many times in a variety of cases, that the Companies Law indeed has provided and formulated the route of a complete tender offer, but the route is not unique and exclusive, and the routes are alternative to one another. Holders of controlling interests can choose and formulate for themselves the optimal route for performing a Going Private transaction as they see fit, and in as much as they meet all requirements of the Companies Law and the regulations, it is also possible to formulate the transaction in the route of a reverse triangular merger[3].
BJR or the rule of Entire Fairness Standard
In the case of Atzmon vs. Osem Investment, the outline which was selected to perform the transaction was the route of a reverse triangular merger. In light of the relationship between the purchasing corporation and the target corporation, for the purpose of pricing the transaction, it was decided in the purchasing parent company, Nestle, that an independent committee will be established, where one of its main roles will be to determine the price of purchasing the public holdings in the target company (Osem Investments). In the comprehensive judgment, Honorable Justice Ruth-Ronen discussed the issue of what is the standard of judicial review which should applied to the case. The justice has repeated the spectrum of judicial review over the decisions of the board of directors (as well as committees appointed pursuant to it):
On the one hand of the spectrum is the first standard of review – the BJR (the Business Judgement Rule) which is the most lenient. On the other side of the spectrum is the rule of Entire Fairness Standard, which is the strictest. In the middle is a medium standard: the Enhanced Scrutiny Standard.
In the Atzmon case it was determined that in case where: (1) the board of directors has adopted the decision not in a conflict of interests; and (2) the decision was adopted in subjective good faith; and (3) the decision was informed, then – in as much as all three conditions are met, the court will tend to not intervene in the consideration of the officers and will act in accordance with the BJR standard.
Furthermore, the court continued to rule that in Going Private transactions, the court will apply one of the three aforementioned mechanisms of judicial review in accordance with the structure of the transaction and the way in which the decision was adopted by the company organs.
Thus, in cases where an independent committee was formulated, where all of its actions have been and still are transparent, and it has hired independent consultants, and on the basis of their examinations a professional and educated decision was adopted, then the court will tend to not intervene in the decision as stated and in the consideration of the officers, in accordance with the BJR standard. Alternatively, in case where it will be proven that the officers have acted out of a significant conflict of interests, the court will tend to intervene and to apply the rule of complete fairness. Needless to say, the subject is complex, and we do not pertain to exhaust it in our article herein.
Summary
When holders of controlling interests in a public company consider performing a significant Going Private transaction, it is possible to choose a variety of routes in order to construct and complete the transaction. There is great importance in the manner of formulating the structure of the transaction and the mechanisms which assist in actually applying it, in order to have professional and independent discretion of the officers when they decide on whether and how to execute the transaction.
For further information please contact:
Hanan Efraim, Adv. Tsippy Bengi, Adv.
Office: 03-691-6600 Office: 03-691-6600
Email: hanan@ekw.co.il Email: tsippy@ekw.co.il
[1] Class Action (Tel-Aviv) 40404-03-16 Sharon Atzmon vs. Osem Investments Ltd.
[2] Originating Motion 786/07 Naftali Shani vs. Malam System Ltd.
[3] For example, refer to the case of Naftali Shani vs. Malam Systems – above.