May 4, 2022 – Twitter, Inc. agreed on April 25 to be acquired by an entity controlled by Elon Musk for an aggregate purchase price of approximately $44 billion.
Twitter will be the surviving company in a merger with a subsidiary of the Musk entity, emerging as a private company ultimately controlled by Musk.
While the merger is subject to the approval of Twitter’s stockholders and a variety of other conditions, including clearance under certain antitrust and foreign investment laws, news of the proposed transaction has reverberated around Wall Street and the social media, communication and technology industries.
But what does it really mean for a public company to “go private”? This article offers a high-level overview of some of the differences between public and private corporations and explains some of the potential effects of taking a corporation private.
Stockholders and Liquidity
The term “public company” most frequently describes a company that has completed an initial public offering (IPO) of equity securities and has registered those securities with the Securities and Exchange Commission (SEC) under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, (the Exchange Act).
Yamilett Lopez (Marquette 2019) is an attorney at
Godfrey & Kahn S.C., Milwaukee, focusing her practice on various aspects of corporate and securities law. She assists with public and private securities offerings, mergers and acquisitions, corporate governance matters, and SEC compliance and reporting. She received her J.D.,
magna cum laude, from Marquette University Law School, where she remains an active member of the Marquette Volunteer Legal Clinic.
Assuming a public company meets all of the mandatory listing requirements, investors who acquire public company stock can freely trade their shares on the open market on a national securities exchange, such as the New York Stock Exchange (the NYSE).
Twitter completed its IPO in 2013, and its securities are currently registered and traded on the NYSE. As of April 22, 2022, it had 764,180,688 shares of common stock outstanding.
If the merger closes as planned, Twitter’s stock will no longer be registered with the SEC and traded on the NYSE. Rather, each issued and outstanding share of Twitter’s common stock (subject to certain exceptions in the merger agreement) will be canceled and converted into the right to receive $54.20 in cash, without interest.
The parent entity controlled by Musk will then be the sole stockholder of Twitter. As a result, shares of Twitter will no longer be available for purchase on the open market, and it will be virtually impossible for any but a select few investors to acquire a stake in the parent entity.
Public Reporting Requirements
Public companies are subject to periodic and current reporting requirements of Section 13 or 15(d) of the Exchange Act and are often referred to as “reporting companies”.
A reporting company is required to comply with ongoing disclosure requirements under the Exchange Act in order to keep the investing public up to date on the reporting company’s financial condition and results of operations, and a wide variety of other information and material events potentially affecting investment decisions.
Periodic reports that a public company and its insiders must prepare and file with the SEC, include, among others:
Annual reports after the end of the fiscal year, which include audited financial statements and exhaustive disclosure about the reporting company;
Quarterly reports after the end of each of the first three fiscal quarters, which include unaudited financial statements and interim updates to other information;
Reports for certain “current” material events that must be filed within a few days of the triggering material event (e.g., changes in officers or directors, entering into or terminating a material agreement, acquisitions or dispositions of businesses or assets, and a long list of others.);
A proxy statement for the annual stockholder’s meeting, which includes, among other items, highly detailed information about executive officers’ and directors’ compensation, the reporting company’s directors and its corporate governance structure; and
Reports regarding the beneficial ownership of directors, officers, and certain large stockholders.
Producing these reports imposes significant burdens on a reporting company’s financial and human resources, and exposes a public company to potential civil and criminal liability to its stockholders for material misstatements or omissions.
Private companies are generally not subject to these burdens on resources and have less exposure to these potential liabilities. Public reporting obligations are often cited as incentivizing reporting companies to manage their businesses in a manner designed to produce short-term results; conversely, private companies may have more flexibility to manage and execute longer-term plans and goals.
Private companies are also not subject to the same disclosure requirements as public companies. Other than as may be required by state law, private companies do not have to disclose information about the company to the general public.
As a result, Twitter will have no legal obligation to inform the public about the company’s management, financial condition or results of operations once it goes private.
All public and private corporations are governed by the laws of the state in which they are incorporated. As a private company, Twitter would remain subject to any governance requirements under state law (e.g., notices to stockholders, voting and quorum requirements, fiduciary duties of directors, contents of a corporation’s charter documents, etc.).
Public companies with securities listed on a national securities exchange, such as the NYSE or Nasdaq, must also comply with the continued listing standards of that exchange to maintain their listings.
The national securities exchanges have adopted certain corporate governance requirements, and best corporate governance practices have also been developed over the years (e.g., a majority independent board of directors; independent audit, compensation, and nominating and corporate governance committees; detailed committee oversight over an area of the company, and many others).
Public companies must comply with a national securities exchange’s corporate governance requirements or risk losing their listing status, which would result in their stock no longer being traded on the exchange and would have adverse consequences for the company and its investors
Most public companies provide specific avenues for stockholders to nominate directors and make proposals at stockholder meetings. These actions, in part, allow for activist stockholders to put pressure on management, be more active in the daily operations and management of public companies, and engage in contests for control of the company. By taking a company private, the ability of stockholders to actively campaign to influence the actions of the board of directors, such as Musk did during the run-up to Twitter’s agreement to the pending acquisition, would be substantially limited.
Once a private company, Twitter will no longer be subject to the listing standards of the NYSE or need to comply with the NYSE’s governance disclosure requirements.
Through the parent entity of Twitter, Musk will also have control over the company and can guide any changes in the company’s management and operations, such as the composition of the board of directors and the committees of the board of directors, and its policies and initiatives.
The liquidity of public companies, the different disclosure and reporting requirements between public and private companies, and the governance standards are just a few examples of the significant differences between public and private companies.
There are a number of other nuanced differences between private and public companies that are beyond the scope of this article, such as the way public companies access debt and equity public markets and the interaction and relationship between the public and private companies and their stockholders.
Given that Musk’s proposed acquisition of Twitter is one of the largest leveraged buyouts in history, the impact of Twitter going private – on both its users and the social media, communication and technology industries as a whole – is yet to be seen but should prove to be informative and educational.