CLS Blue Sky Blog

The Real Effects of Disclosure in Going Private Deals

In a recent paper, we examine the real effects of disclosure in going private transactions.  The number of companies going private has been steadily increasing over the past decade, with a sharp rise during the last couple of years. This trend is driven by a variety of factors, including a desire to avoid the regulations and public scrutiny imposed on publicly traded companies and to focus on long-term growth rather than short-term financial performance. We argue that disclosure in going private transactions can have significant implications for the ability of buyers and sellers to negotiate a fair price and ensure that sellers are fully informed about the transaction’s terms and effects.

The Securities and Exchange Commission’s (SEC) Rule SC 13E-3 mandates a company’s management to provide detailed disclosures to all shareholders before a general vote to go private. The SEC’s Form SC 13E-3 and its related documents constitute the most important and complete communication on the going private transaction. The rule applies to all companies that communicate their intention to go private by filing Form SC 13E-3, regardless of the transaction’s motives.

We examine the association between the length of all disclosures in Form SC 13E-3 and three outcomes of going private transactions, namely the likelihood of completing the deal, increases in offer price, and litigation actions. We argue that inadequate disclosure may result in uncertainty and mistrust between the parties involved, leading to a failure to reach an agreement. Therefore, a high likelihood of closing a deal is a direct indicator that a transaction has successfully complied with all regulations and passed the sellers’ vetting process.  Second, we posit that inadequate disclosure can harm the confidence of sellers in the deal, who might negotiate the terms of the transactions with the buyers, resulting in an increase in the offer price. Last, we state that the risk of litigation can also be affected by perceived incomplete or misleading disclosure. Adequate disclosure can reduce the risk of litigation by ensuring that all stakeholders are fully informed and understand the terms of the transaction.

We examine 470 deals with transaction-specific SEC filings from 1995 to 2014. For each deal, we collect all filings and use the aggregate text length (i.e., the total number of words). Our descriptive statistics show that the median disclosure length is approximately 57,000 words and that disclosure volume varies considerably, which suggests that managers have much discretion over the level of detail in SEC filings.

We find a positive association between disclosure length and the likelihood of completing a deal, which suggests that deals with more disclosure are more likely to succeed. We also find a positive association between disclosure length and the incidence of upward price revisions and more litigation. These findings suggest that disclosure volume is associated with increased transaction costs, represented by higher offer prices and litigation likelihood. Furthermore, we provide some interesting additional analyses where we break down Form SC 13-E3 into different sections and find that the results are not driven by a specific section. We also examine the role of disclosure in shareholders’ conflicts involving squeeze-outs and document that these transactions do not drive our results. Last, we examine the incremental role of the volume of recurring disclosures, such as 10-K length, and find that the disclosure of Form SC 13-E is incremental to recurring disclosures.

Taken together, our findings show that management disclosure during going private deals is associated with both costs (upward price revision and more litigation) and benefits (higher likelihood of completion). Prior studies in this area focus on several relevant drivers, costs, and benefits that shape going private transactions. We extend these studies by demonstrating the incremental role of disclosure through mandatory SEC filings in closing these deals. Our findings offer insights into the effects of mandatory disclosure in this setting and fit within a broader literature on disclosure processing costs. We also shed light on an important step for companies looking to terminate their public status.

Finally, our paper suggests that mandatory disclosure fulfills the intent of the SEC to protect the rights of minority shareholders in going private transactions. While the disclosure is not related to lower likelihood of deal completion, it is associated with more favorable outcomes for the sellers (i.e., upward price revision) and higher litigation risk that may harm the buyers. Regulators might need to pay attention to the outcomes of the going private disclosure requirements and consider whether we need safeguards to avoid frictions when going private is truly advantageous for all stakeholders.

This post comes to us from professors Pietro A. Bianchi at Florida International University, Miguel Minutti-Meza at the University of Miami, and Maria Vulcheva at Florida International University. It is based on their recent paper, “The Real Effects of Disclosure in Going Private Deals,” available here.

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