Overview
When a company decides to go private, it removes itself from the public marketplace. This means the company is no longer obligated to provide financial information to the Securities and Exchange Commission and the company’s shares are no longer traded on the stock exchange. What happens in this situation to the stock options owned by shareholders? Generally, stock options are forfeited when a company goes private. However, in certain cases, shareholders may be offered alternative compensation, such as cash or private stocks, in exchange for their stock options.
What Are Stock Options?
According to Investopedia, “A stock option is a contract between two parties which gives the buyer the right to buy or sell underlying stocks at a predetermined price and within a specified time period.” These can be used as a form of compensation, allowing the owner to benefit from any increase in the stock’s price when the option is exercised. Generally, there are two kinds of stock options: those granted through an employer, known as incentive stock options (ISOs) and those granted in the open market, known as non-qualified stock options (NSOs).
What Happens to Stock Options When Company Goes Private?
When a company goes private, it no longer must comply with SEC rules and regulations and is not required to provide financial information to the public. It is therefore not subject to the rules that govern the vesting and early exercise of ISOs and NSOs. As such, stock options will generally be forfeited when the company goes private.
However, some companies may be willing to offer alternative compensation in the form of cash or private stocks in exchange for the stock options being forfeited. This is known as a tender offer. Each company will have different terms and conditions for their tender offer, so it is important to understand the specifics before making a decision.
What Are the Benefits of Going Private?
There can be a number of benefits to going private, particularly when a public company has become too large and complex to be managed effectively. Going private can help a company reduce its costs, increase its efficiency by reducing the need to report to shareholders, and provide a greater level of financial stability.
Issues to Consider When Going Private
While there are many potential benefits to going private, it is important to recognize some potential drawbacks. Going private eliminates the liquidity of the stock, meaning shares can no longer be readily bought and sold in the open market. For shareholders, this can mean a lower potential return on their investments. Additionally, stock options will generally be forfeited when the company goes private, so it is important to weigh the potential benefits of any tender offer versus the potential losses when making a decision.
Advantages of Going Private for Companies
Going private can have a number of advantages for a company. By removing the need to comply with the SEC and report to shareholders, the company can dramatically reduce costs. It can also be beneficial for companies who have grown too large and complex to be managed efficiently. By going private, the company can reduce expenses and increase efficiency.
Disadvantages of Going Private for Companies
It is important to recognize some of the potential disadvantages of going private. Going private can limit the liquidity of the stock, reduce access to capital, and make it more difficult to take advantage of market opportunities. Additionally, it can reduce the incentive for management, as stock options will generally be forfeited when the company goes private.
Tax Implications of Going Private
When a company goes private, it can have tax implications for both the company and its shareholders. Companies may need to pay capital gains taxes if their stock is sold, and shareholders may be liable for taxes on any gains from the sale of their stock. It is important to speak with a tax professional to understand the potential tax implications before making a decision.
Developing a Plan for Going Private
When transitioning to a private company, it is important to have a plan in place to ensure the transition is as smooth as possible. This plan should include strategies for reducing costs, financing the transition, and dealing with any regulatory or legal issues that may arise. Additionally, the plan should include details on how shareholders will be compensated for any stock options that are forfeited.
When a company goes private, it is important to protect the interests of shareholders. Shareholders should understand any potential risks, such as tax implications, and should receive adequate compensation for any stock options they may forfeit. Additionally, shareholders should be able to voice their opinion on the proposed transition.
Legal Implications of Going Private
When a company goes private, there are a number of legal implications that must be taken into consideration. These include any changes in ownership structure, employee compensation plans, and corporate governance. Additionally, the company may need to contend with any existing contractual obligations or disputes with creditors or suppliers.
Conclusion
Going private can be a beneficial option for a public company, as it can reduce costs and increase efficiency. However, it is important to consider the potential risks and downsides, such as stock options being forfeited and potential tax implications. Careful planning and an understanding of the legal and regulatory requirements can help to ensure the transition is as smooth as possible.
