Over the past few years, take-private transactions have continued their momentum, driven by market volatility, abundant private equity capital, and the growing regulatory burdens on public companies. Economic turbulence and global uncertainties have depressed valuations for some companies, making private ownership an attractive alternative.

With global private equity and venture capital funds holding a record $2.5 trillion in uncommitted capital as of December 2024, according to an article from S&P Global, firms are seizing opportunities to acquire high-quality assets, streamline operations, and pursue strategic goals free from public market scrutiny and compliance costs. 

As companies navigate a take-private transaction, understanding the SEC filing requirements and accounting complexities is critical to a successful transition.

SEC Filing Considerations

The process of going private requires a series of SEC filings, executed in a specific sequence to ensure compliance and a smooth transition.

Initially, companies must file a Form 8-K to report the company's entry into a material agreement, and a Schedule 13E-3 to disclose details of the going-private transaction, including its purpose, terms, fairness opinions, and financial impacts, as mandated by Rule 13e-3 of the Securities Exchange Act of 1934. Read more about Stout’s fairness opinions expertise.

If shareholder approval is needed, a Proxy Statement (Schedule 14A) is filed to provide shareholders with comprehensive information about the transaction. Upon transaction completion, a Form 8-K is submitted to report the event, followed by the final Form 10-Q or Form 10-K covering the period before closing.

Post transaction, a company files Form 15 after confirming it has fewer than 300 shareholders (subject to certain exceptions) to deregister its securities and suspend public reporting obligations, subject to a 90-day SEC review period.

Because of the complexities associated with these filings, it is imperative that companies engage SEC counsel as early as possible to manage these filings, ensure accuracy, and mitigate risks of shareholder litigation or regulatory delays.

Accounting Complexities

Going private introduces significant accounting changes as companies transition from public company reporting standards to private company requirements. Below are the key accounting complexities to anticipate and prepare for.

Transition from Public to Private Company Accounting Standards

Private companies have more flexibility and certain reduced accounting and disclosure requirements under U.S. Generally Accepted Accounting Principles (GAAP) and the Private Company Council (PCC). In the transition to private company accounting and disclosure, a company must evaluate the method of adoption for changes in accounting policies, and the election of private company expedients. The transition requirements for these policies vary and should be evaluated on a case-by-case basis under the applicable accounting standards.

Transaction-Related Accounting

Acquisition Accounting: Going-private transactions, such as mergers or leveraged buyouts, often requires the acquirer, or the acquiree if push-down accounting is elected, to complete a purchase price allocation under ASC 805, Business Combinations. This involves valuing acquired assets and liabilities at fair value, including the identification and fair valuation of intangible assets.

Determining the Acquirer: Private equity transactions usually involve numerous legal entities (for instance: holding companies, buyer subs, merger subs, blocker entities, etc.). The assessment of which legal entity gains control and whether these entities are substantive or non-substantive under the accounting rules can affect the determination of the accounting acquirer and the financial reporting and presentation requirements of the reporting entity going forward.

Determining the Reporting Entity for Financial Reporting Purposes: Once the accounting acquirer is determined, a company must identify which legal entity will be the reporting entity going forward. The reporting entity determination for the post-transaction organization may be determined by, and generally corresponds with, audit requirements within the group’s legal formation and operating documents, credit facility agreements, or investor preference, and may result in one of the following scenarios:

• The acquiring entity is the new reporting entity: Under this outcome, the acquiree will be consolidated within the acquirer, and the acquirer will apply business combination accounting (ASC 805) to its acquisition of the acquiree. Assets and liabilities of the acquiree are fair valued by the acquirer on the acquisition date.
• The acquiree continues as the reporting entity (push-down accounting is not applied): The acquiree will continue preparing financial statements with no changes in basis to its assets or liabilities. The financial statements will reflect the changes in the entity’s capital structure, but acquisition accounting is not applied to the entity’s separate financial statements.
• The acquiree continues as the reporting entity (push-down accounting is applied): Under this optional election, the acquiree will continue preparing financial statements; however, its statements will reflect the effect of the business combination and the fair valuation of its assets and liabilities on the transaction date. In this instance, the effect of the acquisition is viewed as a termination of the old reporting entity and the creation of a new reporting entity. As such, the preacquisition and post-acquisition periods should be separately presented with a “black line” separating the periods, and narrative disclosures should mirror the pre- and post-acquisition periods.

Evaluating Complex Debt Structures Associated with the Transaction: Many going-private transactions involve significant debt financing, many of which contain complex structures. Entities must carefully identify the legal borrower and any guarantors (refer to reporting entity considerations described above), whether the debt has been amended or modified in conjunction with the transaction, and the accounting implications associated with any complex terms.

If an existing debt agreement is modified to support the transaction, or debt is exchanged with the same lender, an entity may need to perform a modification analysis to determine the correct accounting. Such modification analyses can be complex and require judgment.

Equity Adjustments: Transactions may involve stock repurchasing, option cancellations, or new equity issuances, necessitating complex accounting for equity-based compensation under ASC 718, Share-Based Compensation. Cash payments made to settle outstanding awards should be evaluated to determine whether incremental compensation cost is required to be recorded.

Cancelled awards may have their own accounting implications for an acquiree’s financial statements (when push-down accounting is not applied). Generally, upon the cancellation of a time-based award, any unrecognized compensation cost should be accelerated and recognized on the award cancellation date.

For performance-based awards, unrecognized compensation cost should generally be accelerated and recognized as compensation expense if the performance conditions became probable of being achieved prior to the cancellation of the awards.

Replacement awards, which are typically in the form of profits interests, will need to be evaluated under ASC 718 for the appropriate accounting recognition, and are required to be fair valued on the grant date for equity classified awards, and on a recurring basis for liability classified awards.

Tax Considerations: The value of deferred tax assets and liabilities may need to be reassessed based on the company’s new ownership structure, including analysis of net operating loss limitations under Internal Revenue Code Section 382.

Additionally, go-private transactions may trigger tax consequences, such as capital gains for shareholders or changes in tax attributes (e.g., net operating losses). Debt financing may also create interest deductions, impacting taxable income. It is important to engage tax advisors to model the transaction’s tax implications and optimize tax strategies.

Post-Transaction Reporting

While private companies are not required to follow quarterly, annual, and other recuring reporting requirements under the SEC rules, they may need to provide customized financial information to lenders, private equity investors, or other stakeholders. Company management should identify key stakeholders (e.g., lenders, investors), understand their reporting requirements, and develop monthly, quarterly, and annual reporting that meets the needs of these stakeholders.

Strategic Recommendations

To navigate the complexities of going private, public companies should adopt a proactive and coordinated approach:

1. Assemble a Cross-Functional Team: Form a team of internal and external experts, including legal counsel, accounting advisors, valuation specialists, and investment bankers, to manage the transaction and its regulatory and accounting implications.
2. Conduct a Readiness Assessment: Evaluate the company’s financial reporting processes, internal controls, and stakeholder obligations to identify gaps and develop a transition plan.
3. Develop a Detailed Timeline: Create a comprehensive timeline for SEC filings, transaction execution, and post-transaction integration, accounting for potential delays due to regulatory reviews or shareholder approvals.
4. Engage Stakeholders Early: Communicate with shareholders, employees, and other stakeholders throughout the process to build support and minimize resistance.
5. Plan for Post-Transaction Operations: Prepare for the operational and cultural shift to private company status, including changes in governance, reporting, and strategic priorities.

Conclusion

Going private offers public companies opportunities for greater operational flexibility and reduced regulatory burdens, but it requires meticulous preparation to address SEC filing requirements and accounting complexities. By understanding the regulatory landscape, anticipating accounting challenges, and adopting a strategic approach, companies can execute a successful transition and position themselves for long-term success as private entities.

For further guidance, consult with experienced legal, accounting, and financial advisors to tailor the go-private strategy to your company’s specific circumstances.

Disclaimer

This article provides general information on the accounting implications of take-private transactions. It is not intended to address all facts and circumstances, or constitute professional advice. Companies considering a take-private transaction should consult with qualified advisors to address their specific circumstances and ensure compliance with applicable accounting standards.