United States - Securities - Twitter Sale And The Differences Between Public And Private Companies (2024)

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Twitter, Inc. agreed on April 25 to be acquired by an entitycontrolled by Elon Musk for an aggregate purchase price ofapproximately $44 billion.

Twitter will be the surviving company in a merger with asubsidiary of the Musk entity, emerging as a private companyultimately controlled by Musk.

While the merger is subject to the approval of Twitter'sstockholders and a variety of other conditions, including clearanceunder certain antitrust and foreign investment laws, news of theproposed transaction has reverberated around Wall Street and thesocial media, communication and technology industries.

But what does it really mean for a public company to "goprivate"? This article offers a high-level overview of some ofthe differences between public and private corporations andexplains some of the potential effects of taking a corporationprivate.

Stockholders and Liquidity

The term "public company" most frequently describes acompany that has completed an initial public offering (IPO) ofequity securities and has registered those securities with theSecurities and Exchange Commission (SEC) under the Securities Actof 1933, as amended, and the Securities Exchange Act of 1934, asamended, (the Exchange Act).

Assuming a public company meets all of the mandatory listingrequirements, investors who acquire public company stock can freelytrade their shares on the open market on a national securitiesexchange, such as the New York Stock Exchange (the NYSE).

Twitter completed its IPO in 2013, and its securities arecurrently 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 nolonger 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 becanceled and converted into the right to receive $54.20 in cash,without interest.

The parent entity controlled by Musk will then be the solestockholder of Twitter. As a result, shares of Twitter will nolonger be available for purchase on the open market, and it will bevirtually impossible for any but a select few investors to acquirea stake in the parent entity.

Public Reporting Requirements

Public companies are subject to periodic and current reportingrequirements of Section 13 or 15(d) of the Exchange Act and areoften referred to as "reporting companies".

A reporting company is required to comply with ongoingdisclosure requirements under the Exchange Act in order to keep theinvesting public up to date on the reporting company'sfinancial condition and results of operations, and a wide varietyof other information and material events potentially affectinginvestment decisions.

Periodic reports that a public company and its insiders mustprepare and file with the SEC, include, among others:

• Annual reports after the end of the fiscal year, which includeaudited financial statements and exhaustive disclosure about thereporting company;
• Quarterly reports after the end of each of the first threefiscal quarters, which include unaudited financial statements andinterim updates to other information;
• Reports for certain "current" material events thatmust be filed within a few days of the triggering material event(e.g., changes in officers or directors, entering into orterminating a material agreement, acquisitions or dispositions ofbusinesses or assets, and a long list of others.);
• A proxy statement for the annual stockholder's meeting,which includes, among other items, highly detailed informationabout executive officers' and directors' compensation, thereporting company's directors and its corporate governancestructure; and
• Reports regarding the beneficial ownership of directors,officers, and certain large stockholders.

Producing these reports imposes significant burdens on areporting company's financial and human resources, and exposesa public company to potential civil and criminal liability to itsstockholders for material misstatements or omissions.

Private companies are generally not subject to these burdens onresources and have less exposure to these potential liabilities.Public reporting obligations are often cited as incentivizingreporting companies to manage their businesses in a manner designedto produce short-term results; conversely, private companies mayhave more flexibility to manage and execute longer-term plans andgoals.

Private companies are also not subject to the same disclosurerequirements as public companies. Other than as may be required bystate law, private companies do not have to disclose informationabout the company to the general public.

As a result, Twitter will have no legal obligation to inform thepublic about the company's management, financial condition orresults of operations once it goes private.

Governance

All public and private corporations are governed by the laws ofthe state in which they are incorporated. As a private company,Twitter would remain subject to any governance requirements understate law (e.g., notices to stockholders, voting and quorumrequirements, fiduciary duties of directors, contents of acorporation's charter documents, etc.).

Public companies with securities listed on a national securitiesexchange, such as the NYSE or Nasdaq, must also comply with thecontinued listing standards of that exchange to maintain theirlistings.

The national securities exchanges have adopted certain corporategovernance requirements, and best corporate governance practiceshave also been developed over the years (e.g., a majorityindependent board of directors; independent audit, compensation,and nominating and corporate governance committees; detailedcommittee oversight over an area of the company, and manyothers).

Public companies must comply with a national securitiesexchange's corporate governance requirements or risk losingtheir listing status, which would result in their stock no longerbeing traded on the exchange and would have adverse consequencesfor the company and its investors

Most public companies provide specific avenues for stockholdersto nominate directors and make proposals at stockholder meetings.These actions, in part, allow for activist stockholders to putpressure on management, be more active in the daily operations andmanagement of public companies, and engage in contests for controlof the company. By taking a company private, the ability ofstockholders to actively campaign to influence the actions of theboard of directors, such as Musk did during the run-up toTwitter's agreement to the pending acquisition, would besubstantially limited.

Once a private company, Twitter will no longer be subject to thelisting standards of the NYSE or need to comply with the NYSE'sgovernance disclosure requirements.

Through the parent entity of Twitter, Musk will also havecontrol over the company and can guide any changes in thecompany's management and operations, such as the composition ofthe board of directors and the committees of the board ofdirectors, and its policies and initiatives.

Conclusion

The liquidity of public companies, the different disclosure andreporting requirements between public and private companies, andthe governance standards are just a few examples of the significantdifferences between public and private companies.

There are a number of other nuanced differences between privateand public companies that are beyond the scope of this article,such as the way public companies access debt and equity publicmarkets and the interaction and relationship between the public andprivate companies and their stockholders.

Given that Musk's proposed acquisition of Twitter is one ofthe largest leveraged buyouts in history, the impact of Twittergoing private - on both its users and the social media,communication and technology industries as a whole - is yet to beseen but should prove to be informative and educational.

Originally published by State Bar ofWisconsin.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.