Edge-ucation / Investing Coaching

What Happens to Shares When a Company Goes Private?

  • Austin Still

    Austin holds a Bachelor of Commerce from the University of Saskatchewan and brings over 10 years of investing experience. With a belief the most important decision investors make when buying stocks is the price paid, Austin aims to blend growth with value by finding companies with accelerating growth combined with a discounted valuation. More specifically, Austin’s expertise lies in the technology sector, identifying businesses showing strong growth, a lasting competitive advantage, and sound fundamentals, paired with a valuation that supports further stock price appreciation.

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"Public" and "Private" street signs pointing in opposite directions

Distinction Between A Public Company And a Private Company | Tax Return Wala

When investing in the stock market, a risk that investors need to understand is what happens to shares when a company goes private.

Publicly traded companies, which trade on various stock exchanges, may not always stay on the public markets.

It’s possible that a larger company buys the publicly traded company, meaning their shares will no longer be able to be bought and sold. Or, the management team of a company decides to delist from a major stock exchange and enter into private ownership.

When this happens, there are many different scenarios that can play out for shareholders. And to properly mitigate your risk, investors will need to understand the intricacies and options they have when a company they have invested in either takes their company private or is bought by another privately held company.

Today, we will be giving our readers a detailed overview of the process that happens when a company goes private, highlighting the options shareholders will have, the risks involved, and how they can mitigate these risks moving forward.

Why Does a Company Go Private?

When a publicly traded company decides to go private, it’s not a decision made lightly. There are several compelling reasons that drive companies to make this strategic transition.

And understanding these motivations can help investors identify firms that could potentially leave the public markets.

Let’s explore some of the primary reasons why companies choose to go private:

Greater Flexibility and Freedom:

One of the most significant incentives for companies to go private is the increased flexibility in decision-making. Public companies face stringent regulatory requirements, including quarterly reporting and shareholder communication.

These obligations can be time-consuming and expensive. By going private, a company can escape the constant scrutiny of Wall Street and focus on long-term growth strategies without the pressures of meeting short-term investor expectations.

Escape from Market Volatility:

The stock market is inherently volatile, and a public company’s shares can be influenced by a multitude of external factors, many of which have nothing to do with the company’s actual performance.

This volatility can make it challenging for management to focus on strategic goals when they are constantly reacting to market fluctuations. Going private allows a company to sidestep this rollercoaster ride and focus on executing its business plan without daily stock price worries.

Confidentiality and Competitive Advantage:

Public companies are required to disclose a significant amount of financial and operational information, making their strategies and financial health transparent to competitors. Going private can shield a company’s sensitive information from prying eyes, allowing it to maintain a competitive edge and negotiate deals with a higher level of confidentiality.

Long-Term Focus:

Public markets often prioritize short-term gains and shareholder value over long-term stability and growth. For companies with ambitious, long-term projects that may not yield immediate profits, going private can provide the patience needed to execute these strategies without constant pressure for short-term results.

Cost Savings:

The expenses associated with being a publicly traded company, such as compliance with regulatory requirements, investor relations efforts, and the cost of public audits, can be substantial. Going private can significantly reduce these costs, potentially improving the company’s bottom line.

Strategic Restructuring:

Some companies choose to go private as part of a strategic restructuring or turnaround plan. Going private can facilitate major organizational changes, allowing a company to reposition itself more effectively in the market. Additionally, the company may have received a generous offer from various venture capitalists (or other investors) that the management team deems too good to decline.

The Privatization Process: A Step-by-Step Guide to Becoming a Private Company

The decision to go private is a strategic shift that involves a well-thought-out process. Companies do not simply close their doors to public investors overnight. Instead, they follow a carefully orchestrated series of steps to transition from being publicly traded to privately held.

Below is a step-by-step guide to help you understand the details of this transformation:

1. Preparation and Evaluation

Magnifying glass and pen on stack of papers reading "Due Diligence"

International School Acquisition Due Diligence Checklist | GSineducation

Before initiating the privatization process, a company’s board of directors and management team must evaluate the decision thoroughly. This involves assessing the company’s financial health, identifying the key drivers for going private, and understanding the potential benefits and risks.

2. Board Approval

Men shaking hands

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Once the decision is made, the company’s board of directors must approve the privatization plan. Shareholders may also have a say in this process, depending on the corporate governance structure and applicable regulations.

3. Financing and Funding

Fountain pen signing a paper stamped "Approved"

Top 3 Strategies to Get Grants for your Business | Richmond Economic Development

To execute the privatization, the company needs to secure the necessary financing. This often involves obtaining loans or attracting private equity investors who are willing to fund the buyout of public shareholders.

4. Offer to Public Shareholders

A critical step in going private is the offer made to existing public shareholders. The company, often in conjunction with private equity partners, offers a purchase price for the outstanding shares. Shareholders have the option to accept or decline this offer.

5. Securities and Exchange Commission (SEC) Filings

Companies going private are required to file a Form 13e-3 with the SEC, which provides detailed information about the transaction and the reasons for going private. The SEC closely monitors this process to ensure that shareholders are treated fairly and that all relevant information is disclosed.

6. Shareholder Vote

Raised hands

Shareholder Voting Trends Dashboard | Conference Board

Depending on the company’s corporate governance structure and applicable regulations, shareholders may be required to vote on the privatization proposal. The approval typically requires a majority vote, but this can vary.

7. Deal Closure

Once shareholders approve the privatization, the company finalizes the transaction. Shareholders who accepted the offer receive their compensation, often in cash, and their shares are delisted from public stock exchanges.

8. Post-Privatization

With the company now private, it can focus on its long-term strategies and business objectives without the pressures of public markets. This often includes a reassessment of corporate governance, strategic priorities, and growth initiatives.

It’s important to note that the specifics of the privatization process can vary widely from one company to another and are subject to regulatory requirements. Additionally, the outcome for individual shareholders can differ based on the terms of the privatization.

Implications for Shareholders

The decision of a company to go private has significant implications for shareholders, both individual and institutional.

Understanding these consequences is crucial for investors who find themselves in a company undergoing privatization. Let’s dive into the key implications:

Compensation for Public Shareholders:

Shareholders who accept the privatization offer typically receive compensation for their shares. This compensation can take various forms, including cash payments, shares in the newly private company, or a combination of both. The value of the compensation is determined by the terms negotiated between the company and its private equity partners, and is subject to regulatory oversight.

If and when a company does go private, investors will no longer see the shares in their brokerage account, rather, if they are given shares in the newly private firm they will be given proof of ownership in another format.

Loss of Liquidity:

One of the primary consequences for shareholders is the loss of liquidity. Publicly traded shares can be bought and sold on stock exchanges at any time during trading hours. In contrast, shares in private companies are not easily tradable. Shareholders may need to hold their investment for an extended period before having an opportunity to sell their shares.

Limited Information Access:

Public companies are required to disclose a substantial amount of information to shareholders and the public. When a company goes private, it is no longer subject to the same level of transparency and reporting requirements. Shareholders will have limited access to financial data, potentially making it more challenging to assess the value of their investment.

Changes in Governance and Management:

Privatization often involves changes in corporate governance and management. New owners or private equity firms may exert greater control over the company’s direction and leadership. This can impact the way the company is run and the decisions made regarding dividend payments, reinvestment, and strategic initiatives.

Tax Implications:

Shareholders should consider the tax implications of the privatization transaction. Depending on their jurisdiction and the structure of the deal, they may face capital gains tax on the compensation received for their shares. It’s advisable to consult with a tax professional to assess the specific consequences.

As a shareholder in a company undergoing privatization, it’s essential to carefully evaluate the terms of the privatization offer and consider your long-term financial goals.

In essence though, when a company goes private, your shares will either be converted to ownership in the newly private company, or the firm will attempt to re-purchase the shares back from you. Which scenario happens depends on the strategic direction of the management team, regulatory approval, and a vote from all shareholders.

Hopefully, the list above provides greater context as to what will happen to your shares when a company goes private, as well as some other considerations you should be aware during the privatization process.

Final Word

The decision of a company to go from a publicly traded entity to a private one is a strategic move that carries profound consequences. Throughout this article, we’ve explored the motivations behind such decisions, the intricate process of privatization, and the implications it holds for shareholders.

Existing shareholders will have the chance to vote on whether or not they accept the privatization offer and have the opportunity to receive a premium price on their shares depending on the acquisition offer. Alternatively, if the company is not being bought out, but rather is deciding to go private on their own, shareholders could receive a payout for their shares valued at the current market price.

All told, the options for investors when a company they own shares in goes private is plentiful. What’s really important is for investors to understand their options, the process, and what will likely happen after the company is no longer publicly traded.

This way, investors can create a game plan for any scenario, as well as mitigate their risk when deciding which firms to invest in.


We are not brokers, investment or financial advisers, and you should not rely on the information herein as investment advice. If you are seeking personal investment advice, please contact a qualified and registered broker, investment adviser or financial adviser. You should not make any investment decisions based on our communications. Our stock profiles are intended to highlight certain companies for YOUR further investigation; they are NOT recommendations. The securities issued by the companies we profile should be considered high risk and, if you do invest, you may lose your entire investment. Please do your own research before investing, including reading the companies’ public filings, press releases, and risk disclosures. Information contained in this profile was provided by the company, extracted from public filings, company websites, and other publicly available sources. We believe the sources and information are accurate and reliable but we cannot guarantee it. The commentary and opinions in this article are our own, so please do your own research.

Copyright © 2023 Edge Investments, All rights reserved.

  • Austin Still

    Austin holds a Bachelor of Commerce from the University of Saskatchewan and brings over 10 years of investing experience. With a belief the most important decision investors make when buying stocks is the price paid, Austin aims to blend growth with value by finding companies with accelerating growth combined with a discounted valuation. More specifically, Austin’s expertise lies in the technology sector, identifying businesses showing strong growth, a lasting competitive advantage, and sound fundamentals, paired with a valuation that supports further stock price appreciation.

    View all posts

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