Board guidance for going private: five critical debating points for boards with an ESOP transaction on the agenda.

• Author: Raff, Elliot D.
• Position: CORPORATE REORGANIZATION

YOU ARE AN independent director of what we'll call Micro Technology Corp. (MTC), a small-cap publicly traded biotech firm incorporated in Delaware. MTC did an initial public offering in late 1998 at a price of $17 per share. The stock price skyrocketed to $175 per share in early 2000. Since then, consistent with trends in the public markets generally, MTC's stock has lost more than 90 percent of its value. It has languished in the single digits and is now thinly (or rarely) traded.

MTC is a mature company with a longstanding customer base and strong management who own a significant block of stock. But, like so many small-cap companies, it has been ignored by analysts and institutional investors. Yet MTC has strong revenues and a good product that remains in demand. Profits are less than desired, owing in large part to the costs of being a public company (chiefly legal compliance). Until recently, management and the board of directors had been hopeful that the market's appetite for a company like MTC would revive. But with a market capitalization of only $75 million and no current need for additional equity capital, MTC is not enjoying the supposed benefits of being a public company. Management and the board have now begun to wonder why they took MTC public in the first place.

Meanwhile, MTC has had to (and will continue to) spend millions of dollars annually to comply with the Sarbanes-Oxley Act and rules issued by the Securities and Exchange Commission and the NASD. These costs include significantly increased legal and accounting fees, premiums for D & O insurance, and investor and public relations expenses.

With a deep sigh, you open your binder of materials for an upcoming board meeting. Expecting to see the typical management reports, you are jolted by the first agenda item: "Taking MTC Private: The ESOP/Management Buyout Option." The memorandum touts the cost and tax savings, increased management independence, and employee incentives the proposal will generate. You are intrigued but realize there is much to learn.

You speak with the other two outside directors and meet with your personal legal counsel, who brings along her ESOP--Employee Stock Ownership Plan--expert. To fulfill your duties as a director of MTC, you must first understand the proposed transaction, including the general fiduciary duties of directors to stockholders in this context, and tax benefits generated by an ESOP. What follows is an overview of the five critical issues the directors need to analyze.

1. What is a 'going-private' transaction?

   Generally, the executive management team, a controlling stockholder, or another person takes a public company private by acquiring all of the publicly held shares. Another option is to reduce the number of stockholders to fewer than 300. This permits deregistration under the...