Governing Insiders Going Private on Inside Information

Abstract

Going private transactions represent a unique niche in corporate law; they are distinct in that “the arms-length bargaining that is present in the majority of inter-corporate transactions is absent,” and thus they raise special concern regarding conflicts of interest. This creates a situation ripe for misconduct, and must be specifically addressed. A number of doctrines can be applied to such transactions, including some that were developed in other contexts. For example, the doctrines of fiduciary duty, corporate opportunity and insider trading govern insiders’ conduct generally. In addition to these broader doctrines, Federal securities regulations addressed this going private conflict of interest with the promulgation of Rule 13e-3, the only doctrine developed specifically to police going private. This paper examines the application of these different doctrines to a particular type of going private conflict: the challenge insiders of a corporation face when choosing to take a corporation private on the basis of inside information. This topic is particularly relevant today because of the recent increase in going private transactions. This increase can be attributed in part to depressed stock prices (as a result of the recent market decline) that made it cheaper to buy out stockholders, and to heightened corporate regulation in the wake of recent corporate scandals, particularly in the form of Sarbanes-Oxley, which has increased the costs for companies to remain public.