1. Taking a Company Private or “Dark” Transaction Options for Public Companies Presented to National Association of Corporate Directors By Tom Briggs Breckenridge, Colorado (970) 453-6404 tombriggs@comcast.net Matt Hafter Grippo & Elden LLC (312) 704-7733 mhafter@grippoelden.com Greg Pratt gpratt3651@aol.com

2. Going Private – What Does It Mean? Public  private –Transaction between issuer and affiliates intended to cause securities to be held by less than 300 shareholders of record or delisting from exchange Going dark –Delisting from exchange and withdrawing from public reporting; but no significant changes in ownership and stock can be traded on pink sheets Private  more private –Private company can become “more private” by taking out non-affiliated shareholders and concentrating ownership

3. Reasons to Go Private Greater focus and efficiency –Assets owned by those who value them more highly –Greater control –Better measurements of performance Resolve differences among stockholder groups and other constituencies Costs of being public outweigh benefits

4. When Public Ownership No Longer Makes Sense SOX compliance Costs of accounting, legal, PR, D&O insurance, etc. Demands on directors for greater expertise and attention Public markets are not exclusive source of capital Public markets may not offer liquidity Executive talent does not require public status Disclosure of company information

5. Candidates for Going Private or Dark Market capitalization under $250 million Book value substantially exceeds market value Only a few analysts covering company Low daily average volume (under 50,000 shares) Substantial shareholder blocks with differing agendas; or substantial inside ownership

6. How to Accomplish Tender offer –Odd lot holders (less than 100 shares) –All non-affiliated Cash out merger Reverse stock split (followed by forward split) Negotiated block purchases Private equity purchase

7. Legal Issues Conflict of interest between affiliates (inside group leading the buyout) and non-affiliates (stockholders being bought out) –Affiliates on both sides of deal as buyers and sellers negotiating to buy company from themselves –Risk that affiliates use superior knowledge and bargaining power to dictate terms and non- affiliated stockholders do not get best deal Careful deliberative process often ignored

8. Legal Issues (con’t) Sale of control –May invite/require competing offers or market test of price –Lock up arrangements cannot be too restrictive Fraudulent transfer –Leverage may leave company insolvent

9. Director Responsibilities Business Judgment Rule – judicial deference based on presumption of proper decision making –Duty of care – thorough, informed, skeptical, deliberative; process oriented –Duty of loyalty – protection of minority interests; includes duty of full disclosure –Good faith – subjective belief that transaction benefits company and stockholders

10. Entire Fairness Test Applied when traditional Business Judgment Rule presumption is not appropriate Standard of review – “de novo” examination of: –Fair dealing – procedure –Fair price – substantive terms

11. Ways to Mitigate Risk Independent committee –Authority to negotiate at arms’ length with no constraints imposed by affiliates Price Negotiating process –Advice of independent counsel, financial advisors and other resources of the full board –Carefully evaluate pros and cons

12. Ways to Mitigate Risk (con’t) Price must be fair compared to benchmarks –Historical market price –Liquidation –Size of premium compared to pre-announcement prices –Traditional valuation models – cash flow analysis and market comparables Fairness opinion must confirm that price is fair to non-affiliated stockholders

13. Ways to Mitigate Risk (con’t) Bifurcated stockholder vote –Separate approval by majority of the non-affiliated stockholders Fiduciary “out” enabling company to accept better offer Disclosure of all material information –If public company, SEC Schedule 13E-3 –If private company, disclosure comparable to Schedule 13E-3

14. Disclosure is Key to Process Part of the duty of loyalty For public companies, typically included with proxy or tender offer materials For private companies, more flexible but some tender offer disclosures apply

15. Basic SEC Disclosures in Schedule 13E-3 Offers by unaffiliated parties within prior 18 months History of negotiations Alternative transactions that were considered Positions of outside directors

16. SEC Disclosures Fairness of transaction Description of fairness opinion and other reports Other considerations –Lock-up period –Break-up fees –Fiduciary out clause –Feasibility of financing –Probability of closing

17. Going “Dark” – An Alternative Delist from stock exchange Deregister stock with SEC Stock may continue to trade on Pink Sheets –Must monitor shareholders of record – broker “kick outs” or creeping over limit –Brokers need Rule 15c2-11 information to trade More likely to be covered by Business Judgment Rule

18. Going Dark SEC Form 25 accomplishes delisting and deregistration Suspends all SEC reporting (including SOX compliance) Shareholders “of record” must be less than 300 (500 in some circumstances) –If greater than 300 (or 500), then must file Schedule 13E-3 and formally go private

19. Life After Going Dark “Near term” stock price drop after announcement (10% est.) Reduced trading liquidity on Pink Sheets Negative perception from employees, customers, vendors Reliance on private equity and debt Less effective employee benefits But ….. –Significant cost savings ($500K - $1.5M) –Voluntary periodic disclosure

20. Issues for Directors Use a Special Committee of independent directors Objectively evaluate pros and cons No direct or indirect benefit to any officer or director Assure fairness to all shareholders Independent counsel and financial advisor Fairness opinion Run a good process – keep detailed and accurate records of all meetings and proceedings

21. Practical Problems Timing –Risk of putting company in play and inviting competing bids –“Upside-down” process – requires PE group to incur expense, conduct due diligence and arrange financing before deal is locked up –Risk of SEC review

22. Practical Problems (con’t) Transaction emphasizes process but pressure to move quickly Turns colleagues on board into adversaries Large team of professionals to manage Difficult to explain to stockholders that being public is no longer desirable No clear metrics for safety

23. Relevance to Other Transactions Stockholder derivative litigation or other litigation where directors are defendants Change of control transactions –Structure and conduct of auction –Approval process Mitigation techniques are relevant to many other situations confronting public and private companies

24. Other Transactions Transactions with interested parties –Between portfolio company and PE group (especially if PE director) –Between operating company and real estate partnership that owns plant –Loan to company with which director is affiliated