1. 1 GOING PRIVATE 2003 Practical Tips From the Trenches December 3, 2003 Presented By: Sherman A. Cohen Co-Chair Growth Companies and Private Equity Group Arnall Golden Gregory LLP 2800 One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3450 404.873.8630 email: sherman.cohen@agg.com

2. 2 What Is a Going Private Transaction? For federal securities law purposes, “going private” is the process by which a publicly traded company is converted to private ownership by affiliated persons

3. 3 Why Are Going Private Transactions Regulated? Elimination of public share ownership at propitious times by management or controlling shareholders Transactions themselves may be coercive Potential for overreaching of unaffiliated shareholders exists because of lack of arms- length bargaining between affiliates and the issuer

4. 4 The Effects Necessary to Trigger SEC Rule 13e-3 Governing Going Private Transactions Causing a class of Section 12(g) or 15(d) equity securities to be held by fewer than 300 record holders or Causing a class of equity securities not to be listed on a securities exchange or authorized to be quoted on an inter-dealer quotation system

5. 5 Types of Transactions Covered by Rule 13e-3 Purchase of an equity security by issuer or affiliate of the issuer Tender offer for an equity security by an issuer or affiliate of the issuer Proxy solicitation subject to proxy rules covering merger, consolidation or recapitalization

6. 6 Types of Transactions Covered by Rule 13e-3 (cont’d) A sale of substantially all of the assets of an issuer to its affiliate or group of affiliates A reverse stock split of a class of equity securities involving the purchase of fractional interests

7. 7 Definition of Affiliate Person who controls, is controlled by, or is under common control with the issuer According to the SEC, factors indicating such a “control” relationship include:  common board membership between the acquiror and the issuer  significant management equity participation in the acquiror  generally more than 10%

8. 8 Definition of Affiliate (cont’d)  in the event of an acquisition by an unaffiliated entity where the issuer’s management will remain intact, relevant factors include:  increases in consideration to be received by management  alterations in management’s executive agreements favorable to such management  the equity participation of management in the acquiror, and  the representation of management on the board of the acquiror

9. 9 Definition of Affiliate (cont’d)  SEC staff will not issue a no action letter with respect to whether a person is an affiliate

10. 10 Contractual Considerations in Going Private Transactions  Does the company have any contractual obligations to maintain SEC reporting?  registration rights agreements  prior merger agreements  warrants  bond or loan transactions  Usually these restrictions can be handled by obtaining waivers from the affected parties

11. 11 Typical Going Private Transactions: Advantages and Disadvantages  Reverse Split In a reverse split, the total number of shares is reduced on a pro rata basis, and those shareholders who wind up owning only a fraction of a share receive cash in lieu of the fractional share

12. 12 Typical Going Private Transactions: Advantages and Disadvantages (cont’d) Advantages:  Relatively simple from a legal perspective  no third party agreement and negotiation with outside parties required  No appraisal rights available to dissenters under Delaware law  but dissenters’ rights are available under Georgia law

13. 13 Typical Going Private Transactions: Advantages and Disadvantages (cont’d) Disadvantages:  Requires shareholder approval  which may present a challenge for some companies where control is not sufficiently concentrated to ensure approval

14. 14 Typical Going Private Transactions: Advantages and Disadvantages (cont’d) Disadvantages: (cont’d)  Subject to corporate law restrictions on payments of distributions to shareholders  not available if company has negative stockholders’ equity  Absence of appraisal rights (under Delaware law) may subject a reverse stock split to greater SEC scrutiny than other forms of going private transactions

15. 15 Typical Going Private Transactions: Advantages and Disadvantages (cont’d) Disadvantages: (cont’d)  Less flexibility than a merger transaction as to who the shareholders of the post- transaction company (the “continuing shareholders”) will be

16. 16 Typical Going Private Transactions: Advantages and Disadvantages (cont’d) In a cash tender offer, the public shares of the target company are acquired for cash If the cash tender offer results in 90% ownership by the acquiror, a second-step “short form” merger can be performed, which can be accomplished rapidly since no shareholders meeting or proxy solicitation will be required Transaction is subject to the tender offer rules as well as the going private rules Tender Offer Followed by a Second-Step Merger

17. 17 Typical Going Private Transactions: Advantages and Disadvantages (cont’d) Advantages: Speed of the transaction if 90% of the shares of each class of stock are successfully tendered “Entire fairness” test under Delaware law (which requires that the directors of a corporation going private engage in fair dealing and obtain a fair price) is generally not required if:  acquiror obtains a non-waivable “majority of the minority” tender

18. 18 Typical Going Private Transactions: Advantages and Disadvantages (cont’d) Advantages: (cont’d)  the price paid in the short-form merger to the non-tendering shareholders is the same as the tender price, and  the controlling stockholder/acquiror has made no “retributive threats”  Perceived to be less coercive than merger or reverse stock split on the front end  becomes coercive if 90%+ approval is obtained and is followed by “squeeze out” merger

19. 19 Typical Going Private Transactions: Advantages and Disadvantages (cont’d) Disadvantages: Difficulty in obtaining 90%-plus shareholder approval and difficulty of obtaining a “majority of the minority” Additional expenses and delay if tender is not successful, since tender will need to be followed with negotiated merger and proxy statement

20. 20 Typical Going Private Transactions: Advantages and Disadvantages (cont’d) Some corporate statutes permit companies to differentiate among shareholders with respect to what they receive in a merger, thereby facilitating a merger in which some shareholders receive stock in the surviving company while others receive cash Negotiated Merger Transaction with a Newly- Created Shell Corporation

21. 21 Typical Going Private Transactions: Advantages and Disadvantages (cont’d) Fairly typical structure More control over who will have equity in the surviving company after the transaction Possible differentiation of merger consideration among shareholders as described above Advantages:

22. 22 Typical Going Private Transactions: Advantages and Disadvantages (cont’d) Subject to Delaware’s “entire fairness” standard, including the requirements of fair dealing and a fair price However, Delaware law also provides that the use of a properly functioning independent committee of directors (i.e. exercising due care) in arms-length negotiations with third parties or management shifts to the plaintiff the burden to disprove fairness Disadvantages:

23. 23 Best Practices in Negotiated Going Private Transactions Formation of a special committee of the board of directors in order to negotiate and/or approve a transaction between the issuer and the majority or controlling stockholder Inclusion of certain key provisions in the definitive merger agreement

24. 24 Best Practices in Negotiated Going Private Transactions (cont’d) Obtaining an independent fairness opinion from a financial advisor to support the final price being paid to the issuer’s shareholders as a “fair price”  Having the financial advisor conduct an extensive market check before and after the signing of the acquisition agreement to verify the market value of the issuer

25. 25 Special Committee Best Practices Independence and disinterest of all special committee members Prompt formation of the special committee as soon as it is determined that a majority or controlling stockholder stands on both sides of the transaction A record of informed, deliberate and careful deliberations

26. 26 Special Committee Best Practices (cont’d) A record demonstrating that the special committee was advised by legal counsel of its duties and responsibilities  separate from the issuer’s counsel A real ability of the special committee to “just say no” if the price offered by the acquiror is not fair and best under the circumstances

27. 27 Special Committee Best Practices (cont’d) The absence of “take it or leave it” or other coercive behavior by the acquiror, whether in negotiations or otherwise The payment to the committee member of a fixed fee that is not excessive and is determined in advance

28. 28 Recommended Merger Agreement Provisions If feasible, a “majority of the minority” provision The ability to entertain other offers without incurring a breakup fee A nominal breakup fee The ability to easily exercise a fiduciary out

29. 29 Mandated SEC Disclosure Requirements in Going Private Transactions The acquiror’s purpose for effecting the going private transaction The acquiror’s opinion as to the fairness of the transaction to the issuer’s shareholders  if the merger consideration is differentiated among shareholders, the disclosure must address the fairness as to each group of shareholders SEC Rule 13e-3 require a discussion of the following aspects of a going private transaction, among others:

30. 30 Mandated SEC Disclosure Requirements in Going Private Transactions (cont’d) All reports, opinions or approvals from outside parties Any discussions during the two years prior to the filing of the Schedule 13E-3 concerning transactions between the issuer and its affiliates

31. 31 Mandated SEC Disclosure Requirements in Going Private Transactions (cont’d) Information regarding contacts or negotiations during the same period between the issuer and other parties with respect to a possible merger, acquisition or tender offer Certain financial statements Pro forma financial statements Financial projections

32. 32 SEC Hot Buttons SEC generally will review all of the company’s reports (10-Qs, 10-Ks and proxy statements) in addition to the going private transaction SEC will give particular scrutiny to:  analysis of fair price  procedural fairness to all groups of shareholders  history of negotiations and board deliberations

33. 33 Post-Closing Issues Policing the 300 shareholder limit  if the company creeps back over 300 stockholders, SEC reporting requirements spring back into effect  former “street” holders will start becoming record holders Employee stock plans – how to maintain compliance

34. 34 Keeping investors informed  annual/quarterly reports?  try to stay on “pink sheets”?  still subject to 10b-5 fraud liability  Insiders still subject to Section 16 reporting and short-swing profits liability for 90 days after closing the transaction Post-Closing Issues (cont’d)

35. 35 SHERMAN A. COHEN Sherman Cohen is a partner with the Atlanta law firm of Arnall Golden Gregory LLP and co-chair of its Growth Companies/Private Equity practice group. He specializes in representing growing companies in a wide variety of financing and strategic transactions, including mergers and acquisitions, joint ventures, equity offerings and debt financings and venture capital transactions. Clients of Mr. Cohen include publicly-held and private companies in the technology, healthcare, and distribution industries. Cohen is actively involved in business and civic organizations, and currently serves as an officer and member of the Board of Directors and Executive Committee of the American-Israel Chamber of Commerce, Southeast Region.

36. 36 SHERMAN A. COHEN (cont’d) He also is an active member of the Atlanta Venture Forum and The Technology Association of Georgia, and serves as a sponsor of the Atlanta chapter of the Young Entrepreneurs Organization. Cohen has lectured on a variety of topics, including going private transactions, the effects of Sarbanes- Oxley on private companies and the legal aspects of venture capital transactions. A native of Atlanta, Cohen received his undergraduate degree from the Wharton School of the University of Pennsylvania (cum laude), with majors in accounting and finance and graduated from Columbia University School of Law, where he was a Harlan Fiske Stone Scholar.