It’s an understatement to say that the days of irrational exuberance are well behind us; the days of companies going from start-up to initial public offering (IPO) in a week are over.
And as some private companies decide not to go public due to the increasing burden of the SEC and Sarbanes-Oxley Act requirements, other public companies are examining the costs benefits of going private.
“There are companies that are currently public that are delisting and defiling from the exchange,” says Irv Berliner, partner in the corporate department at Kahn Kleinman.
“There is a lot of it going on, and the exchanges will throw you off if there are not enough shares trading and not enough shareholders,” he says. “Some are doing it voluntarily. and they are the most interesting.”
It’s possible, under the right circumstances and under specific SEC guidelines, to take a company from publicly held to privately owned status, and more companies are taking advantage of that option. But why take this step when less than a decade ago, it seemed like even lemonade stands were going public?
“There are a million reasons,” Berliner says. “And in order of importance, the biggest reason is cost. Because of Sarbanes-Oxley, the cost has gone up a tremendous amount. For a small company, it can cost about $250,000 each year to comply with SEC (regulations), and for a big company, it’s closer to $1 million.”
So why, in the IPO heyday, did it seemed like a good idea for even the youngest, smallest companies to go public?
“There (were) a lot of reasons to go public. They had a good story to tell, and the VC firms wanted liquidity … the companies wanted to continue to grow,” says Berliner.
But with the market downturn and increased fiduciary responsibilities, access to capital became more limited, and smaller companies are not receiving the benefit of being public.
In the case of some smaller companies, Berliner points out, “The earnings are going up but the stock is languishing, in part because there is no analyst who covers the company.”
Going private is not an option for all companies; SEC requirements specify that a business must fall within certain parameters. To go private, a company must have 300 or fewer shareholders of record. That may sound like a small number, but investment funds or clearinghouses for investors count as just one shareholder of record.
Once the decision to go private has been made, two scenarios can play out after delisting; there can be a buyout of shareholders by existing management or a merger/acquisition by an outside group.
After a buyer makes a proposal, it has to get shareholder approval and present detailed information to the SEC. But for some companies, it’s the only way for the business to realize its actual value. And there is always risk involved.
“A couple of things could happen,” Berliner says. “When the deal gets announced and the stock price spikes, the shareholders may want more. And there’s always risk another buyer comes in because you put the company in play.”
For some companies, however, the cost savings is worth the time and the risks. And the move allows them to think long term instead of focusing on quarterly results to appease shareholders.
“I think there are more candidates, especially in this area, for (going private),” says Berliner about local businesses. “And more companies should be thinking of it.” How to reach: Kahn Kleinman, (216) 623-4912 or www.kahnkleinman.com
Hear that whistle blow
One major component of the Sarbanes-Oxley Act is whistleblower protection. And although the legislation was passed awhile ago, the guidelines surrounding the protections have just recently been made public.
The Occupational Safety and Health Administration will handle complaints of discrimination and/or retaliation under the Sarbanes-Oxley Act. OSHA recently published an interim final rule regarding guidelines and procedure for reporting and handling whistleblower complaints.
* The Labor Department is required to send notice to the alleged offender named in the complaint and provide 60 days to respond.
* An investigation is launched only if there is a presumption that the discriminatory action was a result of or would not have taken place unless the protect action (whistleblowing) had taken place.
* If there is a reasonable cause to believe the discriminatory behavior occurred, the Labor Department must notify the parties of its preliminary findings and proposed relief, which may include reinstatement, back pay, interest and special damages.
* Parties then have 30 days to object to findings and proposed relief and request a hearing from an administrative law judge.
