Terminology: going dark versus going private
- Going dark: terminating a company’s public reporting obligations by deregistering shares that were issued by the company under the Exchange Act of 1934. Also referred to as “opting out” (of the SEC’s reporting obligations…).
- “The Securities and Exchange Commission (the “SEC” or the “Commission”) permits an issuer to voluntarily “opt-out” of the public company reporting system because its small shareholder base no longer justifies imposing public company obligations and SEC rules upon it.” Source: http://www.sec.gov/info/smallbus/pnealis.pdf
- If a company has issued some class of securities (e.g. common stock) which is registered under the Exchange Act of 1934, that company is subject to reporting requirements (periodic audited financial statements, disclosures of various kinds). Fulfilling these requirements costs money.
- For relatively small companies (mkt cap: <$50MM, revenues: <$100MM), compliance costs can be in the range of $1MM to $3MM per year. Source: http://www.dorsey.com/going_dark_voluntary_delisting_deregistration/
- If the benefits of a company’s securities being publicly listed do not outweigh the costs (of complying with the requirements for being registered) THEN a company is likely to consider going dark.
- Going dark sounds great!
What are the criteria for being able to deregister a security?
- The security cannot be listed on a national exchange (which offers benefits such as liquidity for stock holders, increased visibility of the company, …).
- The security cannot be registered under the Securities Act of 1933.
- The security must have <300 shareholders of record
- Note that “shareholder of record” does not equal “beneficial owner.”
- Each issuer keeps a list of shareholders of record, which might include a small number of people who have large ownership stakes. It will also likely include the Depository Trust and Clearing (DTC). This institution is used to clear and settle stock trades. See: http://www.bis.org/publ/cpss20r3.pdf
- When counting “shareholders of record”, if the issuer’s list of shareholders includes the DTC then all of the DTC’s participants who own shares in this company are listed. But a DTC participant is typically a bank or a brokerage house (e.g. Fidelity, TD Ameritrade). And so “behind” a single DTC participant (shareholder of record) might be thousands of beneficial owners.
- Again, because of the way shareholders of record are counted, this single DTC participant (e.g. Fidelity) counts as 1 shareholder of record.
- “For purposes of determining whether the Company has less than 300 holders of record, Rule 12g5-1 has been interpreted to mean that an issuer does not have to further “look through” DTC participants to the ultimate beneficial owners.” See: Dorsey and Co – Going Dark
- For this reason, it may not be as difficult to meet the “<300 shareholders of record” criteria as one might imagine at first blush.
- Going private: cashing out a company’s shares (i.e. the publicly-held ones) via a tender offer (by entity “foo” to purchase shares for $X each), merger, reverse stock split, … This reduces the # of shareholders of record for a given security and hence goes some of the distance toward enabling the issuer (company!) to delist and/or deregister if it wishes. See also: http://www.sec.gov/answers/gopriv.htm
- Going private typically alters “the control, capitalization, and ownership composition” of the company dramatically. The act of going private requires extensive board consideration, disclosure, a fairness opinion, SEC filings, a shareholder vote, …
- Typically, a company will go private so that it can go dark. But some companies can go dark without going private – because those companies already do not meet the SEC requirements (for registering a security) and hence they not have to change *who owns what stock* in order to become eligible for deregistering.
- Mechanisms for going private include: reverse stock split (mgmt exchanges 10,000 existing shares for 1), tender offer (some entity buys stock from public shareholders), merger.
Delisting and/or Deregistering
Delisting entails taking a stock off of a national securities exchange (NYSE, Nasdaq, AMEX). This can happen for a few different reasons: (1) the company is being taken private, e.g. by a Private Equity firm; (2) involuntary delistment – the company no longer meets the minimum requirements for having its securities traded on that exchange, typically these have to do with: share price, P/E and other ratios, revenue levels, etc.; (3) the company wants to deregister (“go dark”). (See also: involuntary delistment and here.)
Note that delisting from an exchange and deregistering a security (with the SEC) are separate things. If one delists from an exchange then it may be possible to deregister the security as well (though not necessarily – subject to the number of shareholders of record, etc.). Certainly one cannot deregister a listed security (since all listed securities must be registered per the Exchange Act of 1934).
- Delistment is primarily something which takes place between the company (which has a listed security) and the exchange on which that security is listed. The company must file a form with the SEC (and give sufficient advance notice etc) but the SEC does not require that certain securities be listed. Typically, the exchange requires that the Board of the issuer approve the delistment (see here for additional details). Note that, perhaps counterintuitively, shareholder approval is not required to delist a security (why “counterintuitively”? because the shareholders would seem to be quite impacted by the decision). The effect of delisting a security from an exchange is that investors can no longer trade shares of the stock on that exchange. A delisted stock may still be traded on other exchanges, e.g. Over The Counter (OTC) and Pink Sheets.
- Deregistration is primarily something which takes place between the company (which has a registered security) and the SEC. A security can be deregistered if there are less than 300 holders of record OR there are between 300 and 500 holders of record but the company’s total assets are <= $10MM. Upon filing Form 15 to make this happen, the company is immediately relieved of the duty to file reports (if the request to deregister is denied, the company will be required to supply reports for the interim dark period).
Why go dark? And how?
The question of why go dark is a question of why deregister. The most obvious answer is that the costs of complying with the Exchange Act reporting requirements are too high relative to the benefits. Notably, SOX intensified the reporting requirements, which increases the compliance costs, further tipping the balance in favor of opting out. See also: http://www.investopedia.com/articles/stocks/08/public-companies-privatize-go-private.asp#axzz1eDh3EHO5
Question: does this mean that we are losing SEC “coverage” (in the form of periodic public reporting) for certain issuers because companies are attempting to avoid being subject to SOX? That is, is SOX having the unintended negative consequence of causing companies to “opt out” more aggressively from all regulation (including that which comes along with SEC registration), even regulation that was tolerable before? Appears so…
What does it mean for a privately-held company to “go private”?
By “privately held”, I mean it’s stock is not available to the general public. This is tricky in part because “public” and “private” are overloaded terms. I think that the neophyte thinks of a “public” company as one which has a security listed on a national exchange (by “neophyte”, I mean – me, 3 weeks ago). After reading various SEC documentation as well as other sources, I believe that the better definitions are as follows:
- Public companies: companies that are subject to public reporting obligations (under the Exchange Act of 1934).
- Private companies: companies that are not subject to public reporting requirements (i.e. do not have any securities registered under the Exchange Act of 1934).
- Listed companies: companies whose stock can be purchased on a national securities exchange.
Going private: A case study
(Note that, though I have some relationship to Peter Kiewit the company, all of the info below is gleaned completely from public sources; I possess no privileged information.)
In looking at Peter Kiewit’s SEC filings, I notice that the company appears to have “gone private” at the end of 2007 (about 5 years after SOX was passed as law). That’s when the 10-Q filings end (note that these 10-Q filings have attached certifications from the executive officers, per SOX requirements): When we expand to look at all filings, what we see next is two things: a tender offer (from “the issuer” == Kiewit), which is form SC TO-I/A (circled in blue), and a Going Private transaction, which is form SC 13E3/A (circled in black).
So, what are the mechanics here? How do these two actions relate and how does this explain the cessation of 10-Q reporting? Effectively what we see is that Peter Kiewit the company takes the steps necessary to *deregister* its securities from the SEC. This relieves the company of the reporting obligations. Perhaps more significantly, the company is not required to comply with Sarbanes-Oxley (SOX).
- In particular, prior to the tender offer of November 2007, there were 19,800,866 outstanding shares of common stock owned by various past and present Kiewit employees. The tender offer enabled each single share of common stock to be exchanged for an equivalent “interest” in the Kiewit Employee Ownership Plan (EOP).
- The offer expired on 12/28/2007. 19,611,623 of the shares were tendered and accepted. Some number of the shares were purchased for cash (263,632) – from shareholders that did not accept the tender offer (in some cases because they were not eligible to possess interest in the EOP).
- The remaining # of shares after the tender offer was closed was: 19,800,866 – 263,632 = 19,537,324. And all of these common stock shares were owned by the Administrator (rather than individual employees).
- Therefore, the number of shareholders of record was dramatically reduced. This enabled Kiewit to *deregister* its Common Stock security (since the # of shareholders of record was <300) which in turn temporarily suspended reporting obligations on the company (which is why the stream of 10-Qs ends).