Key Points
- Companies with sharply declining stock prices may find it beneficial to voluntarily exit the reporting system to reduce costs and eliminate compliance burdens.
- To reap the full rewards of “going dark,” a company should consider terminating or suspending its reporting obligations in addition to delisting.
- Some of the possible detriments and risks associated with going dark are not obvious, such as possible impacts on contracts and financings.
During periods of market turmoil and declining stock prices, companies may be tempted or pressured to delist and deregister their shares. This process is often referred to as “going dark.” Given the poor performance of companies that have recently entered the public markets and a dearth of favorable financing options, we anticipate that more companies will experience difficulty maintaining compliance with stock exchange minimum bid price and market capitalization requirements. Other companies may consider voluntarily going dark due to the costs and burdens of complying with exchange listing rules and the burdens of being a public company.
Voluntary Exchange Delistings
Public company boards often begin to consider the possibility of going dark when faced with challenges related to exchange listing standards or upon receipt of a delisting or non-compliance notice.
Sometimes it is possible to implement a plan to cure the non-compliance. If a notice is triggered by a company’s share price falling below the minimum bid price requirement, the company may consider a reverse stock split that decreases the number of issued shares by a specified ratio without affecting the total market capitalization.
Other paths to avoid an involuntary delisting include signaling to the market that a company is interested in finding a buyer or engaging in other strategic transactions. Of course, companies in this position should also be considering changes to business operations that would facilitate long-term growth prospects or other ways to execute current strategy to organically regain compliance.
Despite these efforts, companies sometimes conclude it is neither desirable nor feasible to maintain a listing. Reducing compliance costs and stepping out of the public eye may provide some breathing room to focus on fixing or growing the business.
It should be noted that some investors have come to expect companies to comply with the exchange-imposed governance and disclosure requirements even if a company delists, and auditors will likely require an independent audit committee.
Deregistration
It rarely makes sense to delist but maintain registration of a class of securities. Most companies faced with a delisting will also seek to deregister applicable classes of securities so they do not need to file periodic reports or otherwise comply with the requirements of the Securities Exchange Act of 1934 (Exchange Act). Deregistration is more complex than delisting, however, and requires a detailed analysis of how to efficiently terminate or suspend a company’s reporting obligations.
Generally, a domestic U.S. company will need to have fewer than 300 stockholders of record in order to terminate or suspend its reporting obligations. (For these purposes, shares held in street name by a broker-dealer are held of record only by the broker-dealer, but for commercial depositories like the Depository Trust Company, each of the depository’s accounts holding a company’s shares will count as a distinct record holder.)
If a company has more than 300 stockholders, it may consider implementing a reverse stock split or tender offer in an effort to cash out stockholders with smaller holdings. But these are complex maneuvers that often require consideration of the board’s fiduciary duties and may trigger more demanding “going private” disclosures under the Securities and Exchange Commission’s rules. They may also require complex valuation and solvency determinations.
Bear in mind that some contractual agreements — in particular, debt financing arrangements — may require a company to make ongoing disclosures to the market.
Pros and Cons
Boards must understand the pros and cons associated with voluntarily going dark, regardless of the motivation, and we have found that boards are not always aware of all the disadvantages of going dark beyond the obvious reduction of liquidity. For example, a delisting or deregistration can trigger defaults under a company’s debt financing agreements — exacerbating what may already be a precarious financial position. Before deciding to step out of the public eye, boards must weigh any perceived benefits against the complexity and risks of exiting the reporting system.
Things To Bear in Mind
For an imminent delisting by an exchange, or where a company decides voluntarily to delist and deregister, boards should:
- Be cognizant of requirements to keep stockholders informed.
- Communicate with other stakeholders about the company’s plans.
- Assess the impact of delisting on commercial contracts, debt agreements, leases and employee equity plans.
- Review the company’s equity and debt financing agreements to understand whether and how delisting or deregistration would trigger defaults or other issues under various covenants (e.g., registration rights), and any related consequences.
- Consider, in consultation with counsel, whether and when the company may terminate or suspend its reporting obligations under the Exchange Act.
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