Public Companies Shouldn't be Afraid of the "Dark"

Posted by Andrew Pontious

More frequently, small public companies are considering the prospect of "going dark," meaning the voluntary deregistration of their stock under the Securities Exchange Act of 1934, as amended (the "Exchange Act") in an attempt to avoid statutory obligations to file periodic reports imposed by Sections 13(a) and 15(d) of the Exchange Act. The decision to go dark is based upon the desire to reduce the economical and managerial burden of continued compliance with the reporting requirements of the Exchange Act, including those under the Sarbanes-Oxley Act of 2002. By deregistering its shares, a public reporting company's obligations to file periodic reports (i.e., Forms 10-K, 10-Q and 8-K) may be suspended and eventually terminated, potentially leading to a lack of publicly available information for the company - a "dark" company. Given the mounting cost and burden of reporting compliance and the current economical environment, "going dark" is no longer accompanied by the negative connotations of past years. Nonetheless, "going dark" does come with certain material disadvantages, including decreased liquidity, lack of access to the capital markets, decreased alternatives for incentive programs and acquisition currency, and trading restrictions.

To "go dark," the issuer must certify the Securities Exchange Commission (the "SEC") on Form 15 that it has fewer than 300 shareholders of record, although it typically will have significantly more beneficial owners whose shares are held in street name. (A Form 15 can also be filed by issuers with fewer than 500 shareholders of record if the issuer's total assets have not exceeded $10 million on the last day of each of the issuer's three most recent fiscal years.) For purposes of deregistering, an issuer need only look to the number of its registered holders and DTC positions, not its beneficial owners. (See Section 12 (g)(4) and Rules 12g-4, 12g5-1 and 12h-3(a) of the Exchange Act.) Often, "going dark" will also require the issuer first to "go private" by engaging in a corporate transaction in accordance with Rule 13e-3 of the Exchange Act with the goal of reducing an issuer's shareholder of record below 300.

Upon the filing of a Form 15, an issuer's obligations to file periodic reports required by Sections 13(a) of the Exchange Act (i.e., Forms 10-K, 10-Q and 8-K) are immediately suspended. Effective 90 days after filing, an issuer's shares are deregistered and its obligations to file periodic reports required by the Section 13(a) of the Exchange Act terminate. An issuer's reporting obligations under Section 15(d) of the Exchange Act are not terminated but only suspended for so long as the issuer's shareholders of record number less than 300 and it has no effective registration statements under the Securities Act of 1933, as amended. (See Rule 12h-3 of the Exchange Act).

No shareholder approval is necessary to "go dark" or file the requisite Form 15. Rather, the issuer must simply meet the requirements discussed above. However, as often there are actual or perceived conflicts of interest among directors and/or among majority and minority shareholders regarding "going dark," an issuer's affiliates should be careful to avoid any appearance of self-dealing or self-interest in "going dark."