This is the draft of a paper I hope to continue developing. I hope to eventually publish it. Therefore, this is the first of several posts about delisting and deregistering your public company.
Introduction
The Securities and Exchange Commission (the “SEC”) permits certain issuers to voluntarily “opt-out” of the public company reporting system when its shareholder base is too small to justify its compliance with public company obligations and SEC rules (“Going Dark”). These events suspend SEC reporting obligations.[1] The decision to Go Dark is a decision made by the board of directors and it typically does not require shareholder approval.[2] Due to increased SEC reporting burdens, more and more companies are Going Dark without going private transactions.[3] This paper provides an overview of the going dark but not private phenomenon and discusses the reasons that the current economic and regulatory atmosphere is ripe for even more voluntary going dark but not going private transactions. This paper also describes the procedures for Going Dark as well as outlines different strategies for directors of public companies to consider. Finally this paper discusses possible claims against directors by minority shareholders and gives general guidance on issues directors need to be aware of who choose to take their firm dark.
Overview of Going Dark
Going Dark is a recent phenomenon that started happening largely after the enactment of the Sarbanes Oxley Act of 2002 (“Sarbanes Oxley”). At the time of its enactment, 484 companies voluntarily deregistered[4] because of the new reporting obligations Sarbanes Oxley imposed. This paper argues that more companies will choose to Go Dark and suspend their reporting obligations imposed by the SEC and delist from trading or drop to the Pink Sheets, which can significantly limit their shareholders’ liquidity.
Requirements to List on a Major Stock Exchange
In order to list on a public stock exchange, there are stringent requirements that companies must follow. For example, to list on the New York Stock Exchange (“NYSE”), a company generally needs to have a $40 million market capitalization, a $4.00 stock price at the time of listing, and some variation of 400 shareholders and 1.1 million public shares outstanding.[5] To list on the NYSE American Exchange (“Amex”) there are at least four variations based loosely on standards such as a $3 per share price, $4 million in shareholder equity, $3 million or greater of publicly floating stock, $750,000 pre-tax income in the last fiscal year, 800 public shareholder and 500,000 shares outstanding.[6] To list on Nasdaq Stock Market Inc. (“NASDAQ”) there are four different qualifying standards which all have a $4 minimum per share price and then have a mixture of $11 million in pre-tax earnings for the two most recent fiscal years or $27.5 million in cash flows in the prior three fiscal years or a market cap of between $160 million and $550 million.[7] All three exchanges also have high fees[8] and requirements for composition of directors and committees, such as audit committees, compensation committees, etc.
More than fifty percent of all delistings are involuntary, with the remaining delistings resulting from merger, acquisition, or by voluntarily “Going Dark.”[9] Each exchange has different requirements in order to enjoy listing on their exchange. For example, on the NASDAQ, if a company trades for 30 consecutive days below the minimum bid price or market capitalization, then NASDAQ’s “Listing Qualifications Department” will send a deficiency notice to the company, informing the company that it has 90 or 180 calendar days to get up to standard in the case of the market value listing requirement or the minimum bid listing requirement, respectively.[10] The NYSE and the American Exchange (“Amex”) have similar requirements and typically provide very little leeway, absent extraordinary circumstances.[11] Approximately one in five firms that is listed on the NASDAQ in any given year is delisted.[12]
The OTC Bulletin Board and Pink Sheets Markets
The Over The Counter Bulletin Board (the “OTC Bulletin Board”) and the OTC Markets Group (the “Pink Sheets”)[13] are competing quotation services that trade stocks that either do not or choose not to qualify to trade on other markets in the United States.[14] The OTC Bulletin Board and Pink Sheet trading data are not included in traditional securities research databases such as CRSP[15] and TAQ[16] and there is very limited analyst coverage of OTC Bulletin Board and Pink Sheet stocks.[17]
The OTC Bulletin Board, managed by FINRA, requires registration and reporting with the SEC.[18] Thus, companies traded on the OTC Bulletin Board do not bypass the onerous filing requirements imposed by the SEC but must remain compliant or forced to be removed from the OTC Bulletin Board.[19] As of November 2011, there are currently 2,386 securities traded on the OTC Bulletin Board with a monthly trading dollar volume of $861,751,978.[20] In 2010, the OTC Bulletin Board’s average daily share volume was 1,452,011,520, with an average daily dollar volume of $78,553,028.[21]
In contrast, companies can trade on the Pink Sheets without filing with the SEC. Companies whose securities are traded on the Pink Sheets are historically extremely small, closely-held, or thinly traded—historically making the Pink Sheets generally an exchange of last resort for an issuer.[22] Over the last ten years there has been a 500% increase in dollar volume traded on the Pink Sheets.[23] In response, the Pink Sheets introduced a tiered structure that allows companies to list in different categories depending on how much disclosure the firm provides.[24] There are three tiers, the highest tier, OTCQX requires current disclosure as well as requires firms to undergo a qualitative review.[25] OTCQX currently represents a trillion dollars of market capitalization.[26] The second tier, the OTCQB requires certain disclosure, such as audited financial statements or registration with the SEC but has no financial or qualitative standards.[27] The third tier, OTC Pink, is a speculative trading marketplace that ranges from companies who are currently registered with the SEC down to a tier called “caveat emptor,” where a company, which is known to have committed fraudulent activity, will be listed, albeit with blocked quotations.[28] There are currently approximately 6,233 securities quoted on the Pink Sheets (with some of them also traded on the OTC Bulletin Board).[29]
Going Dark: A Recent Phenomenon
In contrast to an involuntary delisting, some companies affirmatively choose to delist from a major securities market and then suspend their SEC reporting obligations.[30] Going Dark has grown more common over the last decade and particularly more common in the last few years.[31] Companies that voluntarily Go Dark historically have suffered an average of 10% devaluation of their shares as compared to the market as a whole as a result of the announcement to deregister.[32]
Historically, Going Dark accompanies a going-private transaction through a tender offer, exchange, reverse stock split, or some other recapitalization event, however, scholars and spectators have noted the recent trend whereby firms are Going Dark and continuing to trade on the Pink Sheets.[33] There have been surprisingly few cases against directors going dark, and many companies have gone dark without litigation.[34]
Public companies can file for deregistration if they have fewer than 300 shareholders of record, or fewer than 500 holders of record and less than $10 million of assets in each of the prior three years. Many companies that meet these criteria have thousands of beneficial shareholders, most of whom have their shares held in street name by financial institutions, each of which represents only one holder of record according to the current interpretation given by SEC Rule 12g5-1. Many investors have argued that this rule is detrimental to shareholders since it makes it too easy for companies to withhold financial information.
Why Do Firms Go Dark?
It is well-settled that the main reason firms Go Dark is because of the SEC’s burdensome reporting requirements, most notably the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley” or “SOX”).[35] SOX is one of the most far-reaching financial reforms of the nation’s business practices since the Great Depression.[36] Indeed, critics have characterized SOX reforms as largely irrelevant, ineffective, or actually harmful.[37] Practically removing all doubt from the literature, Harold S. Bloomenthal and Samuel Wolff painstakingly reviewed all Form 15s, the form an issuer files when it decides to suspend reporting obligations with the SEC, filed by all issuers between the period 2002 and the second quarter of 2008 and compared it to the reasons disclosed as to why these issuers suspended their reporting obligations (See Table 1: Form 15 Filings).[38] Bloomenthal and Wolff found that up to 18% of issuers actually gave SOX as a reason for deregistration.[39]
| Table 1: Form 15 Filings | |||
| Year | No. of Filings | No. Giving SOX as Reason for Filing | % Giving SOX As Reason |
| 2000 | 710 | n/a | n/a |
| 2001 | 805 | n/a | n/a |
| 2002 | 261 | 15 | 6% |
| 2003 | 744 | 5 | 7% |
| 2004 | 737 | 47 | 6% |
| 2005 | 720 | 71 | 10% |
| 2006 | 654 | 78 | 12% |
| 2007 | 706 | 110 | 16% |
| 2008 | 302 | 53 | 18% |
In addition, Bloomenthal and Wolff reviewed all Form 25s, forms issuers file when they delist from a national securities exchange,[40] filed with the SEC during the same period and found that up to 26% of filers gave SOX as a reason for their delisting from a national securities exchange.[41]
| Table 2: Form 25 Filings | |||
| Year | No. of Filings | No. Giving SOX as Reason for Filing | % Giving SOX As Reason |
| 2003 | 468 | 3 | .6% |
| 2004 | 445 | 8 | 1.8% |
| 2005 | 428 | 4 | .9% |
| 2006 | 333 | 15 | 4.5% |
| 2007 | 334 | 88 | 26% |
| 2008 | 289 | 29 | 10% |
Marosi and Massoud found an increase in deregistrations around the time that SOX regulations took effect.[42]
In addition to burdensome reporting requirements, many small and mid-cap issuers have sparse trading volume and do not enjoy the benefits or liquidity to justify the burdensome costs of complying with the SEC’s reporting requirements. Although popular belief is that the public marketplaces are “efficient,” sometimes small and mid-cap issuers become public “orphans” following their initial public offering (“IPO”).[43] The common characteristics of corporate orphans is that they have minimal public float, minimal or no “promotion” from an investment bank, the trading volume is sparse, and institutional investors are rare, resulting in the bid and ask price having a significant spread, and the stock price often does not reflect the actual value of the business.[44] Compared to going private transactions, Going Dark by deregistering from the SEC’s reporting obligations and delisting from a major market are considerably less expensive and time-consuming.
Finally, some companies Go Dark for other reasons, such as to intentionally make their company less visible and transparent, reducing the likelihood of becoming a future takeover target[45] or to shield proprietary information from being disclosed which could hamper their competitiveness.[46]
The Deregistration Process
The mechanics of deregistration are relatively simple. A company starts the process by filing a notice of intent to file a Form 25 with the exchange on which the stock is listed. At the same time, the company issues a press release and a Form 8-k, notifying its investors of the board’s decision to deregister. Within ten days, the company files a Form 25 to deregister. At this point, the company can begin trading on the Pink Sheets although deregistration will not become effective for another ninety days. The company then has ten days to file Form 15. This is a very short form (one page) that requires the company to report the number of holders of record there are for the securities being deregistered. This confirms that the company has less than 300 shareholders of record. Form 15 also requires the company to show which provisions of the 1934 Act were relied upon to suspend the duty to file reports (section 12(b) in this example).[47]
Ninety days after the Form 15 is filed, if a company goes completely dark and deregisters all securities in all classes, its duty to file any reports under Section 13(a) of the 1934 Act is suspended. Also, the company is no longer subject to the Sarbanes Oxley Act and its requirements.[48]
The Counting Loophole in the Deregistration Requirements
Deregistration is not intended to be available for companies with large numbers of shareholders. For a company to be able to deregister, it must have less than 300 shareholders of record.[49] This number can be very misleading however, it is calculated using the 1934 Act’s counting rules in section 12(g)5. The SEC counts the shareholders of record rather than the actual number shareholders.[50] Cede & Co., for example, may hold thousands of actual shareholders, and they will all be counted as one shareholder of record because one corporate body owns them.
A petition sent to the SEC on July 3, 2003[51] on behalf of a group of institutional shareholders suggests amending the definition of holders of record in order to help tide the “current widespread manipulation of the capital markets by some unprincipled issuers.”
In response to these investor reactions, the SEC’s Advisory Committee on Smaller Public Companies has recently recommended that the SEC amend Rule 12g5-1 to interpret “held of record” to represent actual beneficial holders.[52] More generally, this committee has suggested revisiting the rules used to determine when a company should be allowed to exit the SEC disclosure system. The committee’s report notes that this issue is both important and urgent “because of the possibility of circumvention and manipulation” of entry and exit rules for the SEC disclosure system and because of “the significant increase in costs associated with […] the registration and ongoing reporting obligations of the Exchange Act.”
Vice Chancellor Brown succinctly explained this issue in the unreported case of Giovanini v.
Horizon Corp.,[53] stating:
“Evidence was offered as to the workings of CEDE & CO. which is the name utilized by Depository Trust Company to hold shares held by it for others. Depository Trust Company is an association of more than 200 brokerage houses and financial institutions which was formed for the purpose of holding shares held in street name for the beneficial interest of customers of the brokerage firms and financial institutions. In other words, the name “CEDE & Co.” appearing on the corporate stock ledger is thrice removed from the true beneficial owner. The brokerage house holds the stock for the benefit of its customer, but it holds title through the Depository Trust Company which in turn uses the name CEDE & Co. for this purpose. This is done, as I understand it, for the benefit of those firms participating in the Depository Trust Company so as to simplify their stock transfer transactions on behalf of their customers.
“This mechanism of convenience for the brokerage firms, however, prevents the stock ledger from revealing to one examining it just which brokerage firms hold shares and the number of shares held by each. This information, or “breakdown”, of shares can be provided to the corporation at its request. Again, through the wonders of modern computer technology, this can apparently be accomplished in a matter of minutes. When the breakdown is disclosed the identity of the brokerage firms holding stock under the name of “CEDE & Co.”, can be learned and contact can then be made with them in order to ascertain the number of beneficial owners on whose behalf they hold stock in street name so that a proper amount of informational materials may then be forwarded to the brokerage firms for distribution to the beneficial owners.”[54]
A Cede list, while helpful to the company, is to be distinguished from a non-objecting beneficial ownership list (“NOBO list”). The Delaware Chancery Court found in RB Associates that a NOBO list is usually not within the corporation’s possession because it takes much longer to produce and is not necessary for a corporation to effect a proxy solicitation like the Cede list is.[55] A NOBO list contains a list of the non-objecting beneficial owners.[56]
Going Dark Strategies
There are generally three ways to Go Dark.[57] The first way to Go Dark involves a delisting from a major exchange without deregistration. In other words, the company does not “opt-out” of the SEC reporting obligations but continues trading on the OTC Bulletin Board.
The second way to Go Dark is for the firm to deregister from publicly reporting and then to follow it up with some sort of repurchase, tender-offer, exchange, or going private transaction. Economists have found that this type of deregistration is often correlated with positive outcomes for shareholders.[58]
The third way to Go Dark involves a delisting from a major exchange with deregistration, causing the company to be traded on the Pink Sheets. This type of Going Dark carries the most burdensome costs. Economists have found that when stock moves from a national exchange, such as the NYSE or NASDAQ to Pink Sheets through an involuntary delisting, share prices fall by half or more, percentage spread triples, and stock price volatility doubles.[59] The Macey and O’Hara study have found that in this type of Going Dark scenario, the consequences produce strikingly similar loss to investors as an involuntary delisting by the exchange.[60] Commentators have noted that investors often cannot distinguish between companies who were forced to delist and those who voluntarily delisted.[61]
To assist in reducing liability for the decrease in stock value and the decrease in liquidity, the company’s board should take the following steps: 1) avoid purchases of shares by the company or affiliates after delisting; 2) continue to list shares on Pink Sheets OTC; 3) keep a good record of all actions taking during the decision-making process; 4) evaluate any conflicts of interest as discussed herein; and 5) if there are any such conflicts, the Board should appoint a special committee with independent legal and financial advisors.[62]
Director’s Duties When Pursuing a Going Dark But Not Private Transaction
Directors have certain general duties of loyalty and care that come into play during a going dark transaction. To mitigate liability, in their decision to go dark, directors should ensure that there is no direct personal benefit that would not be shared equally by shareholders, and that the directors are free from the influence of any party subject to such a benefit.
In the absence of a material loss or extraordinary event, minority shareholders may view a voluntary delisting with skepticism and may file lawsuits. To rebut the presumption that the board of directors properly exercised their duty of care, a shareholder must also show that the transaction did not result from a valid exercise of business judgment.[63]
In determining whether to go dark without going private, the company’s board is also bound by the fiduciary duty of loyalty. The board must place the interests of the shareholders generally ahead of the company’s own interests. Unless a director has obvious conflicting interests at odds with the company, there is a general presumption that a director acted with loyalty to the company.[64] The presumption that the board acted with loyalty can be rebutted if the members of the board are “either interested in the outcome of the transaction or lacked the independence to consider objectively whether the transaction was in the best interest of its company and all of its shareholders.”[65] Furthermore, if the delisting is connected to an action to acquire stock, then scrutiny of the transaction is heightened and may be seen as coercion rather than a valid exercise of business judgment.[66]
There are very few cases involving lawsuits against directors when a company voluntarily goes dark without going private to save on compliance fees.[67] One possible reason for this dearth of case law is because when companies pursue a going dark but not private strategy the officers and directors, who are largely compensated in stock, stand to suffer significantly. Should the regulatory burdens cause financial strain on a company, then a company, by Going Dark, can tighten up efficiency and focus less managerial time and liquidity to regulatory filings and can focus more on running the business.[68] The noteworthy cases generally involve extenuating circumstances, such as the directors also serving as officers or deregistering as a pretext for a self-interested reason.[69] However, numerous companies have “gone dark” to reduce their operating expenses without any resulting litigation.[70] It follows that there is a wide-open path for compliant directors to voluntarily pursue a going dark without going private strategy.
As illustrated below, the potential for liability exists because delisting from a major securities market is entirely within the board’s discretion and does not require shareholder approval. However, as discussed above, delisting from an exchange is different than deregistration with the SEC and does not remove any existing statutory compliance with securities laws—only an affirmative deregistration can suspend reporting obligations.[71] Courts recognize the power of the corporation’s directors, in a proper exercise of their business judgment to delist a company even if, as an incidental matter, the delisting and deregistration might adversely impact the market for the corporation’s securities.[72]
The case law suggests that a “going dark” transaction decreases the stock’s value and results in a drop in liquidity, which places directors under scrutiny for a breach of the fiduciary duty of loyalty. In Lennane v. Ask, an unpublished decision from the Delaware Court of Chancery in 1990, the court concluded “that the harm from which plaintiff seeks to be saved — the delisting of ASK common stock from the NASDAQ/NMS is real, but less threatening to the corporation and its shareholders than the risks that delay [the] timely consummation of the … acquisition.”[73] Ultimately, the court held in Lennane that the board of directors could affirmatively make the decision to delist, particularly since the only rule providing a shareholder vote was a rule promulgated by NASDAQ.[74]
In Hamilton v. Nozko, a Delaware court upheld a cause of action for breach of fiduciary duty based on deregistration, because the deregistration by a self-interested and dominate director made the minority shareholders unable “to liquidate their shares at a fair price, and … vulnerable to a forced sale at an unfair price.”[75] Defendant Nozko deregistered both a subsidiary and a parent company and then orchestrated an exchange for Class A stock in the parent which severely diluted their voting power.[76] The subsidiary shareholders had no other liquidity besides the exchange to the parent company, whose valuation was calculated without substantiation.[77]
The court noted that, “[o]n the question of when a corporation’s directors (and as here, its majority stockholder) may properly cause the corporation’s stock to be deregistered (and as a consequence, delisted) under the Exchange Act, the authorities afford little guidance. The Act itself provides that ‘a security registered with the national securities exchange may be withdrawn…from listing and registration…upon application by the issuer…”[78]
The court further stated that Delaware law “allows directors to deregister and delist even if, as an incidental matter, the delisting and deregistration might adversely impact the market for the corporation’s securities.”[79] Therefore, the benefits to the company of deregistering and delisting should not be the only cause for deregistering and delisting because the board “commit[s] an actionable breach of fiduciary duty if, for self-interested reasons, the company’s board cause[s] the corporation’s stock to be deregistered and delisted and as a result, cause the market for the stockholders’ investment to become significantly impaired or eliminated.”[80]
The Hamilton court specifically authorized deregistration “to avoid the continuing expense of complying with the reporting requirements of the [Securities] Exchange Act”[81] cautioning that delisting a corporation’s stock, “even where legally permissible, will be proscribed if taken for an inequitable purpose.”[82]
More recently, in Wynnefield v. Niagara, the Delaware Court of Chancery reaffirmed the Hamilton decision allowing the Niagara board to deregister the company’s shares and denying much of Wynnefield’s Section 220 (“Books and Records”) inspection requests in connection with Niagara’s delisting and deregistration.[83] The Niagara court noted that a Books and Records request is allowed when a stockholder shows “that management suffered from some self-interest or failed to exercise due care in a particular decision.”[84] The Court noted that Delaware law recognizes a corporate board’s ability to take steps to deregister, stating, “I know of no books and records case where a plaintiff succeeded on its demand solely because the board decided to deregister the company’s shares.”[85]
Eventually, in Niagara, the Delaware Court of Chancery denied most of Wynnefield’s inspection requests, but allowed the inspection of Niagara’s stock ledger and list of stockholders and also allowed them to see Niagara’s communications with the SEC, NASD, DTC, and Niagara’s transfer agent regarding their reverse and forward stock splits effected concurrently with their deregistration.[86] On appeal, the Delaware Supreme Court restricted Wynnefield’s investigation, withholding all communications with securities authorities in connection with the deregistration.[87]
In Berger v. Scharf, the Supreme Court of New York reexamined the Wynnefield v. Niagara facts and circumstances and in dicta, left open the possibility of a breach of fiduciary duty for Niagara’s board. Applying Delaware law, the Berger court observed that the Defendant Niagara reported strong earnings up until the deregistration, granted substantial stock options shortly after deregistration, and contemplated the possibility of selling to an acquirer.[88] The court also noted that three of six members of the board were not independent.[89] The court concluded that it was possible that the board attempted to “benefit from … Going Dark because they have information the public shareholders do not, and can engage in transactions and receive compensation without revealing the details the SEC would require.”[90] The court held that the board “act[ed] in a manner that cannot be attributed to a rational business purpose, or reach[ed] their decision by a grossly negligent process that include[d] the failure to consider all material facts reasonably available.”[91] The court granted the defendant’s motion to dismiss the claim for declaratory judgment but denied the defendant’s motion to dismiss the claim for breach of fiduciary duty based on the decision to delist.[92]
Conclusion
Compliant directors who choose to voluntarily pursue a going dark without going private strategy to save money and to shift their focus away from disclosure and towards management currently have a heightened incentive to pursue such strategies. As discussed above, avoid beneficial transaction that occurs close in timing to delisting and deregistering the company that would allow critics to attempt to show that delisting the company did not result from the valid exercise of business judgment. Additionally, the company should refrain from engaging in any major transactions that are close in time to taking the company dark.[93]
However, to more reasonably remove any conflicted interest in the outcome, refrain from granting stock options or attempting to sell the company or its assets. Publishing audited financial statements, for example, would provide evidence that the board was not acting pursuant to any beneficial information that the shareholders do not have. Then, assess any conflicts of interest between the Company and the shareholders, along with any potential lack of independence of board members to make the decision to delist. If there are conflicts or a lack of independence, the board should establish a special committee of independent directors to review the decision and keep good records of all meetings and discussions of the committee.
Finally, the board should review any registration rights agreements, shareholder agreements, credit agreements, loan agreements, indentures or other similar agreements as they may contain contractual obligations to continue to file, report, or disclose the delisted entity.[94]
[1] Going Dark and going private are sometimes confused with one another. Although both Going Dark and going private suspend their SEC reporting obligations and requires the filing of a Form 15, going private transactions involve a shareholder vote, a payment of cash or exchange to shareholders, and are subject to entire fairness review. There is an extensive body of literature surrounding directors’ duties in going private transactions, which I do not seek to replicate here. See, e.g., Faith Stevelman, Going Private at the Intersection of the Market and the Law, 62 Bus. Law. 775 (2007); Letsou & Haas, supra; Guhan Subramanian, Fixing Freezeouts, 115 Yale L.J. 2 (2005); Bradley R. Aronstam et al., Revisiting Delaware’s Going Private Dilemma Post-Pure Resources, 59 Bus. Law. 1459 (2004); Ronald J. Gilson & Jeffrey N. Gordon, Controlling Controlling Shareholders, 152 U. Pa. L.Rev. 785 (2003); John E. Abramczyk et al., Going-Private “Dilemma”?-Not in Delaware, 58 Bus. Law. 1351 (2003); Bradley R. Aronstam et al., Delaware’s Going Private Dilemma: Fostering Protections for Minority Shareholders in the Wake of Siliconix and Unocal Exploration, 58 Bus. Law. 519 (2003); Peter V. Letsou & Steven M. Haas, The Dilemma That Should Never Have Been: Minority Freeze Outs in Delaware, 61 Bus. Law. 25 (2005); Leo E. Strine, Jr., The Inescapably Empirical Foundation of the Common Law of Corporations, 27 Del. J. Corp. L. 499 (2002). There is also extensive case law. See, e.g., In re: CNX Gas Corp. S’holders Litig., 2010 WL 2291842 (Del.Ch. 2010)); In re Life Tech., Inc. S’holders Litig., 1998 WL 1812280 (Del. Ch. Nov. 24, 1998); In re Ocean Drilling & Exploration Co. S’holders Litig., 1991 WL 70028 (Del. Ch. Apr. 30, 1991). In re Cox Communications, Inc. Shareholders Litigation, 879 A.2d 604 (Del. Ch.2005); In re Cox Radio, Inc. S’holders Litig ., 2010 WL 1806616 (Del. Ch. May 6, 2010); Next Level Commc’ns, Inc. v. Motorola, Inc., 834 A.2d 828 (Del. Ch.2003); In re Pure Res. S’holders Litig., 808 A.2d 421 (Del. Ch.2002); In re Aquila Inc. S’holders Litig., 805 A.2d 184 (Del. Ch.2002); Krasner v. Moffett, 826 A.2d 277, 287 (Del.2003); In re Revlon, Inc. S’holders Litig., 990 A.2d 940, 956-57 (Del. Ch.2010); In re Unocal Exploration Corp. S’holders Litig., 793 A.2d 329, 338 n. 26 (Del. Ch.2000), aff’d sub nom. Glassman v. Unocal Exploration Corp., 777 A.2d 242 (Del.2001); Andra v. Blount, 772 A.2d 183 (Del. Ch.2000); Hartley v. Peapod, Inc., C.A. No. 19025 (Del. Ch. Feb. 27, 2002) In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 547-51 (Del. Ch.2003).
[2] In some cases the corporation’s bylaws require shareholder vote in order to deregister. This is generally not the case.
[3] Leuz, Triantis and Wang, Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations, 45 J. of Acc. and Econ. 181 (2008) (documenting “a spike in going dark” while not finding an increase in going private transactions during the sample period).
[4] These firms may have gone private through a transaction.
[5] NYSE Euronext Listing Standards — U.S. Standards available at: http://usequities.nyx.com/regulation/listed-companies-compliance/listings-standards/us (last visited November 12, 2011).
[6] NYSE Amex LLC Company Guide Part 1. Original Listing Requirements Sections 101-146, available at: http://cchwallstreet.com/AMEXtools/PlatformViewer.asp?SelectedNode=chp_1_1_1&manual=/AMEX/CompanyGuide/amex-company-guide/ (last visited November 12, 2011).
[7] NASDAQ Listing Standards & Fees, Global Select Market Initial Listing Requirements, available at: http://www.nasdaq.com/about/nasdaq_listing_req_fees.pdf (last visited November 12, 2011).
[8] Jeffrey H. Harris, Venkatesh Panchapagesan, and Ingrid M. Werner “Off but Not Gone: A Study of Nasdaq Delistings” Fisher College of Business Working Paper No. 2008-03-005 and Dice Center Working Paper No. 2008-6, March 2008 at 7, n. 4, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=628203&rec=1&srcabs=565325 (last visited November 12, 2011) (finding that 34% of NASDAQ revenues were generated from fees, and that annual fees top out at $75,000 for NASDAQ listed companies).
[9] James J. Angel, Jeffrey H. Harris et al., “From Pink Slips to Pink Sheets: Liquidity and Shareholder Wealth Consequences of Nasdaq Delistings,” Working Paper Series from Ohio State University, Charles A Dice Center for Research in Financial Economics, 2004 at 2 (available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=565325, last visited, November 12, 2011).
[10] Id. at 9.
[11] Cory Jansen, “The Dirt on Delisting Stocks” available at http://www.investopedia.com/articles/02/032002.asp#ixzz1d5ml3LMG. “For example, on September 27, 2001, the Nasdaq announced that it was implementing a three-month moratorium on price and market value listing requirements as a result of the market turbulence created by the September 11, 2001, terrorist attacks in New York City. For many of the approximately 400 stocks trading under $1, the freeze expired on January 2, 2002, and some companies found themselves promptly delisted from the exchange. The same measures were taken in late 2008 in the midst of the global financial crisis, as hundreds of Nasdaq-listed companies plunged below the $1 threshold. The Nasdaq makes other exceptions to its rules by extending the 90-day grace period for several months if a company has either a net income of $750,000, stockholders’ equity of $5 million or total market value of $50 million.”
[12] Jeffrey H. Harris, Venkatesh Panchapagesan, and Ingrid M. Werner “Off but Not Gone: A Study of Nasdaq Delistings” at 2 Fisher College of Business Working Paper No. 2008-03-005 and Dice Center Working Paper No. 2008-6, March 2008, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=628203&rec=1&srcabs=565325 (last visited November 12, 2011) (hereinafter, “Off But Not Gone”) (consequently, this article found that the further a firm fell the more liquidity the company loses, meaning that if the Amex listed company fell to the OTC Bulletin Board, then the liquidity loss was not as dramatic as when the company fell from the Amex to the Pink Sheets. Id. at 3).
[13] Pink Sheets has gone through several name changes. The company was first established in 1913 as The National Quotation Bureau (NQB). For decades, the NQB reported quotations for both stocks and bonds, publishing them in publications called Pink Sheets and Yellow Sheets, named for the color of paper they were printed on. Then for a time their parent company was called Pink Sheets LLC. Most recently the Pink Sheets changed its name from Pink OTC Markets to the OTC Markets Group with its parent company named OTC Markets Group Inc. See http://www.otcmarkets.com/news/otc-press-release?id=311
[14] The Pink Sheets, according to it’s CEO is there for firms who “cannot, will not, or do not want to list on a major exchange.” See Angel, Harris, et. a l., From Pink Slips to Pink Sheets, at fn. 1.
[15] CSRP is the Chicago Booth School’s Center for Research in Security Prices, which maintains an extensive database of U.S. equities. Available at: http://www.crsp.com/products/stocks.htm (last visited, December 5, 2011).
[16] TAQ is the Kellogg School of Management’s Trade and Quote Database, which is a collection of intraday trades and quotes for all securities listed on the NYSE, Amex, and NASDAQ. Available at: http://www.kellogg.northwestern.edu/rc/taq.htm (last visited December 5, 2011).
[17] Off But Not Gone, supra, note 11 at 9.
[18] http://www.otcbb.com/faqs/otcbb_faq.stm#Contact
[19] And would then either be quoted on the Pink Sheets or the OTC Market Group’s “OTC Link inter-dealer quotation service” which is a quotation service not cited in any of the literature.
[20] http://www.otcbb.com/dynamic/marketstats.htm
[21] http://www.otcbb.com/TradingData/HistAnnualStats.stm. OTC Bulletin Board has shrunk dramatically in the last ten years. For example, in the year 2000, during the dot com bubble, the OTC Bulletin Board’s average daily dollar volume was $402,220,236. In September 2009, FINRA, the manager of the OTC Bulletin Board even tried to find a buyer for the OTC Bulletin Board. See Peter Chapman, “FINRA Proposal Riles OTC Market” Traders Magazine.com, January 25, 2010 available at http://www.tradersmagazine.com/news/finra-pink-sheets-otc-markets-104992-1.html?pg=1 (last visited December 5, 2011).
[22] http://www.sec.gov/answers/pink.htm
[23] http://www.otcmarkets.com/content/doc/ps/OTCQBfactsheet.pdf (last visited December 11, 2011). See also, “The Pink Sheets: A Better Option Than You Think,” Venture Law Corporation, April 26, 2007 available at: http://www.venturelawcorp.com/pink_sheets.pdf (last visited December 11, 2011).
[24] http://www.otcmarkets.com/otc-101/otc-market-tiers
[25] Requirements include total assets of $2 million, a minimum bid price of $0.10, ongoing operations, 50 beneficial shareholders owning at least 100 shares, ongoing audited quarterly and annual financial reports posted on OTCQX.com or Edgar, inclusion in the S&P Corporation Records or Mergent Manuals, which satisfy the Blue Sky requirements for secondary transactions as well as a letter of introduction from a qualifying Designated Advisors for Disclosure (“DADs”) or Principal American Liaisons (“PALs”). http://www.otcqx.com/qx/otcqx/requirements (last visited December 5, 2011). For a list of DADs and PALs, see http://www.otcqx.com/qx/otcqx/dadpal (last visited December 11, 2011).
[26] http://www.otcmarkets.com/content/doc/ps/OTCQBfactsheet.pdf
[27] http://www.otcmarkets.com/content/doc/ps/OTCQBfactsheet.pdf
[28] http://www.otcmarkets.com/otc-101/otc-market-tiers
[29] http://www.otcmarkets.com/otc-pink/marketActivity/current-otc-market
[30] Andras Marosi and Nadia Massoud, “Why Do Firms Go Dark?” 42 Journal of Financial and Quantitative Analysis 421 (2007).
[31] Id at 2.
[32] Christian Leuz, Alexander Triantis & Tracy Wang, Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations (ECGI Working Paper No 155/2007, Mar 2008), http://knowledge.wharton.upenn.edu/papers/1285.pdf (visited Oct. 6, 2011). See Claudia H. Deutsch, “The Higher Price of Staying Public,” N.Y. Times, Jan. 23, 2005, § 3, at 5 (citing an executive at Fidelity Federal Bancorp of Evansville, Ind., who claimed that terminating registration would save $300,000 a year, even though its accounting and management would easily pass SOX scrutiny); see also Neal L. Wolkoff, Op-Ed, “Sarbanes-Oxley Is a Curse for Small-Cap Companies,” Wall St. J., Aug. 15, 2005, at A13 (explaining that more than a dozen small companies delisted from the American Stock Exchange and deregistered their securities because of the high costs of compliance with SOX, particularly section 404).
[33] Id. at 2 (quoting, “A Legal Way to Keep Investors in the Dark” and “When Companies ‘Go Dark’, Investors Can Lose” in the August 4, 2003 and May 24, 2004 issues of BusinessWeek, respectively).
[34] Note that this article focuses exclusively on Delaware law because Delaware corporate law is the nation’s preeminent source of corporate law. See Michael P. Dooley & Michael D. Goldman, Some Comparisons Between the Model Business Corporation Act and the Delaware General Corporate Law, 56 Bus. Law. 737, 737-738 (2001); Ehud Kamar, A Regulatory Competition Theory of Indeterminacy in Corporate Law, 98 Colum. L. Rev. 1908 (1998) (discussing the factors contributing to Delaware’s domination of corporate law); Dennis J. Block et. al., The Business Judgment Rule: Fiduciary Duties of Corporate Directors 3 (5th ed. 1998) (“The Delaware court system…is viewed as ‘the Mother Court of corporate law.’”).
[35] Kamar, P. Karaca-Mandic, and E. Talley, Sarbanes-Oxley’s Effects on Small Firms: What is the Evidence (2007); Ellen Engel, Hayes and Wang, The Sarbanes-Oxley Act and Firms’ Going Private-Decisions, 44 J. of Acc. and Econ. 116, 118, 126 (2007) (“[t]he data show a substantial increase in the number of firms undertaking going-private transactions after the enactment of SOX”; authors examined Schedule 13E-3 filings, excluding foreign issuers and certain other filers); Leuz, Triantis and Wang, Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations, 45 J. of Acc. and Econ. 181 (2008) (documenting “a spike in going dark that is largely attributable to the Sarbanes-Oxley Act”; “we find that the pattern of going dark decisions is closely associated with the passage of SOX and the timing of policy changes regarding the implementation of the internal controls requirement in Section 404”; not finding an increase in going private transactions during the sample period); Li, X., The Sarbanes-Oxley Act and Cross-Listed Foreign Private Issuers (2007); Marosi, A. and N. Massoud, Why Do Firms Go Dark?, 42 J. of Financial and Quantitative Analysis 421 (June 2007) (“the number of firms going dark has grown dramatically over time” …. [t]he increase is the highest after Sarbanes-Oxley”); Kamar, Karaca-Mandic, and Tally, Going Private Decisions and the Sarbanes-Oxley Act of 2002 (Apr. 2006) (relative increase in going private transactions by small U.S. firms in the first year after SOX); S. Block, The Latest Movement to Going Private: An Empirical Study, 14 J. of Applied Finance 36 (Spring 2004) (finding an increase in going private transactions and stating that the “cost of being public is the number one reason for going private by smaller firms”); Piotroski and Srinivasan, Regulation and Bonding: The Sarbanes-Oxley Act and the Flow of International Listings, 46 J. of Accounting Research 383, 388, No. 2 (May 2008) (observing a decline in the rate of U.S. listings post-SOX among smaller foreign firms, consistent with smaller firms being unable to absorb the incremental costs of SOX). Not all commenters evaluating the impact of SOX on U.S. markets have reached the same conclusion. See Marc Morgenstern and Peter Nealis, “Going Private: A Reasoned Response to Sarbanes Oxley?” available electronically at http://www.sec.gov/info/smallbus/pnealis.pdf (last visited December 11, 2011).
[36] See Stephen M. Bainbridge & Christina Johnson, Managerialism, Legal Ethics, and Sarbanes-Oxley Section 307, 2004 Mich. St. L. Rev. 299, 301 (2004).
[37] See Stephen M. Bainbridge, The Creeping Federalization of Corporate Law, Regulation at 26 (Spring 2003), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=389403 (last visited December 5, 2011) (“Congress and the regulators have implemented a set of reforms that are deeply flawed. They have adopted policies that have no empirical support or economic justification. Worse yet, in doing so, they have eviscerated basic federalism rules that have long served us well.”); Eric M. Fogel & Andrew M. Geier, Strangers in the House: Rethinking Sarbanes-Oxley and the Independent Board of Directors, 32 DEL. J. CORP. L. 33, 34 (2007) (“[Sarbanes-Oxley] ultimately will be ineffective in preventing corporate scandals in the future.”); Kimberly D. Krawiec, Cosmetic Compliance and the Failure of Negotiated Governance, 81 WASH. U. L.Q. 487, 491 (2003) (“[Internal compliance structures] may largely serve a window-dressing function that provides both market legitimacy and reduced legal liability.”); Larry E. Ribstein, Markets vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002, 28 J. CORP. L. 1, 32 (2002) (suggesting that provisions set forth in Sarbanes-Oxley will not only be costly to implement, but also inhibit the efficient flow of information within firms and the relationship between corporations and their lawyers); Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 YALE L.J. 1521, 1563, 1591 (2005) (characterizing Sarbanes-Oxley governance as a “dismal saga” partly due to the fact that the Act’s provisions are “ill matched to fulfill their stated objectives”); Gregory Carl Leon, Stigmata: The Stain of Sarbanes-Oxley on U.S. Capital Markets 9 Duquesne Bus. L. J. 126 (2007) (“The voices of those that persist in the opinion that [Sarbanes-Oxley] is beneficial to the U.S. market are few and far between.”).
[38] Harold S. Bloomenthal and Samuel Wolff, 10 Int’l Cap. Markets & Sec. Reg. Section 1:33.05 “Trends in Delistings and Deregistrations,” updated in November 2011.
[39] Id.
[40] Such as the NASDAQ, NYSE, or NYSE-Amex.
[41] Id.
[42] Supra, Note 18 at Table 6.
[43] Marc Morgenstern and Peter Nealis, “Going Private: A Reasoned Response to Sarbanes Oxley?” available electronically at http://www.sec.gov/info/smallbus/pnealis.pdf (last visited December 11, 2011).
[44] Id. at 3 (noting that the industry joke for corporate orphans is that the market is so illiquid that trading is by ‘appointment only.’).
[45] See Leuz Triantis and Wang, “Why Do Firms Go Dark?” Supra note 18 at 12.
[46] See Paul M. Healy and Krishna Palepu, Information Asymmetry, Corporate Disclosure, and the Capital Markets: A Review of the Empirical Disclosure Literature, 31 J. of Acc. & Econ. 405-440 (2001).
[47] A company’s duty to file reports is suspended under one of three provisions in the 1934 Act: Rules 12g-4, 12h-3 or 15d-6.
[48] http://www.dorsey.com/going_dark_voluntary_delisting_deregistration/
[49] Securities and Exchange Act of 1934 section 12(g)3.
[50] Id. at section 12(g)5.
[51] (Nelson, 2003)
[52] (SEC 2006).
[53] Del.Ch., (C.A. # 5961-NC, Sept. 12, 1979).
[54] As cited in Hatleigh Corp. v. Lane Bryant, Inc., 428 A.2d 350, 353-354 (Del. Ch. 1981).
[55] RB Associates of New Jersey, L.P. v. Gillette Co., 1988 Del. Ch. LEXIS 40 (Del. Ch. Mar. 22, 1988).
[56] Id.
[57] The following list is compiled from “Why Do Firms Go Dark?” supra note 18 at 5-7 and “Off But Not Gone,” Supra note 7.
[58] “Why Do Firms Go Dark?” Supra note 18 at 10.
[59] See Jonathan Macey, Maureen O’Hara, and David Pompilio, Down and Out in the Stock Market: The Law and Economics of the Delisting Process, 51 J. Law & Econ. 683, 700-709 (showing data for firms involuntarily delisting from the NYSE). See James J. Angel, Jeffrey H. Harris, Venkatesh Panchapagesan, & Ingrid M. Werner, From Pink Slips to Pink Sheets: Shareholder Wealth Consequences of Nasdaq Delistings, Working paper, The Ohio State University (providing similar data for firm delisting from the NASDAQ and noting that shareholder wealth decreases by nineteen percent on average).
[60] Id.
[61] Amy Wong, “Sox: Culprit Behind Increased Delisting?,” available at www.gcconsulting.com
[62] Brad Jacobsen, Chris Scharman, Going Dark — An Alternative to Sarbanes-Oxley Compliance, 20 Utah B.J. 12, 16 (2007).
[63] Williams v. Geier, 671 A.2d 1368 (Del. 1996) (holding that the Business Judgment Rule protected the board of directors who, acting along with a majority of fully-informed shareholders, approved a recapitalization plan that would lead to being delisted from the NYSE).
[64] Brehm v. Eisner, 746A.2d 244, 256 (Del. 2000).
[65] Orman v. Cullman, 794 A.2d 5, 22 (Del. Ch. 2002).
[66] See Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051 (Del. Ch. 1987).
[67] Douglas Enenoff, “Going Dark: What Companies Need to Consider, available at: https://www.pinkotc.com/content/doc/ellenoff-going-dark.pdf (last visited December 16, 11). Delisting cases are more frequent. For example, the court prevented a delisting because it would cause irreparable harm to the shareholders where the board took actions to delist in an attempt to prevent a hostile takeover. See Norlin Corp. v. Rooney, Pace, Inc., 744 F.2d 255 (2d Cir. N.Y. 1984).
[68] It is entirely within the realm of possibility that many companies that should go dark, in fact, do not. The shares held by the officers and directors themselves become less liquid and they remain listed—in spite of the fact that many small issuers are “corporate orphans” and should deregister to save fees. Thus, those with the most to gain, the directors, remain listed and registered longer than they should for their own self-interest.
[69] Id.
[70] Id.
[71] http://www.dorsey.com/going_dark_voluntary_delisting_deregistration/#_ftn11
[72] Lennane v. Ask Computer Systems, Inc., C.A. No. 11744, Allen, C. (Del.Ch. 1990), reprinted at 16 Del. J. Corp. L. 1521 (1991). It is noteworthy to point out that Larry W. Sonsini, of Wilson Sonsini Goodrich & Rosati was one of the directors being targeted in this case.
[73] Lennane, supra, note 73 at 1534.
[74] Stephen J. Massey, Chancellor Allen’s Jurisprudence and the Theory of Corporate Law, Del. J. Corp. L. 683, 783 (Summer 1992).
[75] 1994 WL 413299, at *6 (Del.Ch., 1994).
[76] Id. at *2.
[77] Id.
[78] Id. at *6.
[79] Id. at *6. See also, Lennane Supra, note 73.
[80]Hamilton, Supra, note 76 at *6 (emphasis added).
[81] Id.
[82] Id. (citing Rabkin v. Philip A. Hunt Chemical Corp., 498 A.2d 1099, 1107 (Del. Supr. 1985).
[83] Wynnefield Partners Small Cap Value L.P. v. Niagara Corp., 2006 Del. Ch. LEXIS 119 (Del. Ch., June 19, 2006) aff’d in part and rev’d in part, 907 A.2d 146 (Del. 2006).
[84] Id. at 34.
[85] Id. at 37.
[86] Id. at *19
[87] 907 A.2d at 146.
[88] Berger v. Scharf, 11 Misc.3d 1072(A) at 5 (N.Y. Sup. 2006).
[89] Id. at 5. The dominant director was also the brother of a second director, and employed a third director in unrelated business owned by the dominant director.
[90] Id.
[91] Berger v. Scharf, 11 Misc.3d 1072(A) at 5 (N.Y. Sup. 2006) (quoting Brehm v. Eisner, 746 A.2d 244, 264 n. 66).
[92] Id.
[93] It is recommended to create a “Time-Capsule” of all information available to the board of directors at the time of delisting or deregistration which is relevant. This way, should the value of the underlying assets increase extraordinarily, then the board of directors can show that there was no conflict of interest at the time the board decided to delist. This time-capsule will probably be unnecessary, but should the value of the underlying asset be resurrected, then the board will be protected from the lawsuits which may follow.
[94] Brad Jacobsen, Chris Scharman, “Going Dark — An Alternative to Sarbanes-Oxley Compliance,” 20 Utah B.J. 12, 16 (2007) (“Furthermore, to show that the board’s decision resulted from a valid business judgment, keep good records for all meeting and discussions regarding the decision to delist. These records should show the valid business purposes for delisting. Hire financial consultants to help consider all materially facts that are reasonably available to the company. Additionally, the board might consider listing on the Pink Sheets to increase liquidity for the shareholders.”)
