At the request of subscribers, Compliance Week offers a Remediation Center, in which readers can submit questions—anonymously—to securities and accounting experts. Compliance Week's editors will review all questions and then submit them—confidentially, of course—to specialists who can address the issues. The questions and responses will then be reprinted in a future edition of Compliance Week. Below is one of the Q&As; ask your own questions by clicking here.
THE QUESTION
If an accelerated filer goes private via a private equity buyout which is financed by publicly traded debt, do the quarterly and annual reporting requirements with the Securities and Exchange Commission change? If they do, what are the new requirements, including any Sarbanes-Oxley implications?
ANSWER
Stephen Quinlivan—When the company goes private, debt securities are usually issued pursuant to an exemption from Securities Act registration known as Rule 144A, which permits sales to large, institutional investors. At this point the company is not legally obligated to file Exchange Act reports such as Forms 10-K and 10-Q, because the issuance of the securities was not registered. The terms of the transaction, however, will likely require the company to file Exchange Act reports voluntarily, and the company becomes what is known as a “voluntary filer.”
As a voluntary filer, the form and content of the SEC reports are essentially the same, including Section 302 certifications. A proxy statement will no longer be required because there are no public shareholders. However, at this stage the company is free of many of the burdens imposed by SOX, such as the prohibition on loans to officers and directors and the disgorgement of certain profits and bonuses by the CEO and CFO following a restatement. The company is also free from corporate governance requirements imposed by stock exchanges, such as the requirement to have a majority of independent directors. For a detailed analysis of compliance obligations of a voluntary filer, see the June 2003 memorandum, “Application of the Sarbanes-Oxley Act to Voluntary Filers of Periodic Reports with the SEC” by Simpson Thacher & Bartlett, available in the corporate publications archive of Simpson's Web site.
An interesting question is whether the accelerated filer posed in the question would still be considered an accelerated filer after going private. Intuitively, the answer is no, because the company does not seem to have equity securities with a market value of $50 million or more as required by Rule 12b-2. But that $50 million requirement is determined by looking back to the most recently completed second fiscal quarter, when the test may have been met before going private. In the adopting release which explained the revised definition of “accelerated filer” (Release No. 34-52989), the SEC states that if a company goes private with an existing issue of public debt outstanding, it remains an accelerated filer until the end of the year in which its equity securities had a market value of less than $50 million, measured at the end of the last business day of its second quarter. The adopting release does not address accelerated filer status for voluntary filers, but the text of the rule would not lead to a different result. In informal guidance, SEC staff have previously stated that a voluntary filer with no other public company reporting obligations has exited accelerated filer status. (See the SEC Regulations Committee of the AICPA meeting highlights dated June 15, 2004, which can be found at www.aicpa.org, in the Center for Public Company Audit Firms, under the “Resources” tab.) Given shifting views on the subject, the SEC's Office of General Counsel should be contacted for current views on the subject.
The terms of the 144A transaction often require the company to exchange quickly the unregistered debt for registered debt. Once the registration statement for the debt exchange is filed, all of the provisions of SOX which apply to issuers again become applicable. Thus the company should plan on staying SOX-compliant when it is a voluntary filer. However, the company will still remain free of the corporate governance requirements imposed by stock exchanges and will not have to file a proxy statement even when the registration statement is filed.
Issuers of public debt only generally find that their obligation to file SEC reports is suspended pursuant to Section 15(d) of the Exchange Act at the beginning of the first fiscal year after the registration statement is effective, because the debt securities are generally “held of record” by less than 300 holders. Note that the number of record holders is determined by reference to Rule 12(g)5-1, and does not include all beneficial owners of securities. The terms of the original transaction will most likely require that the company continue to file SEC reports, and so the company is once again a voluntary filer. Given the potential to issue additional securities which may need to be registered, companies should consider remaining SOX compliant.
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