Over the last year or so, there has been significant interest in “going private transactions,” which are generally defined to be transactions in which a controlling shareholder, the executive management team, or other person seeks to “take the company private” by acquiring all outstanding public shares. This increased interest in going private transactions may be explained by a number of new burdens facing public companies.
First, public companies have always experienced higher costs than private companies due to the cost of complying with their obligations under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Those compliance costs have increased significantly as a result of the substantial corporate reforms now required by the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley” or “SOX”) and related rules of the Securities and Exchange Commission (“SEC”), the New York Stock Exchange (“NYSE”), and the National Association of Securities Dealers Automated Quotation system (“NASDAQ”). A recent study commissioned by Foley & Lardner reports that audit fees have increased 27 percent for S&P 500 issuers and 35 percent for S&P MidCap issuers between 2001 and 2002. [FN1] This same study, based upon responses of senior management, estimated that the average costs of being public--including director and officer insurance, accounting services, legal services, public relations, compensation of the board of directors (“board of directors” or “board”), financial reporting and printing, lost productivity, compliance personnel, investor relations, director search firms, transfer agent fees, and other SOX-related costs--will increase 90 percent as a result of the adoption of Sarbanes-Oxley.
Second, with increasing disclosure obligations, especially new certification requirements under Sarbanes-Oxley, management of public companies is subject to increased liability and risk. The Department of Justice recently initiated criminal prosecutions under Sarbanes-Oxley based upon these certifications. [FN3] The SEC has announced an increased focus on directors of public companies. [FN4] Furthermore, in the first year following the adoption of Sarbanes-Oxley, researchers found a decline in the frequency of dismissals of securities lawsuits. [FN5]