Escaping SOX: The Angst of Sarbanes-Oxley Needn't Be Your Future If You Reconsider the Benefit of Being a Public Company (2005)

As costs and burdens of federal securities law compliance continue to soar, Securities and Exchange Commission-reporting bank holding companies (and banks without holding companies that file SEC-compliant reports with FDIC) are increasingly questioning the value of remaining public. There's plenty of cost on that side of the cost-benefit analysis of remaining public. In addition to increased disclosure and corporate governance requirements, the Sarbanes-Oxley Act prescribes a comprehensive, audited review of internal controls over financial reporting plus management certifications regarding quarterly and annual reports. Some mistakes bring criminal penalties. For many financial institutions the costs and liabilities associated with SOX approach an intolerable level. For an SEC-reporting community bank, the total annual compliance costs for legal, audit, Section 404 consulting, and administrative matters can exceed $500,000, based on figures from institutions that have gone private in recent Bankers increasingly question whether the prestige once associated with being publicly-traded is worth the pain. Such costs and pressures have created an incentive for community. banks to go private, which requires that a company reduce its shareholder base to fewer than 300 shareholders of record. Since January 2003, over 40 going-private transactions have been filed by banking institutions. (See Three banks that turned back the clock for a closer look.) The number of transactions has steadily increased since 1996. Should your bank be next? An evaluation of the costs and benefits of the company's public-company status is an essential first step to determining if going private is the right option for your bank. Indeed, one could argue that, under today's circumstances, the board of a small SEC-reporting financial institution faces a fiduciary obligation to perform such an evaluation. The board and management should review the bank's long-term and short-term strategy, capital needs, growth alternatives, and financing options and then weigh the relative advantages and disadvantages of going private within this framework. Let's examine main elements of the analysis. The advantages of going private Expense reductions. The greatest advantage of going private is the reduction of the securities law and accounting rules compliance expense and administrative burden. This includes costs relating to the preparation and filing of SEC reports; consultation with counsel regarding ongoing SEC requirements; and maintenance of a large shareholder base, including the costs of communicating with those owners through periodic mailed reports. In addition to such quantifiable costs, banks experience less readily quantifiable, but no less significant, costs represented by the management time and attention involved in the SEC reporting and compliance process. Efficient use of capital. A repurchase of the company's outstanding stock is an efficient way to deploy excess capital. Coupled with the expense savings realized through cessation of SEC reporting, the repurchase is likely to increase return on equity and earnings per share after the going-private been completed. Flexibility in corporate management. Elimination of the applicability of Regulation FD and other SEC oversight relating to investor communications provides additional flexibility to companies. Without the corporate governance requirements imposed by SOX and stock exchange regulations, banks will have additional flexibility to tailor their board and committee composition and activities to their needs. Positioning for subchapter S election. Finally, a going-private transaction can provide an opportunity to elect subchapter S status if the transaction reduces the number of eligible shareholders to 100 or less. In recent years, several banks have undertaken going-private transactions as an efficient means of reducing their shareholder levels. …