The Movie Studio Inc. (MVES)

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"Going Dark” - Voluntary Delisting and Deregistration under the Securities Exchange Act of 1934 - The Attractions of the “Dark Side”

See the full article - https://www.dorsey.com/newsresources/publications/2009/03/going-dark--voluntary-delisting-and-deregistrati__

The 2008-2009 stock market crash and current deep recession are causing many small public companies to reexamine the costs and benefits of remaining listed on a national securities exchange and continuing as a public reporting company under the Securities Exchange Act of 1934 (the “Exchange Act”). Over the past twelve to eighteen months, many companies have experienced steep declines in their total market capitalization and revenues. For smaller companies, public company compliance costs have increased significantly as a percentage of revenues. In early 2009, more than 200 NASDAQ listed companies and 50 NYSE listed companies were facing delisting for non-compliance with applicable continuing listing requirements. As a result, both NASDAQ and the NYSE have currently suspended certain of such requirements, including the $1.00 minimum bid price standard to avoid an avalanche of delistings.1

Companies facing delisting are more likely to consider “going dark” than those not under immediate pressure to address their listing status. However, many companies not facing near term delisting pressure may also wish to consider this possibility. Public company burdens are particularly acute for companies with a market capitalization of less than $50 million and total revenues of under $100 million. Public company compliance costs can range from $1.0 million to over $3.0 million annually even for such a relatively small company. The more troubled the issuer, the more burdensome public company status can become as a company spends a greater proportion of its diminishing resources dealing with difficult disclosure and accounting questions. In the past there has been some stigma associated with “going dark.” As the current recession has deepened, this negative perception may have less force as companies face the very high costs of remaining a public company in a very difficult business environment.
What “Going Dark” Means

“Going dark” refers to the process of voluntarily delisting a public company’s shares from a national securities exchange or inter-dealer quotation system (if so listed or quoted) and subsequently deregistering the shares under the Exchange Act, thus suspending or terminating the company’s public reporting obligations under the Exchange Act. Delisting alone does not eliminate public reporting requirements. Many non-listed companies are also reporting issuers. However, for such an unlisted public reporting company, the lack of a stock exchange listing may substantially diminish the benefits of remaining a public company.

“Going dark” should not be confused with a “going private” transaction. A “going private” transaction generally involves the cash-out of all or a substantial portion of a company’s public shares so that the company becomes eligible to delist and deregister its shares under the Exchange Act. “Going private” transactions can take many forms and may involve a merger, tender offer or reverse split of the company’s shares. “Going private” transactions require extensive and detailed disclosure filings under Rule 13e-3, the “going private” rule. “Going private” transactions are often undertaken by or at the direction of controlling shareholders or third party acquirors and require extensive board consideration, disclosure, fairness opinions, SEC filings and often a shareholder vote.

“Going dark,” on the other hand, can be accomplished without a shareholder vote, fairness opinion or any shareholder cash out. While some companies electing to delist and “go dark” have considered the possibility of providing shareholders with a liquidity event, such as a tender offer or stock repurchase program, in practice this is not often done because companies which “go dark” rarely have sufficient cash resources to make a meaningful tender offer. Nevertheless, such a liquidity event could be undertaken in connection with a “going dark” transaction by a company that has the cash resources to offer one, provided that care is taken not to trigger the “going private” rules.2
Procedures for “Going Dark”

To understand the “going dark” procedure, it is first necessary to understand what triggers Exchange Act reporting requirements. A company’s Exchange Act obligations can be triggered in any of three ways:

under Section 12(b) if it has shares listed on a national securities exchange;
under Section 12(g) based on having over 500 record holders of a class of securities and total assets exceeding $10 million3; and
under Section 15(d) by having a registration statement declared effective under the Securities Act.

Each of these three independent predicates for Exchange Act registration must be separately addressed as a company considers whether and how to “go dark.”4

Both U.S. domestic issuers and foreign private issuers can delist and/or deregister if there are less than 300 holders of record of the relevant class of its securities as defined in Rule 12g5-1. It is possible for a company to have less than 300 holders of record of a class of securities even though it has thousands of beneficial owners of that class of securities. This is because, in counting record holders, in general, the issuer need only count the number of registered holders on its shareholder list and if depositaries are listed, the number of holders for whom the depositary holds securities. For most U.S. issuers, this mean counting the registered holders and adding the number of participants listed in the security position listing of DTC, the principal depositary for U.S. issuers.5 For purposes of determining whether the Company has less than 300 holders of record, Rule 12g5-1 has been interpreted to mean that an issuer does not have to further “look through” DTC participants to the ultimate beneficial owners. Many companies may therefore be eligible to delist and “go dark” without management or the board of directors even being aware of the possibility.

Foreign private issuers can also delist and deregister under Exchange Act Rule 12h-6 but that Rule requires the company to have and maintain a foreign listing which is its primary trading market. Since the non-U.S. company would still be listed on a non-U.S. Exchange, using Rule 12h-6 would not technically be “going dark,” although it would involve withdrawal from the U.S. reporting system.6
Delisting and Deregistration under Section 12(b)

The “going dark” rules are simple in conception, but can be complex and highly technical in their practical application. The first step for a listed issuer is to delist. Listed issuers are entitled to delist their securities voluntarily and to deregister them under Section 12(b) of the Exchange Act by filing a Form 25 with the SEC. The issuer must give notice of its intention to file the Form 25 and issue a press release announcing that intention ten days prior to filing the Form 25. The delisting will become effective ten days after filing the Form 25 and most SEC reporting obligations are suspended on that date. However, the actual termination of registration under Section 12(b) does not occur until 90 days after effectiveness of the delisting.7
Deregistration under Section 12(g) and Suspension of Reporting Obligations under Section 15(d)

Once delisted, a company may nonetheless be required to continue reporting pursuant to Section 12(g) of the Exchange Act if it has more than 500 holders of record and total assets exceeding $10 million, or pursuant to Section 15(d) of the Exchange Act if it at any time had an effective Registration Statement under the Securities Act of 1933.8 To avoid this result, a company can deregister under Section 12(g) and suspend its reporting obligations under Section 15(d) if it has less than 300 shareholders of record.9 Section 15(d) reporting obligations may be automatically suspended if the issuer had less than 300 shareholders of record10 on the first day of its fiscal year. In either case, the company will need to file a Form 15 certifying that the number of shareholders of record of the class of securities to be deregistered is less than 300 persons to deregister under Section 12(g) and, if applicable, suspend its reporting obligations under Section 15(d).11 Note that Section 15(d) obligations can never be terminated in this manner, they can only be suspended.12 After “going dark,” an issuer’s reporting obligations can be reinstated if the issuer exceeds the limit on the number of record holders on the first day of any fiscal year after it files a Form 15. For example, brokers and other institutions holding shares in street name can elect to cease holding the shares in that capacity, and cause the transfer agent to record the shares directly in the name of the persons for whom they hold the securities. In such a case, each beneficial owner will become a record holder, and the stockholder count may exceed the limits. To avoid having to reregister, companies which have “gone dark” should carefully monitor the number of record holders they have during the year, and take steps (such as a reverse stock split or stock repurchase or tender) to ensure that they continue to have less than 300 record holders before the applicable test dates under Sections 12(g) and 15(d).