Interesting. Now why would MHYS continue to operate and not file??
Pros and Cons of “Going Dark”
The following chart briefly summarizes some of the pros and cons of “going dark.” Of course, these factors will have different weight for different companies depending on the circumstances. It is important for the board of directors to consider and review the specific factors most important to its company and in particular to obtain a detailed analysis of the cost savings expected from “going dark.”
Pros
Cons
1. Significantly lower operating costs and management time commitment for compliance and reporting activities. Sarbanes-Oxley Act compliance is also no longer needed.
1. If the company “goes dark,” but later somehow finds itself back over the 300/500 stockholder limit at a test date, it will once again be subject to SEC reporting requirements.
Securities laws and the Pink Sheets may require some level of ongoing disclosure to stockholders. Annual stockholder meetings are still required.
2. D&O insurance costs may be decreased.
2. Stockholders may bring litigation against the board of directors for, among other things, (a) breach of fiduciary duty caused by decreased liquidity and trading price resulting from “going dark,” if that in fact occurs, (b) insider trading by officers and directors on the basis of material non-public information (because no periodic reports have been filed or adequate information released), or (c) repurchases by the corporation on the basis of material non-public information.
3. Personal liability of officers and directors, particularly certifying CEOs and CFOs, is reduced.
3. The absence of public exposure decreases not only the financial markets presence of the company, but can also hurt the company’s business. The securities of an unlisted non-reporting company will (a) be substantially less useful as currency for acquisitions, and (b) be significantly less attractive to employees for equity based compensation.
4. The stock will continue to trade on the Pink Sheets.
4. Trading volumes and analyst coverage will likely be significantly lower.
5. Less public scrutiny and disclosure, making it easier to keep confidential such matters as competitive business information and executive compensation.
5. The company will remain subject to anti-fraud provisions of state and federal securities laws.
The reduced governance and oversight requirements can result in an increase in conflict transactions, and even breaches of the duty of loyalty and a decreased focus on stockholders as a constituency.
6. The company will have greater freedom to explore possible extraordinary corporate transactions.
6. Stockholders may think the decision to “go dark” means that the company is in play or is trying to hide something.
7. Corporate governance requirements can be simplified. For example, it would not be necessary to have a majority of independent directors and the board of directors may be decreased in size.
7. “Going dark” will likely reduce liquidity in the trading market for the company’s securities and can sometimes result in a significant decrease in trading prices.
8. Many companies which “go dark” are sold or cease doing business within a few years after “going dark.”
Conflicts of Interest
In some cases, conflicts of interest may exist on the board of directors or among shareholders with respect to “going dark.” Large shareholders or a group of controlling shareholders can sometimes be less interested in a public trading market than non-affiliated shareholders would be. Such large shareholders and/or senior management may prefer to operate as a private company and seek M&A opportunities without the burdens of public company disclosures, including Section 16 and Schedule 13D filings. Even though no “going private” transaction is contemplated in such cases, it may be nevertheless desirable to have a special committee of independent disinterested directors consider the decision to “go dark.” The special committee should be able to retain and consult with its own legal and financial advisors in accordance with procedures and practices which have been developed and become customary in the U.S. in change of control and “going private” transactions.
Trading in the Pink Sheets
After “going dark,” the company’s shares would generally continue trading in the Pink Sheets. This can be done without subjecting the company to any Exchange Act reporting requirements. If securities that are delisted from NASDAQ are already quoted in the Pink Sheets, any market maker that had been quoting the security for the 30 days prior to delisting could continue to make a market in the Pink Sheets after delisting. The security would then become “piggy-back qualified” the same day it is delisted, which means that any other market maker can then enter its quotes in the Pink Sheets without going through the usual procedures for initiating a quote. If a “piggy-back qualification” is not available, then the company can undertake the fairly simple process of initiating a quote on the Pink Sheets. Once delisted from NASDAQ the Company will get a new Pink Sheets trading symbol.
Trading prices typically decline when a company moves from a stock exchange to the Pink Sheets. Because Pink Sheets companies are not subject to SEC reporting requirements, the level of information available about them varies greatly. There are several different market tiers to denote the level of information that is available about each Pink Sheets company.
OTCQX: This market includes the newest and highest tiers of the Pink Sheets market. OTCQX has U.S. and International tiers and was designed to compete with the London Stock Exchange’s much larger AIM Market. OTCQX requires a designated advisor for disclosure (DAD) or Principal American Liaison (PAL). OTCQX has listing requirements and has both standard and “premier” tiers within OTCQX for both U.S. and foreign components. There are both application and listing fees for OTCQX. OTCQX describes itself as an alternative to a listing for non-reporting U.S. and foreign companies. OTCQX says it is designed to appeal to more seasoned non-reporting issuers. However, there are currently only 12 U.S. domiciled companies listed on the U.S. tier of OTCQX, so it remains to be seen whether OTCQX will attract a significant number of issuers.
Adequate Public Information: Issuers are considered to have adequate current information publicly available if they provide the required disclosures (described below) through the OTC Disclosure and News Service no later than 90 days after the end of any fiscal year (the “Annual Report”) and 45 days after the end of each fiscal quarter (the “Quarterly Report”). Issuers also need to provide updates within 10 business days (“Current Report”) in the event that any of the information contained in any disclosure statement has become materially inaccurate or incomplete, or upon the occurrence of certain material events (described below).
Limited Information: This category is designed for companies with financial reporting problems, economic distress, or in bankruptcy to make the limited information they have publicly available. The “Limited Information” category also includes companies that may not be troubled, but are unwilling to meet the guidelines for providing adequate public information described above. In order to qualify for this category, companies must have posted limited financial information not older than six months through the OTC Disclosure and News Service, or have filed interim, quarterly, or annual reports with the SEC with a period end date within the previous six months.
No Information: Companies in the “No Information” category are not able or willing to provide disclosure to the public markets -- either to a regulator, an exchange or Pink Sheets, or if they do, the available information is older than six months. This category includes defunct companies that have ceased operations as well as “dark” companies and/or companies with non-standard management and market disclosure practices. Most Pink Sheets companies are currently in this category.
Grey Market: There are no market makers in securities categorized as Grey Market. These securities are not listed, traded or quoted on any stock exchange, or any OTC market. Trades in grey market stocks are reported by broker-dealers to their Self Regulatory Organization (“SRO”) and the SRO distributes the trade data to market data vendors and financial websites so investors can track price and volume.
Caveat Emptor: There is a public interest concern associated with companies in this category, which may include spam campaigns, questionable stock promotions, known investigations of fraudulent activity committed by a company or insiders, regulatory suspensions, or disruptive corporate actions. During the time it is labeled Caveat Emptor, any stock that is not in the Current Information category will also have its quotes blocked on pinksheets.com.
The market tier of an issuer’s securities is indicated by symbols next to the quote on pinksheets.com. The company’s board of directors will wish to consider where the company should continue to disclose sufficient information to qualify for the Adequate Public Information category or the Limited Information category. Of the companies in the top three tiers for non-reporting issuers, approximately 26% are in the Adequate Public Information tier, 11% are in the Limited Information tier and 63% are in the No Information tier.
In order to trade in the Adequate Public Information category, an issuer needs to make the continuing disclosures described in Annex A. This could include preparing a substantially more abbreviated version of the company’s Annual Report on Form 10-K, which would include the information set forth in Annex A which includes, among other things, financial statements, management and director information, a management’s discussion and analysis section and a Chairman/CEO letter.
Conclusion
The decision by a board of directors whether to “go dark” or remain a public company can be a difficult one, and it is important to engage experienced legal advisors early on in the process. The principal decision for the board of directors is whether remaining a public reporting company outweighs the benefits of “going dark.” Each company will have different factors to consider. Some companies are simply too small to achieve any significant benefit from public company status. On the other hand, public shareholders almost always prefer the more liquid market provided by an exchange listing and continuous disclosure requirements. Factors such as stock price, public float, company performance, and the costs of compliance with Sarbanes-Oxley and public company disclosure and accounting requirements must be weighed against the benefits to the company and its shareholders of having publicly traded stock as incentive compensation and acquisition currency. Creditor and customer requirements, company prestige and the company’s relationship with its stockholders can also be important factors to consider. Some boards of directors and special committees have found it helpful to retain a financial advisor to advise on the effects of “going dark” on comparable companies and on the desirability of providing cash to stockholders in the form of a stock repurchase program, tender offer or other liquidity event in connection therewith. In many instances, after a thorough review, the board of directors may conclude that going over to the “dark side” is not such an unpleasant option after all.
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