Private Company Relevance of Sarbanes-Oxley |
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Fellow Directors: While the Sarbanes-Oxley (SOx) legislation passed a year ago was squarely aimed at publicly-traded companies, there are both direct and indirect effects on privately-owned companies. The majority of SOx regulates "Issuers" of securities. However, there are multiple parts of the legislation that have broader scope than just to Issuers. SOx is directly applicable to all companies, public and private, in at least the following ten aspects: * Sec. 306 - 30 days minimum notice for Pension plan changes * Sec. 307 - Pension blackouts * Sec. 802 - Criminalization of Document Alteration * Sec. 803 - Non-dischargeability in Bankruptcy of debts flowing from Securities violations * Sec. 902 - Attempts and Conspiracies to commit fraud * Sec. 903 - Enhanced penalties for committing mail or wire fraud * Sec. 904 - Enhanced penalties for Erisa violations * Sec. 1001 - (recommendation only) CEO must certify corporate tax return * Sec. 1102 - Criminalization of tampering with or impeding an Official Proceeding * Sec. 1107 - Criminalization of retaliation against Whistleblower. SOx is indirectly applicable to privately owned organizations in multiple respects which may have greater practical significance than the direct effects. * Access to Capital. As controls, governance and transparency change for public companies, financial institutions and even venture capital will alter expectations and due diligence requests. Over time it should be expected that the further from the public standards a private firm is, the more intrusive, skeptical and onerous the process to access capital. * Public Aspirations. An IPO exit strategy on the horizon warrants adopting standards early. * Merger or Acquisition - A private company that has adopted SOx controls is more attractive to a potential public acquirer. Due diligence, acquisition and integration are simplified. * Ability to attract and retain directors and key executives. * Directors and Officers liability insurance cost and coverage scope are improved. Private Company directors and officers held to same fiduciary responsibility as for public companies. The New York Times in June reported on the Federal District Court of Manhattan judge's holding in Trace International Holdings. In this case, after an organization filed for bankruptcy, creditors targeted corporate officers and directors, alleging they had a fiduciary duty to the corporation to assure solvency under the circumstances. The judge agreed, and found the officers and directors personally liable. Most disconcerting about the Trace decision is that the independent directors did not in anyway personally benefit, but were held liable nonetheless. SEC announces increased scrutiny of independent directors Stephen Cutler, the SEC's enforcement chief, announced weeks ago that there will be increased scrutiny and pursuit of independent directors aware of misconduct, but not addressing it. Prepared by CDF Corporate Governance member John Niedernhofer, JD johnn@barneyandbarney.com _______________________________________________________________
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