What happens if your public company decides to “go dark”? If you are in the military or in covert operations of some sort, this slang term means you have ceased all forms of communication—probably to save your life. Teenagers can sometimes go dark. If your teenage son or daughter is not responding to your phone calls, texts, tweets, and any other way you to try to communicate, they’ve gone dark. You may feel snubbed and left out. But consider the positive aspect: This quiet period is actually part of their development. They are establishing their independence. Are they using their time wisely? That is what needs to be determined.
For publicly traded companies, going dark means they are delisting from an exchange (e.g., NASDAQ) and simultaneously deregistering with the Securities and Exchange Commission. In this age of transparency, going dark may not seem like a smart move. In fact, it might be just the right move, depending on the company’s objectives. Returning to the teenager example, you need to know—is your company using its time wisely?
If you are an investor, business partner or employee of a company that is going dark, pay attention to these areas as you explore the future potential of the business.
Take a closer look. While there are several practical considerations in the decision to “go dark,” the company may also have strategic implications. Review company filings with respect to the process, as well as press releases announcing the decision. These documents are intended to provide information as to the considerations involved in making the decision to go dark. Strategic implications may or may not be evident from the press releases and filings. It pays to take a closer look and see if you notice opportunity behind the ominous sounding development (more about this later).
Review current shareholder listings and changes in shareholdings. You can get this information from periodic SEC filings, including the latest proxy statement. This will tell you if there are major shareholders owning the stock. A little more research may give you some insights on the major shareholders and their plans for the company.
As an example, a major investor might have a strong track record in turnaround situations, or industry consolidation strategies or other strategic moves. Chances are, you will see a concentrated shareholder base, as companies that go dark must have fewer than 300 registered shareholders (an SEC rule). It pays to know who is driving the bus.
Also review company liquidity and capital structure. Once a company has gone dark, it no longer has direct access to the public capital markets. As a practical matter, if it is a small or microcap company, or if it is underperforming its peers, the company may not have access to such markets in any case. This is something to consider if the company has liquidity issues or is undercapitalized. Private equity and debt may or may not be available, and it can get expensive.
Consider whether cost avoidance is a legitimate driver. Publicly traded companies spend a lot of time and money maintaining the standards required by the national stock exchanges and the SEC. The costs easily exceed $500,000 per year for even the smallest of the small cap companies, to include annual audits, quarterly reviews, legal fees, audit committee fees, SOX compliance costs, annual registration fees and increased insurance premiums for director and officer liability. Oftentimes, boards find that the incremental costs of the public listing outweigh the benefits. Companies often site cost savings as a significant factor in going dark. Saving precious capital is a legitimate reason, but it has a downside.
Look into shareholder liquidity. Shareholder liquidity is probably the scariest part of the going dark process. When the company delists from national exchanges, its stock may continue to trade, but liquidity will depend on whether brokers will continue to make a market for the shares. There can be no guarantees. As such, shareholders may find it difficult, expensive and/or at least time consuming to sell the shares. And there may be a very thin market or no market at all. However, as long as there are market makers, the alternative exchanges—the pink sheets, the bulletin boards, etc.—will continue to trade the shares.
See if you will still have access to financial information. Transparency is another possible casualty of going dark. Most companies that deregister follow a practice of posting their periodic financial results either through quarterly press releases or direct posts on their websites. While they are under no obligation to do so, it’s good business practice, and it doesn’t cost much. And many companies continue to maintain a website and provide contact information. While you won’t see a Form 10-Q or Form 10-K or any of the other SEC filings, at least you will see quarterly and annual financial information, and hopefully you will have contact information if you have questions.
Study the strategic intentions. As noted above, there may be strategic reasons a company goes dark. It could be a logical step in taking a company private and could be a part of a bigger plan. Going dark is a relatively low cost exercise, with immediate cost benefits. If the strategy is in fact to “go private,” and your research shows that the major shareholders have a good track record, you could stand to benefit. At some point the majority shareholders and/or the company may be back in the market to cash out minority shareholders. Once again, no guarantees, but it’s something to consider.
Anytime a company goes through a transformative event, it’s wise to turn to experts who have gone through similar situations and can step in to guide the company, based on their past experiences, best practices and what makes the most sense for the business. Going dark is not routine—it’s a vital, transformative time that requires specialized expertise.
Terry Gibson heads up RoseRyan Private Equity to help PE firms extract more value from their portfolio companies. A founder of Steel Partners Corporate Services, he has been focused on serving the PE industry for over 15 years. He was the CEO of CoSine Communications and BNS Holdings, and he oversaw the finances at Calient Networks and served as controller at Lam Research.
