t the request of subscribers, Compliance Week offers a Remediation Center, in which readers can submit questions—anonymously—to securities and accounting experts. Compliance Week's editors will review all questions and then submit them—confidentially, of course—to specialists who can address the issues. The questions and responses will then be reprinted in a future edition of Compliance Week. Below is one of the Q&As; ask your own questions by clicking here.

ABOUT THE EXPERT
Vasiliki Tsaganos is a corporate partner resident in Fried Frank's Washington, DC office. She became a partner in 1998.

Tsaganos' practice is concentrated in corporate transactions and securities matters. She has broad experience in a variety of corporate and securities transactions including public offerings and private placements, mergers and acquisitions, private equity transactions and general corporate matters. She also regularly counsels clients on a wide variety of corporate governance and securities law compliance matters. She has represented both issuers and underwriters in a variety of industries. Most recently, she represented Rio Tinto in the initial public offering of a U.S. subsidiary in the coal business.

Tsaganos is a co-editor of “The Practitioner's Guide to the Sarbanes-Oxley Act,” published by the American Bar Association. She has written articles in numerous publications, including the Journal of Investment Compliance, Insights and the Securities Regulation Law Journal.

Tsaganos can be reached via email at Vasiliki.Tsaganos@friedfrank.com or at (973) 871-4020.

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QUESTION

Company A is currently in an agreement with a private equity firm to be taken private. In the event that we, Company A, continue after the acquisition to have public debt, but no longer have public securities, with which sections or provisions in the Sarbanes-Oxley Act will we be required to comply?

ANSWER

This response assumes that after the proposed transaction, Company A would have debt that was previously registered under the Securities Act of 1933, but not listed on a national exchange, and continues to be subject to the SEC's reporting requirements under Section 15(d) of the Securities Exchange Act of 1934. As a result, Company A would also be considered an “issuer” for purposes of the Sarbanes-Oxley Act. That means Company A will experience no significant difference in reporting obligations or SOX compliance simply by no longer having public equity, except that it will no longer be required to include an auditor attestation report with its annual report. 

Company A will be required to file periodic reports with the SEC, including Form 10-Q, annual reports on Form 10-K, and current reports on Form 8-K whenever 8-K-triggering events occur. Company A will not have to file a proxy statement, but much of the compensation information required in the proxy statement will be required in the Form 10-K anyway. It will also have to comply with Regulation Fair Disclosure.

The following list highlights a few of the specific reporting obligations Company A would continue to have under the current SEC rules, including the Sarbanes-Oxley Act:

  • CEO and CFO certifications on the review of Company A's financial reports, pursuant to SOX Sections 302 and 906, included in the annual report;
  • A report by management on the adequacy of its internal controls (pursuant to a temporary rule, Company A would no longer need to include the related auditor's attestation report);
  • Conclusions about the effectiveness of its disclosure controls and procedures;
  • Discussion of whether it has adopted a written code of business conduct and ethics for certain senior officers (and if not, why not);
  • Financial statements compliant with Regulation S-X, and management's discussion and analysis of the company's financial condition and results of operations in its periodic reports;
  • A Compensation Discussion and Analysis section and other related executive compensation disclosure; and
  • Disclosure of transactions with related persons and the policies in place for the review, approval, and ratification of such transactions.

Company A will not, however, be subject to many of the corporate governance obligations that have applied following the passage of Sarbanes-Oxley, such as the requirement to have a majority of directors be independent, and the requirement to have independent audit, compensation, and nominating and governance committees. But Company A must identify its independent directors (if any) in the Form 10-K, and state which independence definition is used in making such determination.

Company A must also disclose in its Form 10-K whether at least one member of the audit committee is a financial expert (and if not, why not), and if so, the expert's identity and whether the expert is independent of management. In addition, the SEC rules on auditor independence require that, for an outside auditor to be independent, the audit committee must pre-approve audit and non-audit services provided by the independent accountant. These rules do not require Company A to establish a separately designated audit committee. Rather, Company A may look to an individual or the full board of directors to fulfill that role.

In addition, Company A will continue to be subject to other SOX provisions including whistleblower protections for employees, attorney up-the-ladder reporting requirements, prohibition on personal loans to executives, and forfeiture of incentive compensation following a financial restatement resulting from misconduct.

If Company A's shareholders of record fall below 300, it can suspend its reporting obligations under the Exchange Act. However, the indenture governing its debt securities is likely to require continued reporting. If Company A were to become a “voluntary filer,” some provisions of Sarbanes-Oxley would no longer apply.

Warning, Disclosure

Compliance Week's Remediation Center is an information service only. Answers to questions should not be construed to be legal guidance. Consult with your auditors, internal counsel, external counsel, and/or other securities experts on all critical compliance and governance matters.

Specialists are solicited by the editor to answer Remediation Center questions based on their knowledge of the subject matter and their ability to provide commentary in their particular area of expertise.