NCPA - National Center for Policy Analysis

Public Companies Go Private in Response to New Financial Regs

June 6, 2003

The leaders of a number of small public companies have decided to take their enterprises private. They are fed up with the slew of new financial regulations put in place earlier this year designed to trip up corporate wrongdoers. They are also tired of angry and often misinformed shareholders, as well as onerous record-keeping requirements.

  • Among the largest, the drug-testing firm Quintiles; real estate investment trust National Golf Properties; electronic component maker CoorsTech; and fitness club operator Sports Club.
  • Experts forecast the number of public companies going private to accelerate in the next few years -- despite the requirement that companies going private must offer shareholders as much as a 40 percent premium over market value.

Companies have always disappeared from public markets during downturns, but unlike previous privatization movements, this trend is being driven as much by the unintended consequences of regulatory reform as by market conditions.

  • Consider that the reform legislation known as Sarbanes-Oxley can impose $1 million a year in additional auditing and legal fees and other costs for public firms.
  • Insurance premiums to indemnify new directors against potential liability have doubled in some cases.

The reforms have also slowed the number of initial public offerings as well, experts report. They also point out that a number of public firms are already so closely held that they are public in name only -- and can easily be taken private.

Source: Jeremy Kahn, "The Burden of Being Public," Fortune, May 26, 2003.


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