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Board Issues : Legal

The Benefits and Drawbacks of Going Private

July 24th, 2012 |

The JOBS Act was about the only piece of bipartisan legislation to pass through Congress recently, according to Bruce Bennett, co-head of Covington & Burling LLP’s securities practice. It is supposed to facilitate job and capital formation by reducing disclosure rules for publicly traded companies with less than $1 billion in revenue, a new category deemed “emerging growth” companies. It also has a series of provisions to make it easier for banks and thrifts to stay privately held, enabling them to save costs. Bank Director magazine talked recently to Bennett about the impact of the JOBS Act on banks and thrifts.

What does the JOBS Act say about banks?

Previously, any company with more than 500 shareholders and $10 million in assets had to go public. Now, banks with fewer than 2,000 shareholders can stay private. The other trigger that was changed was the maximum number of shareholders you needed to deregister. Under the JOBS Act, banks no longer need to fall below 300 shareholders to deregister; the threshold is now 1,200 shareholders.

Other provisions apply to all “emerging growth” companies. The Act basically rewrites the rules for IPOs. It removes some fairly significant provisions. It reduces the duration of audited financial statements you need to go public from three years to two years. It allows for “test the waters” communications, so you can go out and talk to investors about whether they would want to make an investment in this company before you file your SEC (Securities and Exchange Commission) report. It reduces some of the public reporting requirements once the company goes public and the company gets the benefit of that for five years, unless it crosses the $1 billion annual revenue threshold sooner.

What impact do you think it will have on banks?

If a small bank is publicly traded, there is a cost to that. I’ve seen the cost estimate at $100,000 or more. If the bank doesn’t have to prepare SEC registration and reporting documents, it will probably save money. The investors who remain in the company will expect audited financial statements and most of the companies that have said they will deregister say they will continue to post those on their web sites.

If a bank is spending $100,000 to $125,000 per year to file SEC reports, and has 10 employees who could otherwise use their time more productively, then there is a benefit to that.

Are there drawbacks to deregistering?

The downside is this: What if in a few years the capital markets have changed and the bank wants to raise money in the public markets? If they have to do an IPO, that is more expensive than just staying public. It’s not good for companies to toddle in and out of public status. Investors would worry: Is this an investment I want to hold? It might make it harder to do the IPO. There also are some protections for a public company. If anyone wants to acquire more than five percent of a company’s stock, that person has to file with the SEC and the company knows who their large shareholders are. As a private company, you could have a large shareholder not aligned with your view as to how to manage the company and you don’t find out about it until that shareholder gets far more than five percent.

What size or type of bank do you think will be most interested in deregistering securities?

Small banks. We’re seeing an increase in stock-for-stock deals in mergers and acquisitions. If you’re a privately held bank, that sort of transaction is harder to do. If a bank is thinking of growing by acquisition, it would probably want to stay public. For a bank with assets in excess of $1 billion or $2 billion, I don’t see that category being interested in deregistering. I could also see regulators saying no, “If you do that, your access to capital is hurt from a safety and soundness perspective.”

Could deregistering hurt stock values?

If the standard metrics are strong, valuation will follow accordingly. If a bank has a compromised loan book and a lot of comprised real estate on the books, I don’t think being public would affect that. The way it would impact them is access to capital markets.

The JOBS Act has been billed as a way to create jobs. Will it?

I don’t think so from the banking perspective. The job creation could come from making IPOs easier to do. With that, you make it easier for small companies to grow or to do an IPO and they get better access to capital.

bbennett

Bruce C. Bennett is co-head of Covington & Burling LLP’s securities practice. His practice focuses on domestic and international capital markets transactions, including equity, equity-linked and fixed income (high yield and investment grade) offerings. In addition to his transactional practice, he advises clients on regulatory and corporate governance matters, and regularly represents clients on interpretive issues before the Securities and Exchange Commission and the Commodity Futures Trading Commission.

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