Think the corporate
reforms of 2002 were targeted entirely at publicly
Think again. The Sarbanes-Oxley Act, created in the
wake of Enron and other corporate scandals, can also
affect private companies that might become publicly
owned, according to securities attorneys. The Sarbanes-Oxley
corporate governance reforms tighten regulation of
five key areas: disclosure, board of directors, auditors,
ethics, and compensation.
When a private company files a registration statement
(to offer securities to the public) with securities
regulators or when a publicly owned corporation acquires
it, the company becomes subject to Sarbanes-Oxley regulations.
A private company might need to demonstrate its readiness
to meet Sarbanes-Oxley requirements if it anticipates
being acquired or plans to make an initial public offering
of stock. Its readiness — or lack of readiness — might
impact the acquisition, offering price, or its ability
to complete a transaction.
Leaders of emerging companies who contemplate entering
a public environment should consider how their firms
would function in that environment. Examining and implementing
practices in the five key areas can also help a private
company position itself more effectively with venture
capitalists, early-stage investors, strategic partners,
and management talent.