UK companies listed in the US are caught in a compliance trap and will find it ‘almost impossible’ to avoid the onerous burdens of Sarbanes-Oxley – even if they delist.
While several UK companies are threatening to withdraw from US exchanges due to the costs associated with adhering to Sarbox, only the very smallest will have any chance of carrying out this threat without enormous costs and trouble.
The New York Stock Exchange this week pointed the finger of blame at the US financial watchdog because, even though it is relatively easy to terminate a listing, it is extremely difficult to end SEC registration, which determines whether a company should comply with the Sarbox legislation.
The news emerged just a week after CBI director general Digby Jones said between 10 and 20 UK companies were considering delisting because of the enormous cost of compliance.
NYSE spokesman Christian Brakman said: ‘You can make a board decision and delist virtually the next day. The problem is that you are still registered with the SEC and it’s almost impossible to deregister.’
Once registered with the SEC, a company can only withdraw its registration if it has fewer than 300 US shareholders. These shares can be held anywhere in the world.
Any company registered with the SEC, regardless of whether it is listed in the US or not, must comply with the Sarbanes-Oxley Act. Failure to do so can result in jail sentences and fines for the company directors. ‘People are unhappy with the rule because it limits their options,’ said Brakman. ‘It makes no sense to delist and stay registered because you have all the expenses without the benefits.’
As a result, the NYSE has yet to see any voluntary delistings so far this year, although it has seen a dramatic slowdown in non-US listings over the last two years, particularly from European countries. There is some hope for smaller companies as the SEC is considering changing the threshold.
A spokesman for Nasdaq, which has seen several companies withdraw their listings, said it understood the concerns of companies. But he insisted that investors would benefit from the transparency that the Act brought.
The SEC was unavailable for comment as we went to press.
Dual-listed UK companies could still face a compliance bill of more than £300m – even if they withdraw from US markets.
There is no doubt that the cost of Sarbox is big – but how big? Last month, Accountancy Age reported that section 404 alone would cost the 113 UK companies dual listed on Nasdaq or NYSE £120m. But figures from Financial Executives International show an average compliance cost of $3m (£1.6m) per company, suggesting the total figure could reach as high as £177m.
For Sarbox compliance as a whole, recruitment firm Korn/Ferry International found the average large US company would pay $5.1m (£2.7m). Assuming the same average for dual-listed firms, that would produce a total bill of more than £300m.
Accountancy firms are also feeling the pain, with Ernst & Young saying it has spent 400,000 man hours just on training for section 404.
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