Private firms feel heat of new law too

August 1, 2003 By    

Last year, President Bush signed into law the Sarbanes-Oxley Act, which makes sweeping amendments to securities laws and other laws affecting public companies. It was enacted largely in response to the Enron, Worldcom and Global Crossings scandals.

As a general matter, the new law imposes significant new responsibilities and greater potential civil and criminal liabilities ­ on public companies and their directors, audit committee members, executive officers, independent auditors and legal counsel.

Most owners of privately held businesses are surprised to learn that certain provisions of the law also apply directly to private companies. Other provisions may be imposed on private companies by lenders, bonding companies, insurance companies, investors and other parties who may require
private companies to comply with public company “best practices” based on the law.

Government investigations and enforcement may produce the threat of heightened sanctions to private companies. Indirectly, both public opinion and corporate culture may demand the higher ethical standard and, as a result, cause voluntary compliance.

As a practical matter, however, unless the ownership interests in your company are held by outside, non-family members or unless you are or anticipate becoming a substantial-sized retailer that could be sold to a publicly traded retailer, you probably need not worry too much about these laws.

The following provisions of the law apply directly to private companies:

  • It provides that the destruction, alteration or concealment of documents
    or records to impair an investigation or administration of any matter within
    the jurisdiction of any department or agency of the United States, or in
    any case under Chapter 11 of the United States Code, is a crime.
  • It amends enhances the penalties for violations of ERISA.
  • It provides that any person who corruptly alters, destroys, mutilates or
    conceals a record or document, or otherwise obstructs, influences or impedes
    any official proceeding may be fined and/or imprisoned.

While the new “whistle-blowing” civil liability section applies only to public companies, the new criminal section applies to public and private companies. Any person who knowingly, intending to retaliate, takes any action to harm a corporate “whistleblower” for providing information
relating to the commission or possible commission of federal crimes may be fined and/or imprisoned.

In connection with financial statement and other required, public companies acquiring businesses from a private company may require assistance from the seller in meeting the certification requirement. Sellers may be required to make available to the publicly held buyer representatives responsible for internal controls and disclosure controls and procedures.

You should consult with lawyers if you anticipate the sale of your business to a publicly-traded MLP or to be prepared for a sale.

Although the provisions relating to the relationship of companies and their auditors apply only to public companies, it is likely that many of these requirements will likewise impact those relationships in private companies. The provisions most likely to affect the relationship of a private
company and its auditor are those that prohibit certain non-audit services, those that require audit partner rotation, and those that prohibit certain conflicts of interest.

Also, private companies should evaluate whether to adopt any of the corporate governance standards included in the law. These are most likely to be relevant to private companies whose stock is widely held and private companies with a significant percentage of outstanding stock held by outside or passive investors.

Many commentators believe that certain requirements of the law may become applicable standards of conduct for executive officers and directors under state law. Lenders, bonding companies, insurance companies and investors also may impose certain requirements.

If you do need to seek legal advice on the law, you should realize it is a highly specialized area of the law.

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