Granite City Food & Brewery is the latest small public company thinking about leaving its shareholders in the dark.
That means that Granite City would deregister its shares and get out of the costs of complying and disclosing, a task that can easily exceed $500,000 a year for even small companies. One of the first expensive things Granite City won’t have to do is file the big annual report that the Securities and Exchange Commission requires every year.
But no public filings means no readily available information about the company. That lack of disclosure is one reason why the whole process of deregistering is called “going dark.”
Going dark is mostly a small-company strategy, and there are a number of dark companies around our region. Like Granite City, they got tired of paying to comply with SEC rules, and their stocks were not actively trading anyway.
But of all the options, going dark seems easily to be the worst. Shareholders already own a relatively inactive stock that isn’t easy to sell at a fair valuation. Being left in the dark on how the business is performing financially just makes that a whole lot worse. After all, the reason we have an SEC is that we have agreed that fairness and transparency help create an efficient capital market.
Instead of lingering on the stock market with little public access to company performance, it would be far better to find a buyer for all the company shares, or have insiders and big holders become the buyer. At least try.
That’s what Granite City ought to be doing, though it didn’t return a call seeking to discuss the matter. A private equity firm from Dallas is the controlling shareholder. The firm should figure out a fair price to pay the other owners for their Granite City shares and buy them.
Granite City isn’t a start-up anymore, with about $34 million in revenue for its last reported quarter, but it is small for the public markets. In its late October announcement about possibly going dark, the company said “in light of the company’s size, small market capitalization and the thinly traded market for its stock,” the “financial burden of reporting [may be] disproportionate to any benefits.”
That idea, what Dorsey & Whitney partner Ted Farris called a “balancing of interest,” is the legal principle behind a going-dark process. Yes, it doesn’t help investors trade when their company goes dark, but they do get the benefit of lower costs.
“In the case of Granite City, they had already been delisted by Nasdaq,” Farris said. “The company no longer has the benefit of the listing, and but it still has all the costs and legal reporting obligations a listed company would have.”
But then again, the high costs for being public borne by too small of a company like Granite City would have been a great discussion to have had back in June 2000. That is, one day before the company went ahead with its initial public offering. That IPO netted about $3.5 million and came to market less than a year after the company had opened its first and then-only restaurant in St. Cloud.
Yes, times were different then, but the situation in 2013 for Granite City could also have been easily predicted.
Another company that never should have been public is Zareba Systems of Plymouth. Not a single Zareba share traded on Nasdaq 36 of the 50 trading days prior to Zareba deciding in the summer of 2009 to go dark. Yet Zareba’s is a curious case of more or less accidentally doing the right thing, because it ended up being sold rather than going through with the deregistration.
Dale Nordquist, who was CEO at the time, said the company was “going dark to facilitate a strategic sale,” and a competitor named Woodstream Corp. “misunderstood our intention,” as Woodstream did not wait for that sale process to gear up and promptly renewed its effort to acquire Zareba.
Hunt Greene, an investment banker who advised Zareba, said Nordquist’s explanation for going dark was perhaps a post-deal rationalization, but both agree that it led to a great outcome. Pennsylvania-based Woodstream paid more than four times what the company was valued on Nasdaq the day before the going-dark idea was announced.
Greene said company boards that are serious about finding a good buyer can skip deregistering the shares, and instead publicly announce the search for a good buyer. That gives competitors who had been thinking about making a bid a sense of urgency about making their move.
Not everybody agrees that trying to find a buyer beats going dark for reasons that are maybe as simple as the directors can’t imagine anyone who would want to buy their company. In any case, we now have the odd situation of watching active trading in the stock of companies that have long been dark.
Even with up-to-date filings by publicly held companies, buying stock in them is one of the examples an economics professor might use when discussing the problem of one side of a transaction knowing a whole lot more about what something is really worth than the other side does.
Going dark clearly can make that a lot worse.
There are dark companies that do try to inform holders. Mark Thomas, the CEO of HEI Inc. of Victoria, several times referred to HEI as “public” in a brief conversation, even though it went dark at the end of 2007. That’s because HEI puts audited financial statements and quarterly announcements of results on its website.
Delphax Technologies, a Bloomington-based producer of printers and supplies that went dark in late 2008, has a different approach. Back when I was working with Delphax 12 years ago, information was readily available, but in checking last week, it looked like the most-recent financial news is just a summary with no balance sheet information — from the September 2011 fiscal year.
That did not stop shares of Delphax stock from changing hands last week, last at 45 cents each.
What that last trade was based on is anyone’s guess, but the good news is that the problem of unequal information probably wasn’t an issue.
With both sides in the dark, neither one may have had any idea what was going on.
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