William J. Carney is the Charles Howard Chandler Professor of Law at Emory Law School, where he specializes in business associations, securities regulation and corporate law. In this new SSRN paper, The Costs of Being Public After Sarbanes-Oxley: The Irony of ‘Going Private’, Professor Carney observes that the SOX legislation may be the final nail in the coffin for public equity financing being a cheaper alternative for many smaller private firms:

The enactment of the Sarbanes-Oxley Act (“SOX”) in 2002 may represent
the final act in regulation of corporate disclosure. By that I mean that regulation may have reached the point where the costs of regulation clearly exceed its benefits for many corporations. When the securities acts were originally enacted in the 1930s, one justification was that they would restore investor confidence and allow honest businesses to raise capital once again. The relevant question today is whether regulation has gone so far that honest businesses, at least those of modest size, are being forced to consider abandoning public markets for less regulated private markets. . .

Professor Carney also reminds us of the intrinsic limitations of governmental regulation of securities markets:

In an economically rational world we don’t want to prevent all fraud,
because that would be too expensive. Instead, the goal should be to keep on spending on fraud prevention until the returns on a dollar invested in prevention are no more than a dollar. There is an “Optimal Amount of Fraud.” . . These new [SOX] procedures won’t prevent all fraud. Section 404 of SOX, the principal factor in increased costs, deals strictly with financial statement issues, and leaves the rest of corporate disclosure untouched. Financial fraud was already illegal and subject to both civil liability and criminal penalties. The other initiatives thus far mostly involve acceleration of filings. Estimating the benefits of new regulations is much more difficult, and can only be approached indirectly. I do so here by looking at the possibility of exit from U.S. public markets (presumably attractive to most companies) because of increased (and cumulative) regulatory costs.
Ultimately we must ask why an increasing number of companies are finding these alternatives attractive. . . The main impact of SOX, then, may be to mandate controls that are not those that would be selected absent the mandate.

Consequently, one of the unintended consequences of Sarbones-Oxley is that an increasing number of public firms are delisting because of the high cost of compliance with the legislation. Thus, as Professor Ribstein notes here, “we can add a decline in disclosure as firms delist and withdraw from mandatory disclosure requirements” as one of the consequences of Sarbox. I don’t think that consequence is what the Sarbox legislative sponsors had in mind.
Hat tip to Professor Bainbridge for the link to Professor Carney’s article.

Russian oil company and former United States debtor-in-possession OAO Yukos lost another round in its legal battle with its creditors Friday as U.S. District Judge Nancy Atlas declined to grant the company a stay under Fed. R. Bankr. P. 8005 for a stay of Bankruptcy Judge Letitia Clark’s earlier order dismissing the Yukos chapter 11 case pending Yukos’ appeal of that order. Here are the previous posts over the past several months on the fascinating Yukos case.
As with its chapter 11 strategy generally, Yukos’ motion for a stay of Judge Clark’s dismissal order is a longshot because it is unlikely that the company can establish a reasonable likelihood of success on the merits of its appeal, which is a requirement for the granting of such a stay order. Despite the failure to obtain a stay, Yukos can and probably will continue its appeal of Judge Clark’s dismissal order to the District Court and, assuming a loss there, ultimately to the Fifth Circuit Court of Appeals. Inasmuch as two Fifth Circuit judges are noted experts on bankruptcy and reorganization law — Judge Carolyn Randall King and Judge Edith H. Jones — the Fifth Circuit decision on the Yukos appeal could be quite interesting.
Yukos essentially has nothing to lose by pursuing its longshot chapter 11 strategy in the United States courts. The company lost 60% of its oil production capacity when the Russian government conducted the December 2004 auction of Yukos key Yugansk subsidiary. Absent relief from a U.S. court, it is doubtful that any other legal move will place the Russian government or Yukos’ bank creditors sufficiently at risk that they feel compelled to enter into settlement negotiations with Yukos.
In the meantime, the Russian government continues to pursue criminal charges against various Yukos executives, including its former CEO and primary owner, Mikhail Khodorkovsky.