Delisting Decision - Discount clothing retailer Syms Corp was sued last week when it decided to delist its stock from the New York Stock Exchange in favor of the pink sheets. Syms, which operates 33 stores, said its decision was motivated by an estimated $750,000 in direct annual cost savings from not having to comply with Sarbanes-Oxley ("SOX"). The company also stated that there would be indirect cost savings, as its management team would be more focused on operations.
Investors Critical - The decision was roundly criticized by investors, who sent its stock price sharply downwards. The stock was delisted on January 14, and on January 18, a group of shareholders filed suit against the board of directors, alleging a breach of fiduciary duty. See Barington Co. Equity Partners, L.P. v. Syms (N.J. Super. Ct., Bergen County filed Jan. 18, 2008). The shareholders issued a press release about their suit, which seeks to compel Syms to relist on a national exchange.
Not Unique - A number of companies have voluntarily delisted from the major exchanges to avoid the burdens of SOX compliance. The costs of compliance disproportionately affects smaller companies, which must devote a greater percentage of their revenue to reporting requirements.
Business Judgment Rule - While the board of directors of a public company owes a fiduciary duty to its shareholders, the board generally has broad discretion under the business judgment rule. The rule protects business decisions when the board is acting in good faith on the honest belief that the actions taken were in the best interests of the company. Under the rule, courts will not substitute their own notions of sound business judgment for those of the board of directors.
Although short-term shareholder value has been adversely affected, delisting is not per se improper, and the Syms board has a plausible argument that the action is in the best long-term interests of the company. If, however, the board's decision for delisting is for improper purposes, or if the board is not disinterested, then delisting may be forbidden.
Avoiding the Risk of Litigation - Despite the discretion provided by the rule, boards of directors should seek legal advice before any action that may adversely affect shareholder value. Legal issues, precedents, and steps that can be taken to avoid litigation risks when delisting, are discussed here.