From PLI’s Treatise Initial Public Offerings: A Practical Guide to Going Public #19784

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PREPACKAGED BANKRUPTCY AND PREARRANGED BANKRUPTCY PROCESS

Deryck Palmer Jessica Fink Cadwalader, Wickersham & Taft LLP

Disclaimers and Suggested References: The outline that follows provides a general overview of retiree medical benefit VEBAs, with specific focus on the VEBAs recently proposed by the Big Three U.S. automakers. The author is by no means an expert on medical benefit plans or VEBAs. Nor can the author claim special insight into any aspect of the Big Three VEBAs. The information in this outline is gleaned entirely from public sources. For two very practical references on retiree medical and VEBAs see: (1) the ABA-JCEB teleconference “Shifting Retiree Health Benefits from Employers to VEBAs” (December 6, 2007—available in archived teleconf format or CD), in which Nell Hennessey, Douglas Greenfield, Karen Handorf and Vicki Hood do a terrific job describing the background on union retiree medical and the Big Three VEBAs and (2) Jones Day Commentary—Who Killed Yard-Man (Apr. 2007), a Jones Day client newsletter available on-line which provides an excellent summary Chapter 9

Assembling the IPO Team

§ 9:1 Introduction § 9:2 Management and Employees § 9:2.1 CEO and CFO § 9:2.2 New Positions [A] Controller [B] Additional Finance and Accounting Staff [C] General Counsel [D] Relations Personnel [E] Plan Administrator [F] Internal Auditor [G] Webmaster § 9:3 § 9:3.1 Board Composition § 9:3.2 Compensation for Outside Directors § 9:4 Counsel § 9:4.1 Selection Criteria § 9:4.2 Sample Questions/Requests for Company Counsel Candidates § 9:5 Independent Accountants § 9:5.1 Big 4 or Not? § 9:5.2 Switching Auditors Prior to an IPO § 9:5.3 Sample Questions/Requests for Independent Accountant Candidates § 9:6 Managing Underwriters § 9:6.1 Identifying Possible Candidates § 9:6.2 Bases for Evaluating Potential Managing Underwriters [A] Track Record [B] Team Members [C] Commitment to the Company [D] Distribution Reach and Mix [E] Aftermarket Support

9–1 § 9:1 INITIAL PUBLIC OFFERINGS

[F] Prestige and Reputation [G] Client Satisfaction [H] Economic Factors [I] Financial Strength and Stability [J] Other Capabilities § 9:6.3 The Selection Process [A] Narrowing the Field [B] Designating Lead Managing Underwriters [C] Selecting Co-Managers [D] Being Evaluated by the Underwriters [E] Confidentiality Agreements § 9:6.4 Sample Questions/Requests for Managing Underwriter Candidates § 9:7 Underwriters’ Counsel § 9:8 Consultants and Advisors § 9:8.1 Compensation Consultant § 9:8.2 Investor Relations Firm § 9:8.3 Accounting Consultant § 9:8.4 IPO Consultant § 9:9 Outside Vendors § 9:9.1 Financial Printer § 9:9.2 Transfer Agent § 9:9.3 Virtual Data Room Provider § 9:9.4 Electronic Road Show Host § 9:9.5 Banknote Company § 9:9.6 Option Administrator § 9:10 Changes in the IPO Team

§ 9:1 Introduction As part of its IPO preparations, the company must assemble the group of employees, board members, outside professionals, and advisors who are needed for the IPO journey and subsequent life as a . In addition to company management and new hires with specific skill sets, the IPO team will include company counsel, independent accountants, managing underwriters, underwriters’ counsel, other advisors, and various vendors. This chapter describes the principal members of the IPO team, in the approximate order in which they should be in place, and suggests selection criteria for each. In assembling its IPO team, the company should always remember that there is no substitute for experience when the stakes are high and time is —hallmarks of every IPO.1

1. The roles of the key IPO participants are discussed in chapter 10.

9–2 Assembling the IPO Team § 9:2.2

§ 9:2 Management and Employees § 9:2.1 CEO and CFO The CEO and CFO are essential to the success of the company’s IPO. If the incumbents do not possess the combination of experience, knowledge, communications skills, vision, and integrity needed to lead the company through the IPO process, woo on the road show, and tend to public company obligations after the closing—all while managing the company’s operations—the board will need to consider deferring the IPO or changing the company’s leadership. The skills needed to manage a company from formation through private funding and expansion are very different from those required for the IPO process and public company life; many entrepreneur-CEOs do not fit both roles equally well. Similarly, it is not uncommon for a company going public to seek a more seasoned CFO, even when the existing CFO has been more than adequate for the company’s needs while privately held.

§ 9:2.2 New Positions On top of normal hiring to meet its growing needs, most IPO need to add other capabilities. [A] Controller The company should have a controller on board before completing the IPO, and preferably six to twelve months before the organizational meeting—particularly if the CFO has more of a finance than an accounting background. The controller should be well grounded in accounting and public company reporting. Many controllers have prior work experience in public accounting firms, although the company must be mindful of the restrictions on hiring out of their own independent accounting firm. Familiarity with industry-specific accounting issues is very helpful. [B] Additional Finance and Accounting Staff Additional finance and accounting employees will be needed to assist with various public company responsibilities, including prepara- tion for section 404 of the Sarbanes-Oxley Act and public reporting matters. The size and timing of these staffing needs vary among companies, but generally some new employees are hired during the IPO process and others are added as the company’s needs develop over time. Prior experience with their anticipated responsibilities is very important for these hires, since few IPO companies can afford the luxury of on-the-job training for new employees.

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[C] General Counsel A general counsel can make significant contributions to the IPO process, particularly if hired at least six to twelve months before the organizational meeting—in time to become familiar with the com- pany’s business, contracts, and corporate affairs, and to participate with outside company counsel in public company preparations. Even if the company does not intend to rely on its general counsel for securities related work—which has become increasingly challenging with the growing complexity of and rapid change in securities law—it is always desirable, and sometimes necessary, for the general counsel to have at least some public company experience. Industry familiarity is helpful, and prior experience as a general counsel or senior in-house lawyer is also useful. If the general counsel does not have public company or securities experience, the company may need to add a securities lawyer to its legal staff; many companies also hire a paralegal at this point. [D] Investor Relations Personnel Although some private companies employ public relations person- nel, most private companies rely on the CEO or CFO to handle any stockholder relations matters that come up. Following an IPO, additional resources must be devoted to investor relations. Some companies combine internal staff with professional advisors, while other companies rely entirely on outside firms. (For better or worse, the CEO and CFO usually must master many investor relations skills to survive in a public company.) By the time the IPO is closed, the company should have plans in place to fill this function. Key attributes here include professional experience, knowledge of the company, and familiarity with its industry. [E] Stock Plan Administrator In most private companies, there is no formal stock plan function. Stock and option records are usually maintained by the CFO or counsel, and agreements are generated by counsel, or by the CFO using forms supplied by counsel. An IPO company must hire a qualified transfer agent to handle stock transfers and record keeping. Although some stock plan functions also can be outsourced, most public companies have a need for an internal stock plan administrator—who usually resides within the human resources or finance groups—because of the complexity of public company stock plans and the need for timely and accurate stock option documentation. Many of the option backdating problems that have come to light in public companies were caused by sloppy or incom- plete record keeping.

9–4 Assembling the IPO Team § 9:2.2

[F] Internal Auditor The basic role of an internal auditor is to provide an objective evaluation of the company’s internal controls, identify actual and potential problems, and recommend corrective action. The internal auditor may also monitor compliance with policies, procedures, and regulations, assess the efficiency of business processes, and perform other audit functions. Although the internal auditor is not an adjunct to the company’s independent accounting firm, the is permitted within professional guidelines to take the internal auditor’s findings into account when auditing the company’s financial state- ments or its ICFR. The internal auditor usually has a dual reporting relationship to the company’s management and . In some companies, the internal auditor is an employee, while other companies outsource this function to an accounting firm other than the company’s independent auditor. Although not required by SEC rules, the internal audit function can be an important component of a company’s overall system of financial and accounting controls. Few private companies have an internal auditor, but many companies establish this capability after going public.2 As with other finance and accounting personnel, an internal auditor—whether a company employee or an accounting firm to whom the function has been outsourced—should have public company experience and be familiar with the company and its industry. [G] Webmaster Immediately after an IPO, the company’s website must begin to function as a timely and reliable repository of various types of investor information due to SEC requirements, rules, and investor expectations. These new responsibilities are accompanied by potential liability, since the federal securities laws generally apply in the same manner to the content of a company’s website as to any other statements made by or attributable to the company. The company will need to designate someone familiar with the applicable legal rules and knowledgeable about the company to review and approve all material before it is posted on the website.3

2. NYSE rules require all listed companies to have an internal audit function. 3. This and other issues related to the company’s website are discussed in detail in chapter 23. See section 23:7 et seq.

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§ 9:3 Board of Directors § 9:3.1 Board Composition The IPO presents both a need and an opportunity to reset the board. As IPO planning progresses, the company should reevaluate the post-IPO composition of its board of directors and board committees,4 for the following reasons: • The board will need to satisfy independence standards under SEC and applicable stock exchange rules. • The audit committee should have at least one “audit committee financial expert,” as defined by SEC and applicable stock exchange rules. • There are securities law advantages if each compensation committee member qualifies as a “non-employee director” for purposes of section 16 of the Exchange Act5 and tax law advantages if each is an “outside director” for purposes of section 162(m) of the Internal Revenue Code.6 • It may be necessary or desirable to add board members with public company experience. • Additional independent directors may be useful to the burden of the board’s three principal committees—generally, at least five independent directors are needed to enable a reason- able allocation of committee duties. • Directors appointed by investors often depart after the IPO lockup period ends and their funds’ shareholdings are distributed to their limited partners. Although phase-in rules apply to the director independence stan- dards and there is no technical deadline for most of the other requirements summarized above, the board should begin discussing potential changes in board composition approximately a year before the IPO. Time will be needed if new members are to be recruited: The pool of qualified and willing board candidates has shrunk in recent years, due to more stringent independence requirements, increased workloads (effectively limiting the number of boards on which an individual may sit), and a perception of increased personal exposure to liability. Every director of the company regardless of tenure—even

4. SEC, stock exchange, and Internal Revenue Code requirements applicable to board and board committee membership are discussed in chapter 5. 5. The composition of compensation committees is discussed in chapter 5. See section 5:4.2[A]. 6. For discussion of the section 162(m) requirements for qualification as an “outside director,” see section 22:8.2.

9–6 Assembling the IPO Team § 9:3.2 including persons named in the Form S-1 as having agreed to become directors, whether or not they have actually assumed the role—has potential liability for the contents of the Form S-1.7 As a result, candidates typically join a board sufficiently in advance of the IPO to participate in the review of the Form S-1 along with the other directors, or defer their candidacy (without being named in the Form S-1) until after the IPO.

Planning Tip If new directors are to be added to the board of directors in connection with the IPO, they generally should join at least six months before the organizational meeting in order to get familiar with the company and contribute to the IPO process.

§ 9:3.2 Compensation for Outside Directors The board also needs to establish—and disclose in the Form S-1—a compensation package for outside directors. Private companies typically grant stock options or restricted shares to outside board members, but do not pay cash director fees. In general, public company board compensation consists of a combination of stock and cash, but the permutations are nearly limitless. Stock-based awards may be in the form of options, restricted or unrestricted shares, a combination of options and shares, or more esoteric instruments. Some companies make stock-based awards to all outside directors in equal annual amounts, while other companies make larger grants upon a director’s initial election and smaller grants annually there- after. Cash may be paid on a retainer (annually or quarterly) or on a per-meeting basis, or both, and additional payments generally are made to the chairs or all members of the board committees that carry the heaviest workloads—typically, the audit committee followed by the compensation committee. Board compensation is almost never paid to directors who are company employees. Directors affiliated with venture capitalists or other institutional investors often forego board compensation, as a matter of policy or appearance rather than any legal requirement. Most boards of IPO companies attempt to benchmark director compensation against public company peers. A compensation consultant can help identify comparable companies and make recom- mendations for board compensation following the company’s IPO.

7. Liability issues are discussed in more detail in chapter 12.

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§ 9:4 Company Counsel With the primary responsibility for preparing the Form S-1 and coordinating the entire IPO process, company counsel is a central player in the working group.

§ 9:4.1 Selection Criteria What should the company look for when choosing counsel to lead an IPO? The three most important factors are experience, experience, and experience—substantial, relevant, and recent experience: • serving as company counsel in many IPOs, preferably including offerings by companies in the same or similar industry; • handling recent IPOs—law firms with little IPO deal flow in the past five or ten years will find the rules and practices very different now; • advising public companies on their ongoing reporting obligations; and • navigating both the lore and the law of IPOs. Another dimension of experience is SEC work experience. Former SEC staff members can often draw on prior working knowledge to expedite the resolution of issues or identify the appropriate decision maker within the SEC (although the company should not expect to receive preferential treatment simply because a member of the com- pany counsel team formerly worked at the SEC). An added bonus is if company counsel has significant experience in representing both companies and underwriters in IPOs, since an understanding of the priorities and expectations of underwriters will facilitate the offering process on the company’s side. The composition of the deal team is another important facet of the company counsel decision. The company should consider the experi- ence and capabilities of the individual lawyers who will serve as company counsel in the IPO, and not simply the firm’s experience or reputation. After interviewing the lead partner, the company should meet some of the more junior lawyers who will be involved—the “second chair” on the offering may well be the company’s principal point of contact for many parts of the IPO process. Countless hours will be spent with counsel, and the company will need a comfortable working relationship with each member of the IPO legal team. Strong chemistry between the company and outside counsel can make the IPO process much more pleasant—and productive. In selecting counsel, the company should also consider the full- service capabilities of the candidate firms. The company will inevitably have legal needs in a wide range of other areas, both during and after

9–8 Assembling the IPO Team § 9:4.1 the IPO process, and the ability of one firm to take on all or most of the company’s legal work will present efficiencies and other advantages. Most companies going public will, over time, call on outside counsel for assistance in the areas of , executive compensation, intellectual property, labor and employment, antitrust and other regulatory matters, taxation, commercial and bankruptcy law, real estate, and litigation, often including—regrettably—securities litigation. Many companies will also have international legal needs. For senior executives, estate planning expertise is another useful capability for company counsel to have. The company should check the client references of the law firms and individual lawyers vying for the IPO engagement. If a lawyer ’s references are not unabashedly supportive, or the clients have not worked on a recent IPO with him or her, the company should probably look elsewhere, since the candidate presumably has hand-picked the best available references. The company will have limited ability to evaluate a lawyer’s securities law knowledge, but inquiries of other clients can be made concerning the elements of outstanding legal service, such as commitment to the client, responsiveness, judgment, communication skills, problem-solving ability, energy, work capacity, diligence, collegiality, integrity, and decisiveness (as an old adage goes, clients need a “one-handed lawyer”—one who does not always respond “on the one hand . . . , but on the other hand . . . ”). The leading law firms for representing companies and underwriters in IPOs are clustered in California, Boston, and City; and for energy-related IPOs, in Texas. Many IPO candidates are also located in these areas—the states of California, Massachusetts, New York, and Texas collectively produce about half of all U.S. IPOs—and need not worry about the geographic location of outside counsel. For other companies, physical proximity to outside counsel can be a convenience, but is less important than the requisite experience and skill sets. Most attorney-client communications are conducted by telephone or email, and for an engagement as important as an IPO, no lawyer will object to traveling to the client’s location as frequently as needed. In the course of the IPO process, company counsel will become intimately familiar with the company and its business. Prior working experience with the company will, therefore, give counsel a head-start, which is why the company’s incumbent counsel should be considered for the IPO. It is usually preferable, however, to select a new firm with deep IPO experience than to forge ahead with existing counsel that knows the company but has limited IPO or public company experi- ence. If the company plans to switch counsel in connection with the IPO, it is preferable to do so well before the formal commencement of the IPO process. Although skilled IPO counsel can jump in as late as the organizational meeting and perform well, the process will be

9–9 § 9:4.2 INITIAL PUBLIC OFFERINGS smoother for all concerned if new counsel is lined up at least three to six months before then.

§ 9:4.2 Sample Questions/Requests for Company Counsel Candidates Deal Team r Which of your firm’s lawyers will handle our IPO? Do the junior members of the team have any IPO or public company experience? Will we be able to meet them before hiring your firm? r Please describe the experience of the proposed lead partner in handling IPOs and representing public companies. r Please provide three CEO, CFO, or general counsel references from other IPOs or public company representations handled by the proposed lead partner. r Do the senior members of the proposed deal team have sufficient time to devote to our IPO? r What is your philosophy for the allocation of assignments among team members with different levels of experience and billing rates? r How will the deal team change after we complete our IPO and you begin to represent us on an ongoing basis as a public company? r Please describe how you typically work with a company’s general counsel, both during and after the IPO process, includ- ing any strategies you have found to be especially effective. If we do not have a general counsel during the IPO process, how do you envision interacting with us? Experience r Over the past one, five, and ten years, how many IPOs has your firm completed as company counsel? As underwriters’ counsel? r How many of the companies that your firm has taken public over the past five years no longer use your firm as company counsel, other than as a result of being acquired, and why? r For how many public companies does your firm serve as the primary outside corporate counsel? r Please describe your firm’s experience representing companies in our industry.

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r How many partners in your firm have past employment experience with the SEC? Will the deal team have ready access to these lawyers as needed? r Are there any law firms that you believe your firm works particularly well with as underwriters’ counsel? Other Legal Services r Please describe the other legal services your firm offers that you believe will be of interest to us during the IPO process and thereafter as a public company. r How do these services differentiate your firm from other law firms? r Are there any legal services that your firm’s other public company clients regularly go to other law firms to obtain? Billing r What are your firm’s billing rates and policies? r How do you ordinarily address legal fees for a failed IPO? r Are you willing to consider alternatives to traditional hourly billing, such as a discount for a failed IPO coupled with a premium for a successful offering? r How much do you believe we should budget for legal fees in the IPO? And how much for legal fees on “routine” SEC compli- ance work following the IPO?

§ 9:5 Independent Accountants § 9:5.1 Big 4 or Not? Does a company need to hire a “Big 4” accounting firm to go public? Of course not. But a strong majority of companies do. There are more than 1,800 independent public accounting firms registered with the PCAOB, but the Big 4 ( & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers) were the auditors for 77% of IPO companies, based on combined data from all U.S. IPOs completed in 2007 and 2008.8 When the next three largest audit firms—BDO Seidman, Grant Thornton, and McGladrey & Pullen—are added, the percentage nearly hits 90%. Although mid-size and regional audit firms enjoy a thriving busi- ness serving smaller public companies and private companies and

8. The Big 4 should probably be called the “Gigantic 4,” as each firm has more than 100,000 employees worldwide and $15 billion in annual revenue.

9–11 § 9:5.2 INITIAL PUBLIC OFFERINGS often have reputations for superior service and better value in serving these clients, Big 4 accounting firms dominate the IPO market for several reasons: • SEC Experience: Every independent registered public account- ing firm will be familiar with Regulation S-X, GAAP, and PCAOB auditing standards, but the Big 4 can tap into a well- spring of institutional experience concerning the SEC and IPOs. Much of this knowledge resides within the firm’s “national” office, which works primarily with company engagement part- ners on SEC issues and not directly with companies. • Bench Strength: With large staffs in nearly every major metro- politan area in the United States, the Big 4 have the bandwidth to meet the demanding schedule of an IPO and can service the audit needs of companies with widely dispersed operations. • Additional Services: The Big 4 offer a variety of tax and advisory services in addition to traditional audit services, often enabling companies to benefit from “one-stop shopping” globally.9 • Brand Name: Underwriters and investors often draw comfort from the inclusion of a Big 4 audit opinion in an IPO prospectus. It is probably no coincidence that the success of the law firms with the largest IPO practices could be attributed to similar factors. For that matter, similar statements could be made about the major firms.

§ 9:5.2 Switching Auditors Prior to an IPO There is significant value to continuity in the audit firm used by the company. To an even greater extent than counsel, the audit firm must be very familiar with the company and its industry in order to serve effectively. The selection of an independent registered public account- ing firm for an IPO is, in effect, made by many companies at the time of formation—venture capital–backed companies, who are the most likely startups to pursue an IPO some day, routinely start life with a Big 4 firm. For other IPO candidates, the advantage of familiarity must be weighed against the need for extensive IPO and public company experience in its audit firm. IPO candidates who are not using one of the Big 4 firms, another national firm, or a highly regarded regional firm with at least some IPO experience, should consider switching to an audit firm with more IPO and public company experience. This

9. Subject to limitations on non-audit services imposed by the Sarbanes- Oxley Act, as discussed in chapter 4.

9–12 Assembling the IPO Team § 9:5.3 decision is often a natural consequence of a company outgrowing a local audit firm that met the company’s needs while it was private but lacks the experience and resources for an IPO. If a new audit firm is engaged, previously audited financial state- ments will need to be re-audited if required by the new audit firm or the managing underwriters, or if the former audit firm is unwilling to consent to the use of its prior audit report. Any re-audits could involve substantial time and expense. To avoid potential offering delays, a switch in auditors generally should be made six to twelve months before beginning the IPO process, so that the new firm has time to get up to speed and complete any necessary re-audits. Several disclosures are required in the Form S-1 if the company changes auditors.

§ 9:5.3 Sample Questions/Requests for Independent Accountant Candidates Engagement Team r Please identify the proposed engagement partner, concurring partner, and manager for our account. r In the past five years, has the proposed engagement partner rotated off of an audit client sooner than required, at the client’s request or otherwise? r Please describe the experience of the proposed engagement partner with companies in our industry and with IPOs. r Can your firm provide field service support in all geographic locations where we operate or intend to operate? r Please provide three CFO references from other IPOs or public company engagements led by the proposed engagement partner. Eligibility r Is your firm registered with the PCAOB? r Are you aware of any financial, employment, or other issues that would affect your firm’s independence? r Has your firm conducted internal procedures to determine whether there are any independence issues? Experience r Over the past one, five, and ten years, how many companies for whom your firm was the independent registered public ac- counting firm have completed IPOs?

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r Of these companies, how many subsequently switched from your firm to another independent registered public accounting firm? r For how many public companies does your firm serve as the independent registered public accounting firm? r Please describe your firm’s experience with companies in our industry. r How many partners in your firm have past employment experience with the SEC? Will our engagement team have access to these partners as needed? r Please summarize all investigations and disciplinary proceed- ings brought by the SEC, PCAOB, or any other regulatory authority against your firm or any personnel at your firm in the past five years, including any sanctions imposed, and specifically identifying any such proceedings with which any member of the proposed engagement team was involved. Accounting Matters r Based on your knowledge of our company and our industry, what do you see as the key accounting issues we face? r What are the most common SEC comments that companies like us receive? r In general, what is your view on the best way for a company going public to prepare for compliance with section 404 of the Sarbanes-Oxley Act? r As a condition to accepting our engagement, will you require that our previously audited financial statements be re-audited by your firm? r Please describe the expected involvement of your national office in our IPO filings and subsequent SEC filings. What is the process for communicating with the national office? Audit Committee Matters r Please provide references from audit committee chairs at three public company clients. r Please describe your typical working relationship with the audit committee. r How frequently do you typically meet with the audit committee?

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r In your opinion, what are the attributes of an outstanding audit committee? Other Services r Please describe the assistance you typically provide a client in preparing for an IPO and public company life. r Please describe the permitted non-audit services your firm offers that you believe will be of interest to us during the IPO process and thereafter as a public company. r How do these services differentiate your firm from other public accounting firms? Policies and Practices r Does your firm have any auditing or disclosure policies or practices that are not required by SEC or PCAOB rules or GAAP? r During the SEC review process, what role will you play in any discussions with the SEC staff regarding accounting matters, if necessary? r In the event that your firm is subsequently replaced as our independent registered public accounting firm, what is your policy on providing consents in future SEC filings for your prior audit reports on our financial statements? Billing r What are your firm’s billing rates and policies? r How much do you believe we should budget for accounting fees in the IPO? r For companies similar to us, what is the range of typical annual fees for annual audit and quarterly review services?

§ 9:6 Managing Underwriters The selection of managing underwriters—in particular the lead managing underwriters—is perhaps the single most important deci- sion the company will make as part of the IPO process. The invest- ment banking firms serving as managing underwriters play a crucial role in refining the company’s core message and market positioning, conducting due diligence, helping to develop a compelling Form S-1, marketing the offering to investors, providing critical IPO aftermarket support, and, in many cases, advising the company on subsequent capital markets and M&A transactions. A “bulge-bracket” underwriter with relevant industry experience will enhance any company’s IPO,

9–15 § 9:6.1 INITIAL PUBLIC OFFERINGS particularly when market conditions are difficult. No underwriter can guarantee that an IPO will be successful, but the company can increase the likelihood through its choice of managing underwriters.10

Planning Tip Long before beginning the formal selection process, the company should identify the leading underwriters of IPOs in its industry and begin to build relationships with investment bankers and key research analysts. Invest- ment bankers can offer useful planning guidance early on, at no cost to the company.

§ 9:6.1 Identifying Possible Candidates The universe of potential managing underwriters is well known. Over the past decade, the sheer number of investment banking firms has shrunk substantially, and relatively few now dominate the U.S. IPO market. All major investment banking firms base their capital markets functions in and have offices in financial centers around the world. The company’s directors, outside counsel, professional investors, and audit firm probably will have contacts within suitable investment banking firms and be able to introduce the company, if desired. In some cases, investment banks initiate contact with a company they believe is an attractive IPO candidate. It is not uncommon for a high-profile private company—perhaps one that has announced large venture capital or strategic financings or won prominent industry awards—to be approached by investment bankers trying to arrange meetings. Whether the courtship begins with the company or the investment banking firm, however, the company should begin to cultivate relationships with the contenders six to twelve months before the anticipated date of the organizational meeting.

§ 9:6.2 Bases for Evaluating Potential Managing Underwriters Companies weigh various factors differently, but the following criteria are generally considered relevant in choosing from among competing investment banks.

10. The underwriting process is discussed in detail in chapter 19.

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[A] Track Record An investment bank’s prior experience and success is arguably the most germane factor, and has three dimensions: overall track record (its roster of completed public offerings and other financing transac- tions); IPO experience (the number and performance of IPOs it has led); and familiarity with the company’s industry (measured by the number of IPOs and other offerings it has handled in the same or related industries). This data is publicly available and will usually be proffered by the banks themselves—although every self-respecting investment banking firm can produce at least one ranking with its name on the top. A bank’s experience with similar-sized offerings is also relevant, since a company pursuing an IPO of modest size may get little attention from the sales force of a bank that primarily handles much larger offerings. [B] Team Members When selecting the managing underwriters, the company should understand that the package includes more than investment bankers. The investment banking personnel will be the company’s principal points of contact and should have a strong rapport with management, but other team members also play key roles. In particular, the research analysts employed by investment banking firms develop earnings esti- mates used in the marketing of the offering, help educate the sales forces of the managing underwriters about the company and its investment merits, and can generate investor interest in the company after the IPO through their research coverage. Although investment banking firms cannot make any commitments about the nature of analyst recommen- dations in advance, a firm’s research department is allowed to agree that it will initiate coverage following the IPO. The company should meet the research analysts employed by the contending investment banks who cover the company’s industry (investment banking personnel cannot be present), read their published research reports, review their rankings in industry publications, and do reference checks among the companies the analysts cover and the institutional investors the company hopes to attract. The caliber and reputations of the research analysts employed by prospective managing underwriters often sway a company’s decision. Another less visible, but very important, component of an investment bank is the equity capital markets group. These are the people who gauge investor interest, take orders, assess market conditions, and recommend the offering size and price. If the offering is expected to have a syndicate beyond the managing underwriters, the bank’s syndi- cate group should also be considered.

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[C] Commitment to the Company The company will be one of many clients, including other IPO candidates, that an investment banking firm is working with at any given time. The company should inquire about the number and status of other IPOs and major transactions with which the proposed team members are actively involved. The company should be sure that the managing underwriters it chooses are committed to the company, that the company will be an important client, and that the deal teams have sufficient capacity to devote to the company. These concepts are largely subjective, but inferences can be drawn from the attention and enthusiasm directed toward the company. Did the bank invest the time to understand the company and its industry thoroughly? Were the senior people at the bank substantively engaged in the process? Did the bank offer original insights about the company, its strategy, or potential market positioning? Has the bank sought to build a relationship beyond introductory meetings? Did the bank seize the initiative and outline the key messages for the business section of the Form S-1? (Some companies request that managing underwriter candidates prepare a draft of the business description to be included in the prospectus summary, or even the entire business section; but this takes significant time and provides little real value.) Did the bank respond fully and promptly to the company’s information requests? One situation to watch for is when an investment bank works with a company competitor. Some companies are instinctively bothered by this, feeling that it might result in a lack of commitment or a conflict of interest; other companies are more sanguine about the situation, recognizing that it might enhance the bank’s industry knowledge. If the company objects to the firm’s investment banking personnel working with specific competitors, it should raise the issue early in the selection process. [D] Distribution Reach and Mix The managing underwriters collectively must have sufficient dis- tribution clout to sell the entire IPO and the ability to achieve the target mix of institutional, retail, domestic, and international inves- tors. This is not much of an issue with the leading investment banking firms, all of which have access to major institutional investors and retail customers, but becomes an important selection criterion with smaller underwriters. The company should inquire about each bank’s distribution capability and test the responses by carefully reviewing the bank’s track record in similar IPOs.

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[E] Aftermarket Support An IPO can quickly sour if an active trading market does not develop or the stock underperforms the market after closing, and securities litigation often follows a sudden drop in the stock price. One of the lead managing underwriters will act as “stabilization agent” on behalf of all the underwriters immediately after the offering, and other lead managers thereafter may help maintain liquidity through market-making activities. Post-IPO research coverage by the analysts employed by the managing underwriters can also help stimulate interest in the company. One measure—albeit imperfect—of an in- vestment bank’s aftermarket support is the stock performance of the companies it takes public in relation to overall market performance. Needless to say, the stock performance of individual companies can be due to factors wholly unrelated to the caliber or efforts of their investment bankers. [F] Prestige and Reputation The investment banking industry tends to be hierarchical. Not everyone would agree on each underwriter’s exact slot in the pecking order, and perceptions of relative rankings can vary across company industries; but few directors or institutional investors would have difficulty identifying those potential managing underwriters they consider to be more (or less) prestigious than others. Investment banking reputations tend to be grounded in lengthy track records and are not necessarily illogical. The mistake to be avoided is selecting a managing underwriter solely on the basis of its prestige or general reputation without confirming that it compares favorably on other relevant criteria—most importantly, the commitment to the company and the availability of a highly qualified and motivated team. [G] Client Satisfaction The company should speak with the CEOs and CFOs of other companies taken public by the proposed managing underwriters. After the glow of an IPO has faded, companies can be surprisingly candid in discussing what they liked and disliked about their managing under- writers. The investment banks will probably offer references to the company, but inquiry need not stop there, since information concern- ing a bank’s past IPOs is readily available. One indication of a company’s satisfaction (or dissatisfaction) with its managing under- writers is whether the same underwriters were retained as managing underwriters for a follow-on offering conducted by the company after the IPO.

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[H] Economic Factors Each investment bank should provide a preliminary methodology for the company. The company’s IPO valuation ulti- mately will be determined by market conditions and investor interest at the time of pricing, but the lead managers can influence the offering price through the valuation metrics, multiples, and comparable com- panies it presents during price talk with potential investors. At this point in the process, estimates of the company’s valuation as a public company are less important than the methodology employed. In some cases, it may be in the company’s best interests to defer any discussion of a specific valuation range during the selection process because such a range often is of little predictive value and can have unintended consequences for the company’s financing and option granting activ- ities prior to the completion of the IPO—which will not occur for at least six months after discussions begin with potential underwriters. The underwriting discount is rarely relevant in the selection process. If the company anticipates a large IPO and hopes to negotiate a discount below the generally prevailing 7% rate, the topic should be discussed when banks are competing for the engagement. [I] Financial Strength and Stability More than a passing thought should be given to the financial strength and stability of each investment banking firm under con- sideration. The sale of Bear Stearns and the bankruptcy of in 2008, coupled with steps taken by other major investment banking firms to shore up their balance sheets, serve as stark remin- ders that no financial institution is immune from broad shocks to the market. [J] Other Capabilities Assuming the IPO goes well, the company will probably look to the managing underwriters for additional services over time, including follow-on public offerings, M&A engagements (as buyer or seller) and assistance in defenses, investor relations, and other capital markets matters. The company should assess each candidate’s strengths in the areas of the company’s likely future needs. If the company contemplates a “dual track” process,11 it should also con- sider the bank’s M&A capabilities and track record.

11. Dual tracks are discussed in chapter 21. See section 21:2 et seq.

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§ 9:6.3 The Selection Process [A] Narrowing the Field As the planned date of the organizational meeting approaches, the company will need to complete the evaluation process and pick the managing underwriters. Companies vary in the degree of formality they employ at this point. Some companies ask the contenders to submit written responses to a formal request for proposals, in which the company poses a number of questions and requests various information that it considers relevant to its decision-making process, and then selects finalists on this basis. Other companies may feel they know enough from prior contacts with the candidates to work directly from a shortlist. Regardless of the approach it takes to narrow the field, the company generally will meet again with each firm under final consideration. In attendance for the company typically are the CEO, CFO, general counsel, and often several directors or even the entire board; outside counsel may also participate. The investment bank will be represented by its proposed deal team, ranging from one or more managing directors down to more junior members (but excluding the bank’s research analysts, who are not permitted to solicit underwriting business). In these meetings, the bank will present its case and respond to questions. At the end of this process—often called the “beauty contest,”“bakeoff,” or “dog-and-pony show”—management will make its recommenda- tions, and the board will select the managing underwriters. [B] Designating Lead Managing Underwriters Part of the board’s decision will be to designate the lead managing underwriter or underwriters. In close cases, management and the board may request that a small number of banks return for additional interviews, in order to help reach a consensus as to the lead managers to be selected. Investment banking firms may argue that a sole lead manager is in the company’s best interest, but in recent years the majority of all IPOs have had multiple lead managers—typically two. Lead managers earn a greater share of the underwriting compensation, get “league table” credit for lead managing the offering, and are listed on the top line of the underwriter listings at the bottom of the prospectus cover. (League tables are third-party rankings of investment banking market share that are used for competitive purposes and thus are taken very seriously.) If the board selects joint lead managers, only one can be named on the top line at the far left of the list of underwriters shown on the prospectus cover. This placement is largely symbolic, assuming the lead managers have equal economic arrange- ments, but can be of great importance to investment banking firms— to the point where a bank may refuse to accept an underwriting assignment if it objects to the order in which the lead managers would

9–21 § 9:6.3 INITIAL PUBLIC OFFERINGS be listed on the prospectus cover. In many offerings, co-managers are not selected until after the initial Form S-1 filing. [C] Selecting Co-Managers The company must also select co-managing underwriters, or co- managers, usually in consultation with the lead managers. One or more of the investment banking firms that were not chosen to be lead managers may be invited to act as co-managers, although some may decline the lesser role. The company should view the selection of co- managers as an opportunity to round out the underwriting team with firms of complementary skills. For example, a co-manager may employ an outstanding research analyst; have distribution capabilities in retail, institutional, industry, geographic, or other sectors that are served less well by the lead managers; offer superior trading or market- making expertise; or be particularly skilled at the types of engage- ments, such as M&A transactions, for which the company anticipates a future need. In many offerings, co-managers are not selected until after the initial Form S-1 filing. [D] Being Evaluated by the Underwriters While the company is evaluating investment banking firms to serve as managing underwriters, those banks are also evaluating the com- pany. In accepting an IPO engagement, an investment banking firm is making a major commitment of time, resources, and reputation. Even before winning the mandate, the bank will ask itself whether it wants the assignment. Without initiating the formal due diligence process, the candidates will request financial information, business plans, and other information from the company; assess the experience and capabilities of management; review the company’s website; undertake Internet research; and possibly speak with business contacts who are familiar with the company, its products or services, and its manage- ment. Eventually each managing underwriter will need approval from its commitment committee before proceeding with an offering, and a bank’s preliminary research is intended to inform its decision about whether to continue with the process. [E] Confidentiality Agreements During the selection process, some companies ask each investment banking firm to sign a confidentiality agreement—and usually are surprised when the request is declined. Historically, underwriters have resisted signing confidentiality agreements on the basis that doing so could conflict with a disclosure obligation in the Form S-1, is incon- sistent with the nature of the underwriting and IPO process, or is unnecessary because an investment bank owes a duty of trust and confidence to each client. None of these reasons is an absolute barrier

9–22 Assembling the IPO Team § 9:6.4 to a properly worded confidentiality agreement, but some banks may still object as a matter of policy. If a bank refuses to sign a confidenti- ality agreement, the company will need to decide whether to eliminate the bank from consideration. The alternative is to avoid sharing truly sensitive information (as opposed to routine business information that, although not generally available to the public, poses fewer concerns) during the selection process, and to understand that the company will need to get comfortable with not having a written confidentiality agreement with that bank if it is selected. Most companies conclude this poses little practical risk.

§ 9:6.4 Sample Questions/Requests for Managing Underwriter Candidates Deal Team r Who will be the members of the investment banking team for our IPO? Are the senior members committed to attending the organizational meeting, drafting sessions, and other key meetings? r Please provide the names and contact information for the CEOs and CFOs from three other companies whose IPOs were led by the proposed investment banking team for our IPO. r Who will lead the equity capital markets and syndication functions for our offering? r Who is the most senior sponsor of our IPO within your firm? Recent IPO Experience r Please provide a list of all completed or withdrawn IPOs in which your firm has participated over the past two years, indicating your role in each, and specifying the date and size of each that was completed. r Please provide a list of all IPOs on file in which your firm is participating, indicating your role in each and its present status. r In the past two years, has your firm been chosen as a managing underwriter in any IPOs and then withdrawn or been replaced before pricing? Company Positioning r What is your recommended positioning of our company? r Do you see any potential issues that our company’s business or industry pose for the marketing of the offering?

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r Please supply a list of the key messages you believe should be conveyed in the opening paragraph for the business section of the prospectus. Timing and Preparedness r What is the timing and process of your firm’s commitment committee process, including research analyst involvement? r Please provide a recommended IPO timetable from the organi- zational meeting through pricing. r What is your current view of IPO market conditions as they relate to companies in our industry? Do you foresee significant market changes, positive or negative, over the next six to twelve months? r What do you consider the biggest risks or uncertainties in the successful completion of our IPO, other than market conditions? r From your perspective, what gaps in our board or management must we address in order to complete an IPO successfully? Size and Valuation r Based on present market conditions, what deal size do you consider appropriate? What is the minimum deal size that you would consider feasible or that you are willing to underwrite? r Please provide a description of your valuation methodology for our company, the names of the comparable companies used in your analysis, and the principal operating metrics of those companies. r What is your view of the optimal progression of the market price, from setting the proposed range to pricing the offering and through our first earnings release? Offering and Disclosure r What is your firm’s policy, or recommended practice, with respect to the audit of interim financial statements included in the Form S-1? r Does your firm have any disclosure policies or practices that are not required by SEC rules and are not generally followed in the securities industry? r Are you receptive to the inclusion of selling stockholders in our IPO? If so, what is the maximum percentage of the overall offering you recommend for a secondary component? If mem- bers of management or the board are included, what is the

9–24 Assembling the IPO Team § 9:6.4

maximum percentage of their holdings that you suggest they be allowed to sell? r From whom will you request lockup agreements? r What are your thoughts on the inclusion of a directed share program in our IPO? If a DSP is included, what maximum size do you recommend? Does your firm have the ability and willingness to administer a DSP? r What maximum “overhang” do you believe we can have in our stock option plan without adversely affecting the marketing of the IPO? Do you think an “evergreen” provision providing for automatic annual increases of up to 5% of the outstanding shares will have an adverse effect? Syndicate Structure r How many lead managers and co-managers do you recommend for our IPO, and why? r Are you willing to serve as a joint lead manager if selected, and what are your minimum economics to serve in this capacity? r Which investment banks do you believe your firm works particularly well with as joint lead managers? r Which investment banks do you consider most complementary to your firm’s capabilities as a joint lead manager? r If you are selected as a lead manager, how do you propose to allocate the underwriting discount among all managing underwriters? r What process do you follow for identifying firms to serve as non-managing underwriters? What role does the company play in that process? Sales and Marketing r Please describe your domestic and international institutional and retail sales capabilities, including market share and market presence information if available. r What are your preliminary thoughts regarding the allocation of shares among types of investors? r Who will be the target investors for our IPO? r Can we meet the equity capital markets personnel who will be involved with our offering? r Please indicate the likely duration and locations for our road show. Do you recommend going to Europe? Do you anticipate including an electronic road show?

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Pricing and Stock Performance r Please describe your firm’s pricing process, indicating the levels of transparency available to us relating to management of the order book, pricing and sales activity. r What process do you follow for allocating shares? What role does the company play in that process? r Please describe your policies and processes to minimize flip- ping. In each of the completed IPOs in which your firm served as a lead manager in the past two years, what percentage of the shares were sold by the initial buyers on the first day? r For each of the completed IPOs in which your firm served as a lead manager in the past two years, please provide: r the initial price range; r the revised price range, if any; r the final offering price; r the size, composition (primary versus secondary), and uti- lization of the underwriters’ over-allotment option; r the closing market price on the first day and 30, 90, 180, and 200 days after closing; and r any special lockup arrangements. Public Company Preparations r Please describe the assistance you typically provide an IPO company in preparing for public company life, including in- vestor relations matters. r As a new private company, we will not be required to comply with section 404 of the Sarbanes-Oxley Act at the time of the IPO. What are your expectations for our level of section 404 preparedness? r What anti-takeover measures do you believe best serve compa- nies like us? Aftermarket Support r What are your firm’s views on stabilization activities and strategies, including willingness to commit capital? r Can we meet the individual who will be primarily responsible for trading our stock on behalf of your firm, and will that person be accessible to us after the IPO? r Please describe your firm’s aftermarket services, including non- deal road shows.

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r What conferences and other industry or investor events does your firm sponsor that are suitable for our participation? r For each of the completed IPOs in which your firm served as a lead manager in the past two years, please provide the following information: r Has the company undertaken a follow-on offering? If so, what was your firm’s role? What was the split between primary and secondary shares in each? r Has the company engaged in any M&A transactions? If so, did your firm participate in an advisory capacity? Research Coverage r Has your firm initiated research coverage on each of the companies for which you served as a lead manager in the past two years? r Has your firm dropped research coverage for any of these companies? If so, why? Other Questions r Why do you believe you are a good match for us, and us for you? r What qualitative factors do you believe distinguish your firm from others? r What law firm do you anticipate engaging as underwriters’ counsel? Are you receptive to input from us on the selection? r Is your firm working with any of our competitors on IPOs or other engagements? If so, how do you plan to address potential conflicts of interest?

§ 9:7 Underwriters’ Counsel The lead managers will select an outside law firm to serve as under- writers’ counsel, but will often consider the company’s views. Many law firms are qualified to act as underwriters’ counsel. From the company’s perspective, what are the most important factors in the decision? First and foremost—not surprisingly—is experience with IPOs and the company’s industry. But the lead managers are very unlikely to select an inexperienced firm as counsel, so what kind of meaningful input can the company realistically provide? There are several possi- bilities. If company counsel has had especially good working experi- ences with another law firm on several IPOs, that firm could be suggested for consideration as underwriters’ counsel. Conversely, if company counsel has reason to believe that a particular firm would be

9–27 § 9:8 INITIAL PUBLIC OFFERINGS a poor match for the company’s IPO, that fact could also be shared diplomatically with the lead managers. Sometimes the company picks its counsel from between two law firms that are equally experienced, capable, prepared, and enthused; in this case, the company may wish to suggest that the runner-up be considered as underwriters’ counsel. If the lead managers are uninterested in the company’s input, however, the company should not be unduly concerned, since the choice of under- writers’ counsel from among many possible firms is not as important to the success of the IPO as the selection of company counsel.

§ 9:8 Consultants and Advisors IPO companies regularly retain additional consultants and advi- sors, including compensations consultants, investor relations firms, and accounting consultants.

§ 9:8.1 Compensation Consultant Many companies going public engage a compensation consulting firm to help them with a variety of compensation-related issues and decisions that accompany an IPO. When selecting a compensation consultant, the company should seek a firm that is familiar with the compensation programs and practices of the company’s peers and other similar companies. One obvious way to find potential candidates is to ask the CEO or CFO of other recent IPO companies which compensa- tion consultant firm they used. Companies often finalize their post-IPO compensation arrangements during the lull while awaiting initial SEC comments on the Form S-1, so if a compensation consultant is going to contribute to these decisions it must be retained before this point.

Planning Tip The company should consider engaging a compensation consultant for the fiscal year prior to the anticipated filing of the Form S-1—the period that will be covered by the CD&A in the prospectus. The involvement of a compen- sation consultant during this period should permit the discussion of compensation decisions to reflect consid- eration of third-party comparisons, such as benchmark- ing data, that otherwise may be unavailable to the board and compensation committee.

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§ 9:8.2 Investor Relations Firm Many IPO companies retain an investor relations firm. In light of the publicity restrictions that apply to an IPO, there is not much of a role for an investor relations consultant during the IPO process, although some companies use one to help set up the investor relations portion of their website that will go live after the IPO is priced. The investor relations firm selected by the company should have a solid grounding in the relevant public company rules, such as Regulation FD, and be knowledgeable about the company and its industry. Positive experiences that the CEO or CFO has had with investor relations firms during prior employment often lead the company to suitable candidates.

§ 9:8.3 Accounting Consultant If the company requires assistance on an accounting issue—for example, for a thorny matter raised for the first time during SEC review, or for tax accounting—the company may need to engage an accounting consultant. The company’s counsel or audit firm often can suggest accounting firms other clients have engaged in similar situa- tions in the past. (Many companies also retain accounting consultants for assistance in Sarbanes-Oxley Act compliance.)

§ 9:8.4 IPO Consultant A company going public occasionally hires an “IPO consultant.” Typically consisting of former investment banking professionals, an IPO consultant can assist with the development of financial models, help select underwriters, and generally advise the company on the IPO process. If the company has seasoned finance personnel and company counsel, the incremental expense of an IPO consultant usually is unnecessary.

§ 9:9 Outside Vendors The company will need to line up several vendors as part of the IPO. Their roles are not glamorous but they serve essential functions.

§ 9:9.1 Financial Printer An outstanding financial printing firm is an underappreciated asset in the IPO process. Although most of the printer’s IPO tasks are mundane—typesetting the Form S-1, making changes requested by the working group, assembling exhibits, submitting filings on EDGAR, and printing and delivering the prospectuses—all take on a magnified importance in an IPO, when there invariably is time pressure and no room for mistakes. A few financial printers dominate the market and

9–29 § 9:9.2 INITIAL PUBLIC OFFERINGS are well known to IPO regulars. Printers compete on the basis of services, price, and convenience. Major printers generally offer very similar services and are largely indistinguishable based on objective factors. The company can ask several printers to compete for the business, but bids are often difficult to compare and based on assump- tions that prove unrealistic. Some printers will bundle their IPO services with future public company services, primarily the submis- sion of Exchange Act reports on EDGAR and the typesetting and printing of the proxy statement and . Others will treat the IPO work as a loss leader in order to win more lucrative post-IPO printer assignments, such as for follow-on offerings and M&A trans- actions. In many cases, a financial printing firm is chosen based on geographic location and the past experience of company counsel and management in working with the printers under consideration. The financial printer should be selected by the time of, or shortly after, the organizational meeting so that it can begin typesetting financial statements and assembling exhibits in advance of the Form S-1 filing.

§ 9:9.2 Transfer Agent Transfer agents for public companies are required to register with the SEC or (for banks acting as transfer agents) an applicable bank regulatory agency and must comply with various reporting, record- keeping, and other rules. In order to list its on or the NYSE, the company must choose a transfer agent that meets the insurance and connectivity requirements to operate in the direct registration system of Depository Trust Company (DTC).12 IPO companies can select a transfer agent from among numerous possibi- lities and typically base decisions on factors such as management’s past working relationships, counsel recommendations, and price.

§ 9:9.3 Virtual Data Room Provider To facilitate the due diligence process, particularly when the parties are geographically dispersed or if a dual track process is contemplated, the company may wish to establish a virtual data room in which electronic copies of documents are posted on an external website for remote access by authorized users. Financial printers and other vendors provide this capability, competing on the basis of price and services.

12. Stock exchange is discussed further in chapter 15.

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§ 9:9.4 Electronic Road Show Host If the company utilizes an electronic road show, it will probably be hosted by an outside vendor. Several companies provide this hosting service. Arrangements are usually made by the managing underwriters.

§ 9:9.5 Banknote Company Historically, physical stock certificates were printed by a special kind of printer called a “banknote company.” With the elimination of the exacting design and engraving requirements that applied to stock certificates in decades past, any number of providers—including some transfer agents—can supply an inventory of stock certificates. Com- panies usually pick a banknote company or other supplier of stock certificates based on cost and recommendations from its transfer agent or counsel.

§ 9:9.6 Option Administrator If the company has a large number of optionees or frequent option grants, it may wish to outsource the option administration function to an external provider.

§ 9:10 Changes in the IPO Team Despite a thorough and thoughtful selection process, sometimes the IPO team does not work out as planned. What should the company do? The answer depends on the nature of the problem and the parties involved. Serious issues can arise from the unexpected unavailability of any of the principal players. Although the company would have considered the general reputation of any investment banking firm selected as a lead manager, in all likelihood it was the specific deal team or individuals at that bank that attracted the company, built relation- ships with senior management, and invested the time and effort to learn about the company and its industry. If key members leave the bank or are unable to participate fully in the IPO process, for any reason, the company may have to reevaluate the bank’s role as a lead manager. Less frequently, a lead manager may perform so poorly that a change becomes necessary. Regardless of the reason, a switch in lead managers is disruptive and may cause delays and should be under- taken only when necessary to salvage the offering. A similar—and more common—problem is posed by the departure of a managing underwriter’s research analyst during the offering process. Anticipated coverage by the analyst after the closing may have been an important reason for the company’s selection of the bank

9–31 § 9:10 INITIAL PUBLIC OFFERINGS as a managing underwriter, and loss of that analyst may eliminate the rationale for the bank’s participation. If an analyst moves to another firm, the company may be tempted to bring in the analyst’s new employer as a managing underwriter. In most cases, however, this is neither feasible nor sensible. Somewhat different considerations apply to the departure or un- availability of key members of the company’s counsel or independent accountants. Although the company may have loyalties to particular individuals at its law and accounting firms, it is usually possible for other persons at these firms to step in, with minimal disruption or inefficiency, if staffing changes become necessary. Moreover, as dis- cussed above, a change in accounting firms would precipitate prospec- tus disclosure that is often considered undesirable, and it could result in re-audits of prior periods if required by the new accounting firm or if the former accounting firm refuses to consent to the use of its prior audit report. Minor disagreements and personality clashes among members of the working group are commonplace as the IPO process wears on, but experienced professionals can almost always overcome these distrac- tions. In rare cases, the behavior of one person may present a substantial impediment to the successful completion of the offering. If this happens, the company should simply request that the person be replaced.

•••

The company’s senior management and outside professionals— particularly the managing underwriters, company counsel, and audit firm—play indispensable roles in the IPO process and have substan- tial influence over the ultimate outcome of the effort. The com- pany’s selections can markedly increase the odds of a smooth, successful IPO. With the company’s pre-IPO planning complete and its team in place, the IPO process can begin.

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