NEW YORK STOCK EXCHANGE IPO Guide, Second Edition
NYSE IPO Guide
For an electronic version of the NYSE IPO Guide, please go to: www.nyx.com/ipo-guide
83458_cvr_ptg01_hires.indd 1 19/08/13 7:41 PM Publisher Timothy Dempsey
Consulting publisher Brian Curran, NYSE
Editorial and Production Services PreMediaGlobal
Consulting editors Nicolas Grabar, Sandra L. Flow and John Palenberg Cleary Gottlieb Steen & Hamilton LLP
NYSE IPO Guide, Second Edition, is published by Caxton Business & Legal, Inc 27 N Wacker Drive, Suite 601 Chicago, IL 60606 United States Tel +1 312 361 0821 Fax +1 312 278 0821 www.caxtoninc.com
Printed by RR Donnelley
ISBN 978-0-615-84229-5
NYSE IPO Guide, Second Edition, © 2013 Caxton Business & Legal, Inc
Copyright in individual sections rests with the co-publishers. No photocopying: copyright licenses do not apply.
DISCLAIMER This guide is written as a general guide only. It should not be relied upon as a substitute for specific legal or financial advice. Professional advice should always be sought POTENTIAL UNLOCKED... before taking any action based on the information provided. Every effort has been made to ensure that the information in this ON THE BIGGEST STAGE guide is correct at the time of publication. The views expressed in this guide are those of the authors. The publishers and IN BUSINESS authors stress that this publication does not purport to provide investment advice; nor do they accept responsibility for any errors or omissions contained herein. Tableau Software (NYSE: DATA) The NYSE IPO Guide, Second Edition, contains summary information about legal and regulatory aspects of the IPO process When a company goes public on the NYSE, it is joining the premier global exchange and beginning a and is current as of the date of its initial publication (August 16, 2013). Although partnership that will continue far beyond the opening trade. the NYSE IPO Guide may be revised and updated at some time in the future, the Opportunities only offered by a NYSE listing: NYSE does not have a duty to update the information contained in the NYSE IPO Unique market model — light-speed technologies enhanced by human judgment. Guide, and the NYSE will not be liable for The deepest pools of liquidity. any failure to update such information. The NYSE makes no representation as Unmatched brand exposure providing global visibility, and to the completeness or accuracy of any An unparalleled network of the world’s leading companies. information contained in the NYSE IPO Guide. It is your responsibility to verify any information contained in the NYSE IPO Unlocking the World’s Potential. NYSEBigStage.com Guide before relying upon it.
83458_ifc_ibc_ptg01_hires.indd 1 19/08/13 7:46 PM NYSE IPO Guide
For an electronic version of the NYSE IPO Guide, please go to: www.nyx.com/ipo-guide
NYSE IPO Guide 1 Preface 5 3.4 Underwriting, marketing, 6.2 Listing standards 69 Duncan Niederauer and sale 40 NYSE Chief Executive Officer, NYSE J.P. Morgan (Investment Banking) 6.3 Trading and repurchases 70 Introduction 7 4. The IPO on-ramp under Cleary Gottlieb Steen & Advantages of a NYSE listing the JOBS Act 43 Hamilton LLP NYSE 4.1 The JOBS Act: Emerging growth company status 44 6.4 Ongoing compliance 1. Why go public? 9 Fenwick & West LLP obligations 71 1.1 Advantages of conducting NYSE Governance Services an IPO 10 4.2 Advantages of emerging J.P. Morgan (Investment Banking) growth company status 44 7. A public company and its Fenwick & West LLP shareholders 73 1.2 Potential issues 10 7.1 Proxy statement and J.P. Morgan (Investment Banking) 4.3 Process timeline 45 annual meeting 74 Fenwick & West LLP Morrow & Co., LLC 1.3 Going public without an offering 11 4.4 Conclusion 47 7.2 Providing shareholders J.P. Morgan (Investment Banking) Fenwick & West LLP with proxy material 74 Morrow & Co., LLC 2. Preparing to go public 13 5. IR and communications 49 2.1 Choosing advisors 14 5.1 Preparing an IPO 7.3 Ownership reporting by J.P. Morgan (Investment Banking) communications strategy 50 shareholders 76 FTI Consulting Cleary Gottlieb Steen & 2.2 Financial information 15 Hamilton LLP KPMG LLP 5.2 Communicating with the market post-IPO 52 7.4 Reporting by insiders 77 2.3 Antitakeover defenses and other FTI Consulting RR Donnelley governance matters 24 Cleary Gottlieb Steen & 5.3 Employee and business 7.5 Related party transactions 78 Hamilton LLP partner communications 55 Cleary Gottlieb Steen & FTI Consulting Hamilton LLP 2.4 Providing for employees 26 Cleary Gottlieb Steen & 5.4 Legal framework for 7.6 Share ownership mechanics 79 Hamilton LLP communications 56 Morrow & Co., LLC Cleary Gottlieb Steen & 2.5 NYSE Governance Services: Hamilton LLP 8. Managing risk 83 Reviewing and verifying your 8.1 Liability standards 84 program, meeting regulatory 5.5 Market intelligence and Cleary Gottlieb Steen & standards 29 surveillance 57 Hamilton LLP NYSE Governance Services Ipreo 8.2 Class action and derivative 3. The IPO process 31 5.6 Investor targeting and outreach 59 lawsuits 85 3.1 Process timeline 32 Ipreo Marsh J.P. Morgan (Investment Banking) 5.7 Market perception feedback 60 8.3 Indemnification 87 3.2 SEC registration 33 Ipreo Marsh Cleary Gottlieb Steen & Hamilton LLP 5.8 Investment community 8.4 D&O liability insurance 89 database and CRM 61 Marsh 3.3 Prospectus 35 Ipreo Cleary Gottlieb Steen & 8.5 Personal risk management 93 Hamilton LLP 6. Obligations of a public company 63 Marsh 6.1 Reporting and compliance requirements 64 8.6 Managing compliance risk 94 Cleary Gottlieb Steen & NYSE Governance Services Hamilton LLP
2 NYSE IPO Guide 9. Foreign private issuers 97 Appendix IV: NYSE financial 9.1 American depositary receipts 98 continued listing standards, J.P. Morgan (Depositary U.S. companies 115 Receipts Group) Appendix V: NYSE MKT continued 9.2 Direct equity share listing 102 listing standards 116 Cleary Gottlieb Steen & Hamilton LLP Appendix VI: Summary of filing and other requirements based on issuer 9.3 Description of IPO process category 117 timeline 102 KPMG LLP Cleary Gottlieb Steen & Hamilton LLP Contributor profiles 119
9.4 Publicity 103 Cleary Gottlieb Steen & Hamilton LLP
9.5 Registration 103 Cleary Gottlieb Steen & Hamilton LLP
9.6 Reporting requirements 104 Cleary Gottlieb Steen & Hamilton LLP
9.7 Corporate governance 106 Cleary Gottlieb Steen & Hamilton LLP
9.8 Managing risk 107 Cleary Gottlieb Steen & Hamilton LLP
9.9 Executive and employee compensation programs 108 Cleary Gottlieb Steen & Hamilton LLP
9.10 Financial information 108 KPMG LLP
Appendices 109 Appendix I: NYSE original listing standards, U.S. operating companies, REITs, and funds 110
Appendix lI: NYSE original listing standards, non-U.S. operating companies 112
Appendix III: NYSE MKT original listing standards 114
NYSE IPO Guide 3
Preface
NYSE IPO Guide 5 Preface
Congratulations on making it to this article, 16 of the top 20 technology IPOs in important step in your company’s history. 2012 chose to list with the NYSE. When a company decides to go public, By accessing the U.S. capital markets it takes a giant leap toward growing its via an IPO, you stimulate innovation, enterprise. Yet the process can be complex entrepreneurship and, ultimately, job to navigate. As you embark on your IPO creation. You create new and exciting journey, we hope you will find a valuable investment opportunities for individuals and resource in this NYSE IPO Guide, updated institutions. You fuel not only the growth of for 2013. We are grateful to our partners your company, but the growth of the overall on the project, including our publisher and economy. expert contributors. Our collective goal is We thank you for playing this important to help guide you through the process and role in America’s economic prosperity. We contribute to a positive and successful IPO look forward to helping you navigate your experience. IPO journey and seeing you through this As the world’s leading cash equities significant milestone. trading platform, the NYSE is the proud home to thousands of successful companies Duncan Niederauer of all sizes, industries and geographies. For Chief Executive Officer, NYSE more than 200 years, our markets, people and technology have helped companies unlock their potential. Since our founding in 1792, we have maintained a commitment to transparent, orderly financial markets—a promise that continues today. The NYSE’s market model offers cutting-edge technology enhanced by human judgment and accountability, access to the deepest pools of liquidity, unmatched brand visibility, as well as advocacy support on public-policy and regulatory issues affecting public companies, investors and all market participants. Launching an IPO on the New York Stock Exchange or NYSE MKT, the leading U.S. market for small- and midcap companies, carries a range of advantages, including access to capital, improved branding, and increased liquidity. Our listed companies benefit from market intelligence, investor outreach, education, and advocacy. From listing day and beyond, our people— and products—will partner with you to help your company shine. And our events, networking and unparalleled information sources help you connect with peers and other business leaders to gain new insights and perspectives. Given this, it is not surprising that we continue to rank no. 1 in terms of global IPO capital raising. We’re also proud of our leadership in technology IPOs as well as among small, growth-stage, venture-backed companies that choose our dedication to client service and extensive network of professionals to lead them through their IPO experience. As mentioned in a recent Forbes
6 NYSE IPO Guide Introduction: Advantages of a NYSE listing
NYSE IPO Guide 7 Introduction: Advantages of a NYSE listing
One of the most important decisions automation and anonymity with minimal Governance services in the IPO process is choosing the right market impact. Companies seeking to create a leadership market for listing of the company’s advantage through corporate governance, securities. The NYSE market model is Global reach and visibility risk, ethics and compliance practices can tap designed to maximize liquidity, encourage Beyond market structure and market the integrated resources of NYSE Governance market activity and help participants trade quality, a market’s size and scope should Services. NYSE Governance Services more efficiently. also be considered when choosing a listings leverages the expertise of Corpedia®, a NYSE and NYSE MKT offer a venue. The NYSE is a leading global leader in risk assessment and e-learning for combination of cutting-edge, ultrafast operator of financial markets and provider ethics and compliance, and Corporate Board technology enhanced by the commitment of innovative trading technologies. Member®, a trusted source on governance of capital from traders who are accountable Its exchanges trade equities, futures, matters for company directors and C-level to you, the issuer. This market structure options, fixed-income and exchange- executives—both NYSE companies. It establishes reliable price discovery at traded products. The exchange offers educates and works with companies to the open, the close and during periods comprehensive commercial technology, implement measurable practices that help of volatility, such as times of market connectivity and market data products and them uphold the standards expected of them dislocation. Designated Market Makers services through NYSE Technologies. by their shareholders, customers, the public (DMMs) add significant liquidity to the As an innovative applied technology and the law. market, which is further enhanced by company in the financial space, the NYSE supplemental liquidity providers (SLPs) has built a universal trading platform that Issuer advocate and floor brokers equipped with new, is being deployed to support not only The NYSE acts as an advocate for listed algorithmic trading tools. Their judgment its global exchange operations but also companies, championing policies that are and commitment of capital at the point of its customers around the world that are consistent with the values of fair, efficient sale differentiates the NYSE from every engaged in trading activities and operating and transparent markets—from short-sale other market globally. exchanges. Twin data centers in the greater trading issues to corporate governance New York and London metropolitan areas reform; from the cost of complying with the DMMs offer one-stop access to liquidity with the Sarbanes-Oxley Act of 2002 (SOX) to the DMMs are at the center of the NYSE highest levels of resilience and the lowest difficulties of adhering to the United States’ and NYSE MKT markets. DMMs act as a available latency (the time gap between intricate and idiosyncratic accounting rules. buffer against market volatility, increase trade placement and execution) to market For example, the NYSE has sent liquidity and fulfill an obligation to participants. numerous recommendations to regulators maintain a fair and orderly market. The Many listed companies return to the and lawmakers articulating companies’ NYSE features both a physical auction NYSE multiple times a year to use its views on existing or proposed rules and convened by DMMs and a completely facilities, including the NYSE trading floor, regulations, particularly those designed automated auction that includes for analyst, investor or board meetings, to make markets more fair, transparent algorithmic quotes from DMMs and other as well as corporate announcements and efficient. The exchange has advocated market makers. and events. The daily openings and for improved transparency around share Today, DMMs are among the most closings also represent an opportunity ownership, for the streamlining of and active trading firms on the NYSE. They for companies to elevate their own brand more transparency around proxy fees, as follow strict requirements to maintain an visibility. The NYSE offers a host of other well as for the passage of the Jumpstart orderly market, quote at the National Best visibility programs for its listed companies, Our Business Startups Act (the JOBS Bid and Offer (NBBO) and facilitate price including global investor conferences, Act). The NYSE believes exchanges have discovery during openings, closings and virtual investor forums and multimedia a responsibility to help small companies imbalances. channels. grow by providing entrepreneurs with a Complementing the liquidity of other source of capital. Looking beyond the IPO quote providers are SLPs: electronic, high- IR services to seek new avenues for small businesses volume NYSE market members that are Another important factor to consider to access capital, the exchange launched incentivized to add liquidity. Several SLPs when choosing a listing venue is the NYSE Big StartUp. This jobs-growth may be providing liquidity to your stock. customer service and the quality initiative connects big companies with SLPs are trading firms deploying their own of products the marketplace offers. startups and entrepreneurs, offers training, capital using proprietary trading models. Successful companies require significant mentoring and education programs, as well Also providing liquidity on NYSE resources to build shareholder value. as established a fund to ensure that capital and NYSE MKT markets are trading NYSE Market Access CenterSM is a full- is available to those least able to access it. floor brokers. These brokers leverage service solution including global visibility The NYSE will continue to have its their physical point-of-sale presence and investor relations services, which pulse on the issues affecting its listed- with information technologies and enables management to remain focused company community and provide support algorithmic tools to offer customers on its business objectives as a public in making sure their voices are heard the benefits of flexibility, judgment, company. among policymakers.
8 NYSE IPO Guide 1 Why go public?
NYSE IPO Guide 9 Why go public?
1.1 Advantages of conducting an IPO constant live coverage on publicly traded (a) Loss of privacy and flexibility J.P. Morgan (Investment Banking) companies. In addition, research analysts In order to comply with securities laws, at broker-dealers will begin to write public companies must disclose various When considering an initial public offering reports on the stock and the company, thus forms of potentially sensitive information (IPO), a company should evaluate the raising the profile of the company. Broader publicly, which regulatory agencies, as well associated pros and cons, as well as coverage across various sources will likely as competitors, can then access. Private the motivations for going public. This enhance the company’s visibility, increase companies can operate without disclosing evaluation process is best conducted in its stature with actual and potential proprietary information in a public forum. conjunction with an investment bank, customers and suppliers and thus help In addition, the focus of research analysts which can assist the company in working it grow its market share and competitive and the investor community on quarterly through the salient issues. There are position. results and stock price performance numerous advantages to going public, the may have the effect of constraining the most pertinent of which are detailed below. (d) Public currency for acquisitions operational flexibility enjoyed by the Once the company is public, it can use its management of a private company. (a) Access to capital publicly tradable common stock in whole The most common reasons for going public or in part to acquire other public or private (b) Regulatory requirements and are to raise primary capital to provide the companies in conjunction with, or instead potential liability company with working capital to fund of, raising additional capital. Publicly Correspondingly, public companies must organic growth, to repay debt or to fund tradable stock is clearly more attractive to regularly file various reports with the acquisitions. Further direct results include target shareholders than illiquid private Securities and Exchange Commission the following: company stock. (SEC) and other regulators. In order to • Once the company is public, it has comply with disclosure requirements, access to an entirely new, deep and (e) Enhanced benefits for current companies often need to completely liquid source of capital for any future employees revamp or expand their existing needs it may have. Stock-based compensation incentives documentation policies, which can be • Being publicly traded adds equity align employees’ interests with those costly and time-consuming. In addition, to the company’s capital-raising of the company. By allowing employees directors and officers are potentially toolkit, enabling the company to to benefit alongside the company’s liable for potential misstatements and achieve and maintain an optimal financial success, these programs increase omissions in the registration statement capital structure. productivity and loyalty to the company and in the company’s ongoing reporting • Following the IPO, the company will and serve as a key selling mechanism under the Securities Exchange Act of 1934 be able to tap the equity markets via when attracting top talent. Furthermore, (the Exchange Act). follow-on offerings of primary and/ issuing equity-based compensation or secondary shares, or a mix thereof. will allow the company to attract top (c) Sarbanes-Oxley After the company has been public for talent without incurring additional The Sarbanes-Oxley Act was passed one year, it will be eligible to access the cash expenses. Being a public company in 2002 as a reaction to a number of equity capital markets on demand via a provides employees with the ability to major corporate and accounting shelf registration statement. monetize the value of their stock-based scandals, which cost investors billions compensation, whether it is options or of dollars and shook public confidence (b) Liquidity event restricted stock. in the nation’s securities markets. Listing on the NYSE has numerous SOX set new standards for public benefits, not only for the company but 1.2 Potential issues companies, including requirements also for its shareholders. The IPO can be J.P. Morgan (Investment Banking) relating to accounting, corporate structured such that existing owners of governance, internal controls and the company can sell down their position While there are numerous advantages enhanced financial disclosure. SOX and receive proceeds for their shares. In to going public, there are also a few compliance can be a time-consuming addition, once the company is public, the considerations that the company, its and costly process for a newly public existing owners have a public marketplace management and shareholders should company. Although the JOBS Act relieves through which they can monetize their evaluate prior to embarking on the emerging growth companies (EGCs) of holdings in a straightforward and orderly IPO process. The most successful the obligation to have their independent fashion. companies with the smoothest IPO auditors provide an attestation on internal processes are those that fully weigh these controls under Section 404(b), they are (c) Branding event and prestige considerations before embarking on an still required to put in place internal By listing on the NYSE, the company will IPO and that begin making the necessary controls sufficient for management to receive worldwide media coverage through preparations months, if not years, provide the certifications required by the financial markets, which provide beforehand. Section 404(a).
10 NYSE IPO Guide Why go public?
(d) Cost and distraction of management shares it receives. To this end, it is difficult time and attention to control the investor base in a spin-off Going public is a relatively expensive transaction, whereas during an offering process, incurring one-off and ongoing process shares are strategically placed with costs for legal counsel, accounting those investors known to be interested in and auditing services, D&O insurance, owning them. underwriting fees, printing, as well as for additional personnel to handle expanded (b) Foreign issuers listing ADRs reporting, compliance, and investor A foreign company that is publicly traded relations activities. Furthermore, planning on an international exchange outside the and executing an IPO is a time-consuming United States can list ADRs on the NYSE process that can distract management without conducting an offering. The stock from the company’s core business. is tied to the underlying international Ongoing public company obligations security and traditionally trades in tandem post-IPO should also be expected to take with that security. While the ADR will up significant management time. give the company incremental exposure to U.S. investors, there are often limitations 1.3 Going public without an offering on certain funds holding ADRs similar to J.P. Morgan (Investment Banking) those limitations applying to the holding of international investments, and typically It is possible to go public without the liquidity and trading of ADRs can conducting a simultaneous offering, suffer when compared to direct listings of although this is typically not recommended the underlying stock. except in specific factual circumstances. Through a U.S. listing, foreign private If the company does not conduct a issuers (FPIs) can significantly improve simultaneous offering, its existing shares their access to the U.S. equity market. are listed on the exchange without being During the last decade, demand for foreign placed in the hands of new investors. equities has grown appreciably among U.S. Two examples of going public without an institutional and individual investors alike. offering are (a) spin-offs of existing groups This demand has been driven by a need or divisions of already public companies for enhanced portfolio diversification, and (b) foreign issuers listing American which holdings of foreign equities can depositary receipts (ADRs) in the United provide, and a desire to tap into the higher States. economic growth rates found in many countries outside the United States— (a) Spin-offs emerging markets in particular. ● A spin-off from an existing company occurs when a public listed company spins off a part of its business into a separate public entity listed on an exchange. Typically, that part can function as a separate, stand-alone business, with characteristics distinct from those of the parent company. In such a transaction, each existing investor in the parent company will receive shares in the spin-off entity pro rata to its ownership in the parent. For example, Investor A, which owns 5% of Parent Company A, will receive 5% of the shares outstanding in SpinCo A. In this transaction, liquidity is generally preserved for the SpinCo, but the investor churn may be considerable. For example, Investor A may own Parent Company A for its other businesses, which still reside in Parent Company A, and have no interest in SpinCo A and quickly dispose of the
NYSE IPO Guide 11
2 Preparing to go public
NYSE IPO Guide 13 Preparing to go public
2.1 Choosing advisors confirms the accuracy of certain financial they literally run the order book for the J.P. Morgan (Investment Banking) numbers included in the registration offering once it is in its marketing phase. statement. The underwriters and their Many companies will choose more than (a) Retention of advisors/service counsel will conduct in-depth due one bookrunner, in which case one will be providers diligence with the accounting firm around appointed the lead bookrunner, or “lead Going public involves assembling a large their relationship with the company, their left” bookrunner (so called because its and experienced team of professionals, independence under applicable rules and name is listed first on the top line in the including lawyers for the company and regulations, the integrity of the company’s prospectus). The company should carefully the underwriters, independent auditors, financial statements and the processes choose the lead bookrunner for the IPO underwriters, insurance brokers, financial and methodologies underpinning their because of the critical role that it plays printers and data room providers. The preparation and audit. throughout the process. As the quarterback company should carefully consider the The decision to hire auditors is of of the IPO, the lead bookrunner advises skills and qualifications of all parties it critical importance, given that they will the company on all aspects of the IPO hires, given the importance of the advice be integrally involved in the company’s process, assists the company in shaping and services they will provide throughout financial reporting for many years. Auditors its investment thesis to be used while the process as well as the messages their should be hired well in advance of preparing marketing the transaction, guides the involvement with the IPO will signal to for the IPO so that the financial statements company in its dealings with investors other advisors and to the market. The key and related disclosures to be included in during the roadshow and develops the advisors and service providers that the the registration statement are presented on optimal pricing recommendation for company and board need to evaluate and a basis consistent with prior-year audits. the IPO. hire are as follows. The SEC requires three years of annual The bookrunners as a group are closely historical audited financials (two years in involved in diligence, drafting the registration Company counsel: Company counsel work the case of emerging growth companies) statement, crafting the marketing materials, in concert with the company’s management and these would ideally have been audited creating the roadshow schedule, pricing the team, including in particular the company’s by a single firm of auditors. Although a transaction and supporting the stock in the chief financial officer (CFO) and general “Big 4” firm is typically recommended for aftermarket. The bookrunners’ research counsel, to represent the company’s legal companies that are contemplating an IPO, analysts will also be involved in undertaking interests throughout the process. They there are a number of boutique and regional due diligence on the company and play an are integrally involved in carrying out due auditing firms that are also well regarded important role in providing an independent diligence investigations into the company, and talented. The company should consider view on the company to investors during drafting the registration statement and industry expertise, reputation and fit with the roadshow. The bookrunners should be advising the company in relation to the the company, among other factors, when chosen based on their relationship with the various legal agreements it will enter into selecting an auditing firm. company, industry expertise, expertise in in connection with the IPO process, such In many cases the company requires executing IPOs, track records with issuers as lock-up and underwriting agreements, assistance in designing enhanced and investors, distribution platform, research as well as generally providing legal advice accounting processes and controls, analyst capabilities and market-making to the company throughout the process. preparing financial statements and other ability. In selecting company counsel, it information for audit and to supplement its Beneath the bookrunners sit a is important to choose a firm that has staff during the IPO process and transition further group of underwriters, typically considerable expertise and a proven to becoming a public company. The auditor known as “Co-managers.” The Co- track record of executing IPOs as well as may be unable to perform some of these managers’ investment banking teams are appropriate industry and sector expertise. tasks due to independence requirements, significantly less involved in the day-to-day At a more personal level, it is critical so a separate accounting consultant may be advisory role for which the bookrunners are to select individual law firm partners necessary. Accounting consultants provide responsible. They are, however, involved with whom the management team has useful skills, experience and resources to in most (if not all) of the due diligence good rapport, as they will be spending supplement the company’s accounting undertaken. The Co-managers’ research a considerable amount of time together and controls functions in this time of analysts will also take part in all analyst through the process. transition, though the company should diligence that is conducted, and they will ensure that it does not become reliant on also play an active role in discussing their Independent auditors and consulting them beyond the IPO and has assembled an view of the company with investors while accountants: The independent accountants appropriate team of in-house experts. the roadshow is ongoing (although separate are involved in performing an audit and, from the roadshow). The primary role of the where relevant, review of certain financial Underwriters: The underwriting syndicate Co-managers is to underwrite additional statements prepared by management and consists of various banks, each having shares in the offering, provide additional included in the registration statement, different roles and status within the research coverage post-IPO and assist in and in providing a “comfort letter” to the syndicate. The lead banks are known as market making once the stock is public. underwriters which, among other things, bookrunners and are so called because Co-managers should be chosen based
14 NYSE IPO Guide Preparing to go public
on their relationship with the company, Transfer Agent: To list its stock on the company’s IPO. Form S-3 is generally industry expertise, research analyst NYSE, the company will need to appoint used for the registration of securities by capabilities and market-making ability. a transfer agent that complies with the a company that already has securities connectivity and insurance requirements registered with the SEC, while Form S-4 Underwriters’ counsel: The bookrunners, to operate within the direct registration is generally used for the registration of on behalf of the underwriters, will select system of the Depository Trust Company debt or equity securities issued in relation a counsel to act for them in connection (DTC). to a merger or acquisition. Form S-11 may with the IPO. This role includes advising be used for the registration of securities the underwriters generally on managing Electronic Roadshow Provider: Companies issued by certain real estate companies, their own liability in connection with the undertaking an IPO typically use an including real estate investment trusts IPO, including ensuring that the offering electronic roadshow for both the or securities issued by other companies disclosure does not contain any material institutional and retail parts of the whose business is primarily that of misstatements or omissions, and that offering. This consists of a taped version acquiring and holding for investment any issues that arise in due diligence are of the roadshow, available for viewing interests in real estate. thoroughly and appropriately dealt with, electronically, and is usually arranged The SEC has specific and complex whether by disclosure or otherwise. In by the underwriters on behalf of the rules regarding the financial statements addition, underwriters’ counsel prepares company. and other financial information that must drafts of the underwriting agreement be presented in a registration statement and lock-up agreements and negotiates Stock Option / Equity Administrator: Either for an IPO. Some of the significant them with company counsel, as well as before or, if not, upon becoming a public financial statement information that may negotiating the terms of the comfort company, it is common for the company be required includes: letter to be delivered to the underwriters to appoint a third party to manage and • audited annual financial statements for by the company’s auditors. administer its stock option program(s). recent fiscal years; • unaudited interim financial statements Other advisors: In addition to the above, 2.2 Financial information for the most recently completed it may be appropriate to appoint various KPMG LLP interim period and the corresponding other advisors in connection with the period of the preceding year; IPO, such as a compensation consultant (a) Registration statement • selected financial information (usually (to advise the company on the structure An entity making an offering of securities summarized from the company’s of its stock-based compensation and registered with the SEC under the financial statements) for the past related disclosures in the registration Securities Act of 1933 (the Securities five fiscal years and most recently statement), a roadshow coach (to advise Act) must file a registration statement completed subsequent interim period the management team, alongside the and distribute a prospectus in connection and its comparative period; underwriters, on the most effective way of with the offering. The registration • separate audited annual and unaudited presenting the company and its business statement and prospectus must contain interim financial statements for during the roadshow), and an investor financial statements and other financial businesses that have been acquired relations firm. information regarding the financial or will probably be acquired that condition of the company and the results meet certain significance thresholds Other service providers: Aside from the of its operations. (described below). Depending on the advisory team, the company will require The Securities Act and the related significance of the acquisition, the the services of a number of service rules and regulations set out the company may be required to present providers in connection with its IPO: requirements that the company must one to three years of audited financial follow when making an offer to sell statements; Financial Printers and Data Room Providers: securities that do not meet one of the • separate audited or unaudited annual The company will need to appoint a limited exceptions from registration. financial statements for significant specialist firm of financial printers This framework includes the use of investments accounted for under to typeset and format its registration forms for registrations of offers (in the equity method that meet certain statement and deal with the submission of particular, Forms S-1, S-3, S-4 and S-11). significance thresholds; it to the SEC via EDGAR, as well as process These forms specify the information • financial statements of guarantors of subsequent changes to the registration that must be disclosed under Regulation securities being offered and affiliates statement resulting from SEC comments S-X and Regulation S-K. Regulation S-X whose securities collateralize the and general updates. The financial printer generally deals with financial statement securities being offered; is also likely to provide virtual data form and content, while Regulation • pro forma financial information room services to the company, enabling S-K generally deals with nonfinancial giving effect to certain events such documents required for the due diligence statement disclosures in the body of the as significant business acquisitions/ process to be uploaded and viewed registration statement. Form S-1 is the dispositions, reorganizations, unusual electronically by the working group. basic registration form used for a U.S. asset exchanges and debt restructurings;
NYSE IPO Guide 15 Preparing to go public
• segment reporting for companies • balance sheets as of the end of the two presentation that arise during the that are engaged in multiple lines of most recent fiscal years; if the company most recent period covered by the business or with operations in more has been in existence for less than financial statements that may have than one geographic area. Required one year, an audited balance sheet as a retroactive impact on the financial disclosures include separate revenues of a date within 135 days of the date statements and other financial and operating data for each segment; of filing the registration statement is information presented for previous • supplemental schedules for particular required; and years; and industries and circumstances; and • statements of income, cash flows, • the retrospective presentation of • enhanced disclosure of financial and changes in stockholders’ equity and discontinued operations consistently operational metrics for companies in comprehensive income for each of the across the periods covered by the certain industries. most recent three fiscal years or such financial information presented. shorter period as the company (and its Companies that are classified in any predecessors) has been in existence. Accordingly, a company with financial of the following categories have modified Designation of an acquired business statements covering the required number reporting requirements: as a predecessor is generally required of years should revisit those financial • “Smaller reporting company,” as where a company acquires in a single statements and ensure that they are defined by Item 10(f)(1) of Regulation succession, or in a series of related compliant with SEC requirements and S-K, generally applies to new issuers successions, substantially all of the recent SEC staff interpretations. Any with an expected public float of business (or a separately identifiable modifications to previously issued audited less than $75 million when their line of business) of another entity (or financial statements will likely require registration becomes effective. group of entities) and the company’s the independent accountant to perform • “Emerging growth company,” as defined own operations prior to the succession additional procedures. by Section 2(a) of the Securities Act, appear insignificant relative to the generally applies to companies that operations assumed or acquired. Age of financial statements: Knowing the have their initial sale of registered periods for which financial statements equity securities after December 8, Audited financial statements for the will be required to complete a particular 2011 and have “total annual gross company and its predecessor must be financing is a critical step in planning an revenues” less than $1 billion during its accompanied by an audit report issued by IPO. Financial statements must comply most recently completed fiscal independent accountants that are registered with the SEC’s age of financial statements year. with the Public Company Accounting requirements before the SEC staff will • “Foreign private issuer,” as defined Oversight Board (PCAOB) and audited in commence review of a filing. by Section 3b-4 of the Exchange accordance with PCAOB standards. If any The age of financial statements Act, generally applies to companies of the audited financial statements required included in an IPO is measured by the incorporated outside the United to be included with the registration number of days between the date of States that meet certain additional statement were audited by a predecessor effectiveness of the registration statement criteria. independent accountant, consent may be and the date of the latest balance sheet needed from that independent accountant in the filing. The latest audited annual Some additional details regarding to allow for inclusion of those financial financial statements included in the the first two categories, criteria for statements and their audit report in the prospectus cannot be more than one year qualification and some of the differences registration statement. and 45 days old. in reporting requirements are outlined The preparation of these financial If more than 134 days have lapsed since later in this chapter on pages 21–22. statements often raises certain data the latest audited annual balance sheet, See Chapter 9 for additional information collection, accounting and auditing issues, unaudited interim financial statements regarding foreign private issuers. A table such as: must also be included in the registration containing selected comparative financial • the need to reevaluate existing statement. Whenever updated interim statement reporting requirements for accounting policies and consider financial statements are included, an these categories is provided in the expanding disclosures to comply with interim income statement, statement of appendices. The following discussion reporting requirements for public comprehensive income and statement focuses on the SEC requirements for companies (e.g., segment information, of cash flows must be included for the companies that do not fall into any of the tax-rate reconciliation, earnings per corresponding period of the prior year. above three categories. share and general compliance with Interim financial statements for the Regulation S-X and SEC interpretations first and second quarters must each be Audited financial statements: Audited of generally accepted accounting updated after 134 days. Interim financial annual financial statements required to principles (GAAP)); statements for the third quarter must be be included in the registration statement • the treatment of changes in accounting updated 45 days after the following fiscal include: policies or financial statement year-end, at which time audited financial
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statements for the recently completed • long-term obligations and redeemable • progress of the negotiations, fiscal year are required. preferred stock; and considering such factors as progress • cash dividends declared per common of discussions among senior Unaudited interim financial statements: share. executives, execution of confidentiality Article 10 of Regulation S-X provides agreements, execution of letters guidance on the form and content of The selected financial data may of intent, conduct of due diligence condensed interim financial statements. also include any additional items that procedures, approvals of the board Interim financial statements (also referred would enhance an understanding of the of directors and/or shareholders and to as stub-period financial statements) company’s financial condition and trends submission to appropriate government must be included in the registration in its results of operations, such as cash regulators for acquisition approval; statement if the period between the and cash equivalents balances, working • economic and legal penalties associated date of effectiveness of the registration capital balances and summary comparative with failure to consummate, including statement and the date of the latest income statements. costs incurred to date in pursuing the audited balance sheet in the filing exceeds acquisition; and a specified number of days. See section Financial statements of an acquired • significance of required regulatory titled “Age of financial statements,” business: If the company has made approvals. above. Interim financial statements or is proposing to make a significant include a balance sheet as of the end of acquisition of a business, an investment The independent accountant that the most recent interim fiscal quarter, that will be accounted for under the has audited the financial statements statements of income, comprehensive equity method or multiple acquisitions prepared for purposes of complying income, stockholders’ equity and cash of related or unrelated businesses, it with Rule 3-05 need not be registered flows for the period between the latest may need to include audited financial with the PCAOB, unless the acquired audited balance sheet and interim statements of the acquired business plus business is a public company in the balance sheet and the corresponding appropriate unaudited interim financial United States. The number of years of period of the preceding year. The interim statements to comply with Rule 3-05 of audited financial statements required is financial statements can be presented in a Regulation S-X. determined by the size of the acquisition condensed format but often are presented Whether a proposed acquisition and its significance relative to the in a noncondensed format. The interim requires inclusion of financial statements company based on the following three financial statements may be unaudited, in a registered offering depends on the significance tests under Rule 1-02(w) of but the company’s underwriters might significance of the acquisition and whether Regulation S-X: request them to be reviewed by an the acquisition is probable. The SEC has • the amount of the company’s independent accountant prior to filing issued no formal guidance on the standard investment in the acquired business as part of their requested comfort letter of probability for business combinations.1 compared to its total assets; procedures. Generally, the determination is based on • the total assets of the acquired the preponderance of evidence supporting business compared to the company’s Selected financial information: Item 301 the conclusion that an acquisition is total assets; and of Regulation S-K requires selected probable. However, the SEC views • the pre-tax income from continuing income statement and balance sheet public announcement of a business operations of the acquired business data for each of the last five fiscal years combination as strong evidence of a compared to the company’s pre-tax (or, if shorter, for the life of the company probable acquisition. The company must income from continuing operations and its predecessor entities) and the assess the probability of an acquisition by (“pre-tax income from continuing most recent interim period to be included considering factors such as the following operations” is income before income in the registration statement together in addition to the advice of its securities taxes, extraordinary items and with comparative information for the counsel: the cumulative effect of a change corresponding interim period of the in accounting principle exclusive prior year. The purpose of the selected of amounts attributable to any financial data is to highlight certain 1 The SEC Codification of Financial Reporting noncontrolling interests). significant trends in the company’s Policies, Section 506.02(c)(ii), provides the The rules should be consulted as financial condition and results of its following: “Guidance as to when consummation they contain specific instructions for operations. It must include: of a transaction is probable cannot be given modifying the calculation under certain because such a determination is dependent • net sales or operating revenues; upon the facts and circumstances. In essence, circumstances. • income (loss) from continuing however, consummation of a transaction The test generally is performed using operations; is considered to be probable whenever the the company’s and the target’s most • income (loss) from continuing registrants’ financial statements alone would recent audited financial statements prior not provide investors with adequate financial operations per common share; information with which to make an investment to the date of acquisition. The following • total assets; decision.” table summarizes the general rules for
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General rules for acquisitions more than 75 days pre-IPO set of disclosure requirements under Rule 3-14 of Regulation S-X, which addresses Acquisition criteria Reporting requirement3 income-producing real estate operations such as apartment buildings and shopping The acquisition does not exceed 20% for No audited financial statements required. malls. Rule 3-14(a) requires as follows: any of the three significance criteria. • Audited income statements must be provided for the three most recent fiscal The acquired business (or multiple One year of audited financial statements years for any such acquisition or probable acquisitions of related businesses) required. acquisition that would be “significant” exceeds 20% but not 40% for any of the (generally, that would account for 10% three significance criteria. or more of the company’s total assets as of the last fiscal year-end prior to There have been multiple acquisitions of One year of audited financial statements the acquisition). If the property is not unrelated businesses whose significance required for a mathematical majority of the acquired from a related party, only one is less than 20% individually but more individually insignificant acquisitions. year of income statements must be than 50% for any of the three significance provided if certain additional textual criteria when aggregated. disclosure is made. Rule 3-14(a) also requires certain variations from the The acquired business (or multiple Two years of audited financial statements typical form of income statement. acquisitions of related businesses) required. • If the property is to be operated by exceeds 40% but not 50% for any of the the company, a statement must be three significance criteria. furnished showing the estimated taxable operating results of the The acquired business or any acquisition Three years of audited financial company based on the most recent that is probable at the time of the statements required, unless the business 12-month period, including such offering exceeds 50% for any of the has under $50 million in revenues, in adjustments as can be factually three significance criteria (or securities which case only two years of audited supported. If the property is to be are being registered to be offered to the financial statements required. acquired subject to a net lease, the shareholders of the acquired business). estimated taxable operating results shall be based on the rent to be paid for the first year of the lease. In either acquisitions that occurred more than 75 involving companies whose operations have case, the estimated amount of cash to days before the offering.2 been built by the aggregation of discrete be made available by operations shall In addition, if audited financial businesses that remain substantially intact be shown. An introductory paragraph statements are required, applicable after acquisition. SAB 80 allows first- is required stating the principal interim financial information that would time issuers to consider the significance assumptions which have been made in be required according to the guidelines of businesses recently acquired or to be preparing the statements of estimated described in “Age of financial statements” acquired based on the pro forma taxable operating results and cash to be and “Unaudited interim financial financial statements for the issuer’s most made available by operations. statements” must also be included. recently completed fiscal year. While • If appropriate under the circumstances, Staff Accounting Bulletin No. 80 (SAB compliance with this interpretation requires a table should be provided disclosing 80) provides a special interpretation of an application of SAB 80’s guidance and the estimated cash distribution per unit Rule 3-05 of Regulation S-X for IPOs examples on a case-by-case basis, this for a limited number of years, with the interpretation allows currently insignificant portion thereof reportable as taxable business acquisitions to be excluded from income and the portion representing the financial statement requirements, while a return of capital together with an 2An exception to the general requirements occurs for an individual or multiple acquisitions that still ensuring that the registration statement explanation of annual variations, if exceed 50% of any of the significance criteria, will include not less than three, two and one any. If taxable net income per unit will for which, if they have closed within the 75-day year(s) of financial statements for not less become greater than the cash available period prior to the offering or are “probable” at than 60%, 80% and 90%, respectively, of for distribution per unit, that fact and the time of the offering, the financial statements described above will be required. the constituent businesses of the issuer. the approximate year of occurrence Audited financial statements for the earliest The acquisition or probable acquisition should be stated, if significant. of the three fiscal years required may be omitted of real estate operations is subject to its own if net revenues reported by the acquired The SEC staff has noted that one business in its most recent fiscal year are less element used in distinguishing a real than $50 million. Unaudited interim financial 3The number of years for which balance sheets statements may need to be included, depending and income statements are required to be estate operation from an acquired business on the time of year that the offering takes place. presented is based upon the level of significance. subject to Rule 3-05 of Regulation S-X is
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the predictability of cash flows ordinarily financial statements by the company’s Pro forma financial information: Pro forma associated with apartment and commercial principal independent accountant. If financial information may be required to property leasing, which generally includes the registrant’s principal independent assist investors in understanding the nature shopping centers and malls. Nursing accountant makes reference to the audit of and effect of significant acquisitions, homes, hotels, motels, golf courses, auto the investee in its report, then the investee dispositions, reorganizations, unusual dealerships, equipment rental operations audit must be performed by an independent asset exchanges, debt restructurings and other businesses that are more accountant registered with the PCAOB.4 or other transactions contemplated in susceptible to variations in costs and Under Rule 4-08(g) of Regulation S-X, the prospectus. In such cases, historical revenues over shorter periods due to market for any unconsolidated subsidiaries and financial information is adjusted in thepro and managerial factors are not considered to 50%-or-less owned entities accounted forma financial information to reflect the be real estate operations. In such cases, the for under the equity method that meet transactions and the impact of the offering Rule 3-05 requirements will apply. any of the three Rule 1-02(w) criteria at on the company’s capital structure. All the greater than 10% but not more than significant assumptions must be disclosed. Financial statements of an equity method 20% significance level, summary financial Guidance regarding pro forma financial investment: If the company holds an information as described by Rule 1-02(bb) information is provided in Article 11 of investment in unconsolidated subsidiaries must be presented in the notes to the Regulation S-X.5 Rule 11-01 of Regulation or 50%-or-less owned entities accounted financial statements. S-X specifies the circumstances under for under the equity method that exceeds which pro forma financial information is significance thresholds as defined by Rule Financial statements of guarantors and required in filings with the SEC and sets 3-09 of Regulation S-X, separate financial for collateralizations: A guarantee of a forth general guidelines for the content of statements for the investee company public security (e.g., a guarantee of a public that information. Article 11 requires: may need to be filed with the registration debt or public preferred equity security) • a condensed pro forma balance sheet as statement, including an audit for certain is itself considered a security that must of the end of the most recent period periods. be registered under the Securities Act, for which a consolidated balance sheet Significance of investees is evaluated absent an applicable exemption. Rule of the company is required, unless the under Rule 1-02(w) of Regulation S-X 3-10 of Regulation S-X requires each transaction is already reflected in that based on the following tests: guarantor of registered securities to file balance sheet; and • the company’s and its other subsidiaries’ the same financial statements required • a condensed pro forma income investments in, and advances to, the for the company in the filing. If certain statement for the company’s most investee exceed 20% of the total assets criteria are met, condensed consolidating recently completed fiscal year and of the company and its subsidiaries financial information may be provided in the most recent interim period of the consolidated as of the end of the most the company’s financial statements in lieu company, unless the historical income recently completed fiscal year; and of separate audited financial statements, statement reflects the transaction for • the company’s and its subsidiaries’ unless a guarantor is newly acquired. the entire period. equity in the pre-tax income from Under Rule 3-16 of Regulation S-X, continuing operations of the investee audited financial statements must also Pro forma adjustments related to the exceed 20% of such income of be filed for each affiliate whose securities pro forma condensed balance sheet and the company and its subsidiaries collateralize any class of registered condensed income statement must include consolidated for the most recently securities if the greater of the aggregate adjustments which give effect to events completed fiscal year. principal amount, par value, book value or that are: market value equals 20% or more of the • directly attributable to the transaction; If either of these tests is met, separate principal amount of the secured class of • factually supportable; and financial statements of the investee must securities being offered. • expected to have a continuing impact be filed. Insofar as is practicable, the If any of the above situations is on the company (applicable only to the separate financial statements required applicable, Rules 3-10 and 3-16 should condensed income statement). shall be as of the same dates and for the be reviewed to determine the extent same periods as the audited consolidated of financial information required to be financial statements required to be filed included with the registration statement. by the company. The required financial 5Certain pro forma disclosures are required statements of the investee must be audited by GAAP (e.g., Financial Accounting 4 only for those fiscal years in which either of The auditor of the financial statements of Standards Board (FASB) Accounting Standards the nonissuer entity must be registered if, Codification (ASC) Topic 805 [Statement of the above tests is met; the remaining years in performing the audit, the auditor played a Financial Accounting Standards (SFAS) 141R], can be unaudited. These audited financial “substantial role” in the audit of the issuer, as ASC Topic 718 [SFAS 123(R)] and certain statements may or may not be required to that term is defined in PCAOB Rule 1001(p)(ii). Emerging Issues Task Force (EITF) consensuses) be audited by an independent accountant If the “substantial role” test is not met, the firm and should be provided where applicable. is not required to be registered. The inclusion Those presentations may differ in style and registered with the PCAOB, depending on or exclusion of such a report under Rule 2-05 of content from the requirements of Article 11 of the level of reliance placed on these audited Regulation S-X does not affect this determination. Regulation S-X.
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As a result, any pro forma adjustments decisions about resources to be profit or loss, total assets attributable for expected future cost synergies or allocated to the segment and assess its to that segment, revenues from external other similar adjustments that are not performance; and customers and a reconciliation to the specifically supported by the acquisition • for which discrete financial information corresponding consolidated amounts. documents will generally not be allowed. is available.7 Furthermore, disclosure of items If a business or assets are disposed of (or such as interest revenue and expense, planned to be disposed of) after the latest Determining whether the company depreciation and related expense, balance sheet presented in the registration has multiple operating segments involves equity method investments and capital statement, but before the effective date of an assessment of how management expenditures may be required under ASC the IPO, the effect of the disposal should runs its business. Aggregating two or Topic 280 if such amounts are included be reflected in the company’spro forma more operating segments may be highly in the measure of segment profit or financial statements that are prepared in subjective and involves consideration loss or in the determination of segment accordance with Article 11. of the similarities in the economic assets, as reviewed by the company’s characteristics and in other factors such as chief operating decision maker on a Segment reporting: For companies that the nature of the products and services, the segment basis. operate in multiple lines of business or nature of the production process, customer ASC Topic 280 also requires certain geographic regions, additional disclosure type or class, distribution channels and enterprise-wide disclosures regardless data may be required to be presented, applicable regulatory environment. of whether the company has multiple which includes separate revenues and The company must provide required reportable segments, if not already operating results information for each disclosure information about an operating provided as part of the reportable major line of business or geographic region. segment if it meets any of the following operating segment information. These ASC Topic 280, “Segment Reporting” (ASC thresholds: disclosures include revenues from external Topic 280), requires disclosures regarding • Its reported revenue (including both customers for each product and service or segments for each year for which an sales to external customers and each group of similar products, as well as audited statement of income is provided. intersegment sales) is 10% or more services and revenues by geographic area. Item 101(b) of Regulation S-K requires of the combined revenue (internal For interim periods, disclosure for disclosure of certain financial information and external) of all reported operating each segment must include revenues about industry segments, including segments. from external customers, intersegment revenues from external customers, • The absolute amount of its reported revenues, a measure of profit or loss, profitability measures and total assets for profit or loss is 10% or more of the a reconciliation to the company’s each of the last three fiscal years presented. greater, in absolute amount, of: consolidated information and material ASC Topic 280 establishes standards • the combined profit of all operating changes to total assets. for the way that public business enterprises segments that did not report a loss; or The time and effort required in report information about operating • the combined loss of all operating identifying, gathering and reporting financial segments in annual financial statements, segments that did report a loss. information for operating segments may requires those enterprises to report • Its assets are 10% or more of the be significant. A first-time issuer should selected information about operating combined assets of all operating carefully consider the requirements for segments in their interim financial reports segments. segment reporting and revisit its reporting and also establishes standards for related obligations whenever (1) it enters into new disclosures about products and services, The company must disclose the lines of business, (2) it exits an existing line geographic regions and major customers. factors used to identify the enterprise’s of business or engages in other restructuring It defines an “operating segment” as a reportable segments, including the activities or (3) the company’s chief component of an enterprise: basis of organization and the types of operating decision maker begins to analyze • that engages in business activities products and services from which each its business in a new or a different way. from which it may earn revenues and reportable segment derives its revenues. incur expenses (including revenues and The company must also report for each Supplemental schedules for certain expenses relating to transactions with of its reportable segments a measure of transactions: Rule 5-04 of Regulation other components of the same enterprise); S-X requires that a number of • whose operating results are regularly supplemental schedules be provided for operating decision maker of an enterprise is its reviewed by the enterprise’s chief chief executive officer (CEO) or chief operating particular industries and under certain operating decision maker6 to make officer, but it may be a group consisting of, for circumstances. Each of these schedules example, the enterprise’s president, executive contains additional financial information vice presidents, and others. that must be audited by the company’s 6The term chief operating decision maker 7Discrete financial information is considered to independent accountant: identifies a function, not necessarily a manager be any measure of a business activity’s profit or • Schedule I—Condensed Financial with a specific title. That function is to allocate loss. Depending upon the circumstances, this resources to and assess the performance of measure could be comprised of revenue and/or Information of Registrant must be the segments of an enterprise. Often, the chief expenses. filed when the restricted net assets of
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consolidated subsidiaries exceed 25% subsidiaries as of the beginning of the no market price for their outstanding of consolidated net assets as of the fiscal year. For purposes of this test common equity) and has annual end of the most recently completed only, the proportionate share of the revenues of $50 million or less, upon fiscal year. For purposes of this test, company and its other subsidiaries entering the system; or restricted net assets of consolidated in the reserves for unpaid claims • in the case of an initial registration subsidiaries are the amount of the and claim adjustment expenses of statement, had a public float of less company’s proportionate share of net 50%-or-less owned equity method than $75 million as of a date within assets of consolidated subsidiaries investees taken in the aggregate after 30 days of filing its initial registration (after intercompany eliminations), intercompany eliminations shall be statement. which, as of the end of the most recent taken into account. fiscal year, may not be transferred to In the case of a company filing an the parent company by subsidiaries Companies in specific industries, initial registration statement, the public in the form of loans, advances or cash including insurance, may have additional float is computed by multiplying the dividends without the consent of a supplemental information requirements aggregate worldwide number of common third party (e.g., lender, regulatory that vary from those listed above. The equity shares held by nonaffiliates before agency, foreign government). schedule information may be provided the offering plus the number of common • Schedule II—Valuation and Qualifying separately or in the notes to the audited shares being offered in a Securities Act Accounts must be filed in support financial statements. registration statement by the estimated of valuation and qualifying accounts public offering price of the common equity (e.g., allowance for doubtful accounts, Industry guides: Item 801 of Regulation shares. allowance for inventory obsolescence) S-K sets out five industry “guides” If smaller reporting company included in each balance sheet. requiring enhanced disclosure of financial status is achieved, the registration • Schedule III—Real Estate and and operational metrics for companies in statement may comply with the SEC’s Accumulated Depreciation must be certain industries: scaled disclosure system. The scaled filed for real estate held by companies • Guide 3—Statistical Disclosure by disclosure requirements are integrated with a substantial portion of their Bank Holding Companies; into Regulation S-X (Article 8 for business involving acquiring and • Guide 4—Prospectuses Relating to financial statement requirements) and holding investment real estate, Interests in Oil and Gas Programs; Regulation S-K (for nonfinancial statement interests in real estate or interests in • Guide 5—Preparation of Registration disclosure requirements). A few of the other companies a substantial portion Statements Relating to Interests in Real key differences in financial statement of whose business is acquiring and Estate Limited Partnerships; requirements are as follows: holding real estate or interests in real • Guide 6—Disclosure Concerning • Audited annual financial statements— estate for investment. Real estate used Unpaid Claims and Claim Adjustment These include statements of income, in the business is excluded from the Expenses of Property-Casualty cash flows, changes in stockholders’ schedule. Insurance Underwriters; and equity and comprehensive income for • Schedule IV—Mortgage Loans on • Guide 7—Description of Property by the past two years, as contrasted to Real Estate must be filed by certain Issuers Engaged or to Be Engaged in three years for large companies. The companies for investments in mortgage Significant Mining Operations. balance sheet requirement is the same. loans on real estate. • Financial statements for significant • Schedule V—Supplemental Guidance for disclosures for companies acquisitions—Rule 8-04 of Regulation Information Concerning Property- with oil and gas operations is provided in S-X requires two years of financial Casualty Insurance Operations Item 1200 of Regulation S-K. statements for a business acquired must be filed when the company, its by a smaller reporting company if subsidiaries or 50%-or-less owned Smaller reporting companies: Smaller the acquisition is greater than 50% investees accounted for under the reporting companies, as defined by Item significant. Under Rule 3-05, a third year equity method have liabilities for 10(f)(1) of Regulation S-K, may be eligible is required if the acquisition is greater property-casualty (P/C) insurance for scaled reporting requirements. These than 50% significant and the acquired claims. The schedule may be omitted scaled requirements streamline and business had revenues of at least $50 if reserves for unpaid P/C claims simplify the disclosure requirements to million in its most recent fiscal year. and claims adjustment expenses of make it easier and less costly for smaller • Audited financial statements the company and its consolidated reporting companies to comply. Under the for significant equity method subsidiaries, its unconsolidated rules, a company qualifies as a “smaller investments—Article 8 does not subsidiaries and its 50%-or-less reporting company” if it: require the filing of separate financial owned equity method investees did • has a public common equity float of statements of investees as would not, in aggregate, exceed one-half less than $75 million; or be required under Rule 3-09, but of common stockholders’ equity of • has no public float (e.g., companies summarized financial information the company and its consolidated with no common equity outstanding or must be disclosed.
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If the company qualifies as a requirement that registrants present • An EGC is exempt from the requirement smaller reporting company in an initial unaudited financial statements for for auditor attestation of internal control registration statement, it must reassess the most current interim period and over financial reporting (ICFR).14 this status at the end of its second fiscal comparative prior year period in • An EGC may report using the scaled quarter in each subsequent fiscal year. registration statements. disclosure requirements available If the company fails to meet the test, a • An EGC may comply with the to smaller reporting companies for transition to the larger company reporting management’s discussion and analysis executive compensation disclosures. requirements commences with the first (MD&A) and selected financial data quarter of the subsequent fiscal year. requirements of Regulation S-K by An EGC retains this status until the presenting information about the same earliest of: Emerging growth company: The JOBS periods for which it presents financial • the last day of its fiscal year in which Act created a new category of public equity statements in an initial registration it has total annual gross revenues of $1 issuers called emerging growth companies statement. billion or more; that are exempt from certain SEC reporting • Because an EGC is not required • the last day of its fiscal year following requirements for up to five years. (For a to present more than two years of the fifth anniversary of the date of the more detailed discussion of the JOBS Act, audited financial statements in a first sale of common equity securities see Chapter 4). An EGC8 is a company that registration statement for an initial pursuant to an effective registration has not had an initial sale of registered public offering of its common equity statement; equity securities on or before December 8, securities, the SEC will not object • the date on which the issuer has issued 2011 and has total annual gross revenues9 to limiting the years of financial more than $1 billion in nonconvertible less than $1 billion for its most recently statements provided under Rule 3-05 debt during the previous three-year completed fiscal year. or 3-09 to two years. The SEC period; or Among the reduced reporting staff would also not object if an • the date on which the issuer is deemed requirements allowed an EGC under the EGC voluntarily provides the third to be a large accelerated filer. JOBS Act are the following: year of audited financial statements • An EGC may limit presentation of in the initial registration statement An EGC must continually revaluate audited financial statements in the but chooses to provide only two its ability to qualify for EGC status. If initial registration statement of its years of audited financial statements an entity fails to qualify for EGC status common equity securities to the two under Rules 3-05 or 3-09 when at any point, the entity must follow most recent fiscal years.10,11,12 The three years of audited financial certain transitional rules and commence JOBS Act does not change the existing statements may otherwise be complying with non-EGC reporting required based on the significance requirements during the year in which the of the acquired business or equity entity no longer qualifies as an EGC. See 8An FPI may also qualify as an EGC. method investment. An EGC will Chapter 4 for further details of transitional 9“Total revenues” means the revenues presented also be allowed to apply these offboarding rules. in a company’s most recent fiscal year’s income accommodations to any other statement prepared under U.S. GAAP (for registration statement it files. Summary: Planning an IPO is a complex domestic companies and foreign companies • An EGC may apply the effective date undertaking that requires the compilation that present a reconciliation to U.S. GAAP) or International Financial Reporting Standards provisions applicable to nonpublic and collection of numerous financial (IFRS) as issued by the International Accounting companies for adoption of new or statements and related information. Standards Board (IASB). revised accounting standards issued by Knowing what financial statements and 10The JOBS Act provision that permits an EGC to the FASB but must make this choice at other information will be required to file only two years of audited financial statements the time the company is first required complete a registration statement is a is limited to the registration statement for the EGC’s initial public offering of common equity to file a registration statement, critical step in planning an IPO. The securities. However, an EGC will not be required periodic report, or other report with company should consult the SEC rules to include, in its first annual report on Form 10-K the SEC.13 and regulations, as well as its auditor or on Form 20-F, audited financial statements for any period prior to the earliest audited period included in the registration statement filed in connection with its initial public offering of 13 14 common equity securities. EGCs must adhere to public company effective Under existing SEC rules and regulations, dates for all standards issued prior to April 5, newly public entities, other than nonaccelerated 11 If an EGC is not a smaller reporting company, 2012. Any update to the FASB’s Accounting filers, begin complying with Section 404(b) it must include three years of audited financial Standards Codification after April 5, 2012 would auditor attestation of the Sarbanes-Oxley statements in its initial registration statement be eligible for adoption according to the private Act with their second annual report filed with for debt securities. company timetable. If an EGC elects to comply the SEC. An EGC will be exempt from this 12An FPI qualifying as an EGC may comply with with public company effective date provisions, it requirement as long as it qualifies as an EGC; the scaled disclosure provisions in a Form 20-F. must comply with them consistently for all new however, management’s reporting on internal If an FPI takes advantage of any benefit available and revised standards throughout the period it control is still required, as according to Section to an EGC, then it will be treated as an EGC. qualifies as an EGC. 404(a).
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and other advisors, to determine what • providing preliminary assessment of also be required to file current reports financial information requirements might effectiveness of design and operation of on Form 8-K after the occurrence of be applicable in its circumstances to allow key controls; certain specified material events within for the planning of sufficient time and • remediating missing and ineffective four business days of the occurrence of resources to complete the filing within controls; the event. Many private companies are manageable time frames. • demonstrating consideration of the unaccustomed to formal accounting closes regulatory risks and environment; and for interim reporting periods and the strict (b) Transition to being a public company • conducting final tests that support an reporting time lines for both quarterly and The completion of an IPO marks the start assertion of effective internal controls annual periods. In anticipation of going of life as a public company. One of the first over financial reporting. public, the following are some actions that challenges for a successful transition is the company should take in advance of the adapting to the new, often more complex, Section 6.1 contains a more detailed IPO: requirements of operating as a public discussion of the SOX compliance • Evaluate the current financial company. New processes may need to requirements. close process in light of post-IPO be adopted, and management must now requirements and consider early consider how decisions affect a much larger Financial accounting department: implementation of an accelerated close group of stakeholders and be conscious of The process leading up to filing of the time line that will be required of an ensuring regulatory compliance. Some of the registration statement requires the SEC issuer, including the gathering of transition areas that should be considered gathering of various financial information. disclosure information for notes to going forward are outlined below. The company can utilize external advisors the financial statements. Reducing the to assist in gathering this information, financial close cycle time will most Controls and procedures: The level of but once an IPO is completed, internal likely involve changes in processes, IT investor confidence in the reliability of resources should be in place to support systems and possibly resources. The financial disclosures can be a key factor the ongoing reporting needs of a public transition to an established process can in a public company’s success. To help company. The company will need to: take time, but it is imperative that these ensure investor—and market—confidence, • prepare ongoing reports that provide modifications be in place before the first a public company’s internal controls financial and nonfinancial information Form 10-Q or Form 10-K is required. systems must comply with all regulatory at a level of detail and in a time frame • Evaluate the finance and accounting requirements. These requirements include that generally was not required in the departments’ organizational structure quarterly certifications by executives and past; and skill sets of key personnel in light an audit report on the effectiveness of • develop a public entity organizational of post-IPO reporting requirements, internal control over financial reporting structure and recruit appropriate and identify gaps. Gaps can be filled by required by Section 404 of the Sarbanes- personnel to satisfy its public reporting recruiting additional staff and providing Oxley Act, typically as of the second fiscal requirements; training for current personnel. year-end after the IPO (although an EGC • develop sufficient resources or • Draft an accounting policy manual. is exempt from the auditor attestation processes to perform regular and Many private companies have informal requirement in Section 404(b) of the consistent financial close and policies and procedures, but public Sarbanes-Oxley Act for as long as it reporting processes to meet reporting companies should have documented qualifies as an EGC). requirements; accounting policies as a component of Complying with Section 404 requires • develop or enhance its accounting and their internal control environment. a significant investment of resources over reporting policies and procedures; several months to move through a project • enhance the training and skills of Budgeting and forecasting: After the plan that includes a number of phases, its existing workforce involving IPO, investors will expect the company such as: accounting and reporting requirements to implement the plans presented in the • assessing financial statement and of public companies; prospectus. The following are some of the general and specific fraud risks; • develop or enhance its budgeting, organizational changes that the company • evaluating the control environment, forecasting and financial modeling should consider: entity-level controls and general IT processes to reflect its operations • Review business strategies, forecasting controls; as a stand-alone entity with public processes and cost infrastructure • identifying significant accounts and shareholders; and in order to help ensure its disclosures; • change underlying business processes competitiveness and meet shareholder • defining significant locations and to meet appropriate metrics or best-in- expectations. business units; class services. • Develop an investor relations • documenting processes involving major infrastructure and resources. classes of transactions; After the IPO, the company will be • Develop or enhance budgeting, • identifying significant risk points and subject to strict SEC reporting time lines forecasting and financial modeling key mitigating controls; for quarterly and annual reporting. It will processes.
NYSE IPO Guide 23 Preparing to go public
• Determine key performance indicators subsequent period forecasts reflecting The IT effort required for compliance to be used to communicate business the impacts of such changes. Ideally, the with establishing, evaluating and performance to stakeholders that are in subsequent year’s budgeting process obtaining an audit of ICFR should not be line with industry practices. should be embedded in the forecasting underestimated. Information technology • Design appropriate compensation process during the latter part of the plays a large role within the internal programs that align and incentivize current fiscal year. control structure and is an integral part employee behavior and focus with of SOX compliance. A systems-embedded the overall business strategy and key XBRL: During 2009, the SEC issued new approach to the financial reporting process objectives. rules and related guidance that requires can include automated key controls to public companies (both domestic and reduce the overall number of controls. The company’s strategic plan should foreign private issuers) to provide their IT strategy can be a key driver in encompass both external and internal financial statements to the SEC in a accelerating the accounting close process factors that span the entire organization. separate exhibit to certain reports and through the reduction or consolidation of The plan establishes the framework for registration statements in an interactive multiple general ledgers, charts of accounts the annual budget, providing the top- data format using Extensible Business and reporting systems. For systems that down direction, financial targets and key Reporting Language (XBRL). The rules are have disparate interfaces or lack real- assumptions. designed to make it easier for analysts time reporting capabilities, modifying The annual budget should focus on and investors to locate and compare data the existing system’s capabilities or key operational drivers of the business on financial and business performance building the case for an enterprise resource for both revenue and cost with key inputs in a standard format across all public planning system may be warranted. from senior management. The budget companies. The XBRL rules also require Greater use of IT systems can also process should be flexible and have a short public companies to post their XBRL enhance the budgeting and forecasting cycle time to accommodate market-driven filings on their corporate websites. With process and allow for the leveraging of changes. interactive data, all of the items in a information more effectively. Communication Forecasting should be a periodic financial statement are labeled with unique requirements to key stakeholders after the update to the budget (and strategic plan) computer-readable “tags,” which make IPO about the performance of the company that reflects changes and impacts actually financial information more searchable on should be aligned with external reporting. being experienced in the marketplace. the Internet and readable by spreadsheet Implementation of an integrated system Although implementation of forecasting and other software. providing both external and management is generally the domain of the finance XBRL is not required for IPOs, but reporting can provide timely, quality department, ownership of the process a company with an IPO that becomes information. belongs with the recipients of the results, effective will be required to comply including operational management. with the XBRL rules commencing with Summary: Becoming a public company The process should involve a focused, periodic filings starting with its first often requires management to make bottom-up process based on specific, Form 10-Q filed after the registration numerous improvements to business measurable drivers and should closely statement becomes effective. The rules processes and the underlying systems as involve operational managers. should be consulted regarding when initial they react to the demands of investors, If the company does not have adequate compliance with the rule commences, government regulators and other sales forecasting, it may consider using as this will be dependent on the timing stakeholders. Preparing for this change key performance indicators, industry of the IPO. in status may require considerable time trends or other third-party data to and effort. To achieve a more seamless benchmark target sales numbers. Technology considerations: Information transition, the company should consider Similarly, external cost trends and technology is a critical enabler for the taking steps to operate and report like a industry averages can help quantify or company in creating value and achieving public company before the IPO becomes even qualify expense forecasts. Creating financial reporting and regulatory effective to ease the post-IPO transition. standardized relationships between compliance. Companies that have not internal and external financial and adequately invested in technology and 2.3 Antitakeover defenses and other operational sources can provide both tools for financial reporting and business governance matters insight and consistency in the forecasting operations may struggle with technology Cleary Gottlieb Steen & Hamilton LLP process, and also identify a baseline to and system limitations in meeting the measure the company’s performance needs of a public company. This may Before going public, the company will need relative to the industry. require additional resources to ensure to ensure that its governance structure meets At a minimum, forecasts should be business processes are adapted to meeting SEC and stock exchange requirements. This updated semiannually, but more frequent IT system needs. In addition, the company is the ideal time for the company to consider updates are preferable. The actual results may need to implement new technology organizational matters more generally, may prompt changes in strategies, and systems or customize existing systems implement desired changes to the company’s priorities and resource allocation, with and reports. jurisdiction of organization, subsidiary
24 NYSE IPO Guide Preparing to go public
framework and capital structure and put company must have an audit committee (usually half price) if a hostile bidder in place a strong board and governance meeting SEC and stock exchange rules on acquires a certain percentage (usually structure, including antitakeover defenses, composition, independence and financial 15% or 20%) of the outstanding for a number of reasons: expertise and under stock exchange shares. This dilutes the voting • Changes after the IPO will be very rules must also have compensation and power of the bidder and makes it visible, likely requiring disclosure, nominating committees made up of more expensive to acquire control governance document posting and independent directors. As required under of the target. Although their terms potential filings. the Dodd-Frank Wall Street Reform and and conditions vary considerably, • Post-IPO changes may require Consumer Protection Act (the Dodd- the purpose of a poison pill is to stockholder approval, which may be Frank Act), the stock exchange rules now force potential bidders to negotiate difficult to obtain. also contain additional independence with the target’s board of directors. • Some governance requirements, such requirements for compensation The rights usually have redemption as identifying independent directors, committee members. Some of these provisions that permit the company should be initiated early in the process, governance requirements can be phased to redeem the rights at a nominal as they may take considerable time. in following the IPO, but the company price. If the acquisition is friendly and generally must be fully compliant within the board approves the deal, it may It is important that the company work one year. “Controlled companies,” or use this feature to redeem the pill or closely with the underwriters to develop companies with a majority stockholder, otherwise exempt the transaction. a properly balanced board and governance are exempt from most of these • Controlling changes to the board of structure, as certain elements may affect requirements except the audit committee directors—Various charter or bylaw investor interest and, ultimately, pricing. The rules. Other SEC and U.S. tax rules also provisions related to changes in company should also anticipate the makeup typically influence the composition of the directors can make it more difficult of its stockholder base. What percentage of compensation committee, as discussed for hostile bidders or dissidents stockholders are likely to be institutional in Section 2.4, as well as “interlocking” to influence and control a board investors compared to retail investors? relationships with other companies. of directors, although these are Are there likely to be any hedge funds or Beyond the required structures, the also under pressure from activist stockholder activists? Going forward, these company should carefully consider the stockholders. For example, with a characteristics of the stockholder base will be right mix of board member qualifications; typical classified or staggered board an important element of investor relations. and a larger board, with more than seven having three classes of directors, Governance matters have become a central or eight members, might warrant the each elected for a three-year term, focus of activist stockholders, as well as formation of other standing committees, only one-third of the directors investment advisory firms such as ISS and such as a finance committee or a risk are up for renewal at each annual Glass Lewis, which evaluate a company’s committee. meeting. The company may wish to governance structure in making stockholder avoid other provisions that make it voting recommendations. Antitakeover defenses: Antitakeover easier for an insurgent group to force This chapter describes the governance defenses are a key element of pre-IPO changes in directors and thus gain structure for a U.S. domestic company and, governance planning. Achieving the control, such as cumulative voting, in particular, a Delaware corporation. For a right balance is important, as too strong which can result in the election of discussion of governance issues relevant to a defense profile may be disfavored by a director with the support of only foreign private issuers, see Section 9.7. investors, which often benefit from stock a small percentage of stockholders, price premiums in a takeover context; and provisions allowing stockholders Board of directors and board committees: many of these protections may attract to remove directors without cause, A public company’s board composition negative stockholder attention and increase the number of directors and structure are often very different proposals for change down the road. The without limit and fill board from those of a private company. A defenses an IPO company may consider vacancies. The company should U.S. public company must comply with include the following: also consider whether to adopt a governance requirements imposed by • Poison pill (or “rights plan”)— plurality or majority voting standard stock exchange listing requirements and Increasingly a focus of pressure for director elections. While SEC rules, as well as related disclosure from activist stockholders, the plurality voting generally increases requirements. For more information about poison pill remains the most potent the likelihood that management’s these stock exchange listing requirements, structural takeover defense. Under director nominees will be elected, see Section 6.2. a typical poison pill or rights plan, majority voting provides for a In particular, the stock exchanges, the company issues rights to the more democratic process and has including the NYSE, require that the existing stockholders. These rights gained in popularity over the past board of directors have a majority of allow holders (other than a bidder) to several years, with a strong focus by independent directors within one year purchase stock in the target or in the activist stockholders and investment of listing. In addition, post-IPO, the acquiring company at a steep discount advisory firms.
NYSE IPO Guide 25 Preparing to go public
• Stockholder action provisions—The company may include in its authorized properly documented, including for the company can improve its defensive and unissued stock a certain amount issuance of stock of the company and its posture by regulating the methods of undesignated preferred shares. subsidiaries. by which a hostile bidder can call The board will be authorized to for and obtain a stockholder vote on issue preferred shares in one or more 2.4 Providing for employees director elections or other proposals series and to determine and fix the Cleary Gottlieb Steen & Hamilton LLP that may facilitate a takeover. Charter designation, voting power, preference and bylaw provisions can be used to and rights of each series. The existence In preparing for an IPO, the company limit the ability of the hostile bidder of blank check preferred stock allows should review all of its employee to call special meetings or bypass the the board to issue preferred stock with compensation and benefits arrangements meeting requirement altogether by supervoting, special approval, dividend in light of the opportunities and the use of a written consent of the or other rights or preferences without responsibilities resulting from the IPO. stockholders. The company may also a stockholder vote. However, NYSE The major opportunity is the ability to wish to consider provisions requiring rules generally require stockholder compensate employees with publicly stockholders to give adequate advance approval by a majority of votes cast traded stock. The new responsibilities notice and supply information before a company issues shares include becoming subject to tax and before their proposals are added to representing 20% or more of the securities laws that did not previously the agenda of a regular or special outstanding voting power outside apply, including Section 162(m) of the meeting. a public offering. Also, if there is a Internal Revenue Code of 1986 (the • Supermajority voting—“Supermajority” poison pill, the company should make Code), rules for compensation disclosure voting requirements may be imposed sure it has sufficient authorized shares in annual reports and proxy statements for mergers and other specified for the shares to be issued if the pill is and Section 16 of the Exchange Act. This transactions between the company and triggered. chapter describes these topics for a U.S. an “interested stockholder,” which may • Change of control provisions—A domestic company that does not qualify as be defined, for example, as a holder common feature of loan agreements an emerging growth company. For certain of more than 10% of the outstanding and other significant contracts is differences applicable to emerging growth shares. Thus, an 80% vote might be a provision restricting a change of companies, see Chapter 4, and to foreign required to approve an acquisition of control of the company, resulting private issuers, see Chapter 9. the company by a major stockholder, in an event of default if breached. The company’s compensation instead of the more typical 50% or These provisions protect the lender committee might consider hiring a 66%. A fair price condition may be or other contracting party, but compensation consultant to help structure incorporated into the supermajority reduce the company’s flexibility, new arrangements in light of the IPO. provision, requiring a supermajority particularly in restructuring efforts As required by the Dodd-Frank Act, vote, for example, when an interested or friendly takeover transactions, stock exchange listing rules require the stockholder proposes a merger at any as well as making the company less compensation committee of a post- price less than the highest price paid attractive to a potential acquirer. IPO company to have the authority and for any share of company stock by the In 2009, the Delaware Chancery adequate funding to retain or obtain interested stockholder. Court raised questions regarding advice from compensation advisers, • Business combinations with the interpretation and validity of including compensation consultants interested stockholders—For example, certain of these provisions, as a and independent legal counsel, and under Delaware law, an “interested contractual term that could affect to be directly and solely responsible stockholder” (generally a holder of the stockholder franchise. The for overseeing them. In addition, the 15% or more of the voting stock) is company should carefully consider compensation committee is required generally prohibited from engaging these provisions in its existing and to consider specific factors regarding in a business combination with proposed agreements, and if they the independence of its advisers but the company for three years after cannot be eliminated, they should be may nevertheless receive advice from the holder became an interested approved at the board level. an adviser who is not considered to be stockholder. Although a Delaware independent based on those factors. corporation can expressly elect in Corporate housekeeping: In anticipation of Whether or not it retains advisers, the its charter not to be subject to this going public, the company should review compensation committee is required to “freeze-out” statute, it can be an and clean up documents with provisions exercise its own judgment in fulfillment of effective antitakeover defense. that are intended for a private company its fiduciary duties. • Issuance of shares—The company (e.g., charter documents and stockholder should ensure that it has a sufficient agreements). Similarly, it is important for (a) Equity compensation amount of common and “blank check” the company to review corporate minutes Incentive plans: Having publicly preferred stock authorized under its and other records to confirm that corporate traded stock opens up new avenues for charter. In many jurisdictions, the formalities have been observed and compensating employees of the company.
26 NYSE IPO Guide Preparing to go public
In connection with its IPO, the company economic equivalency. If pre-IPO awards option; but either action must be very should carefully consider putting in place a were subject to conditions common to carefully reviewed prior to implementation. new equity incentive compensation plan or private company equity (e.g., a repurchase reviewing and revising any existing plans in right upon termination of employment), Form S-8: The company may register the light of its status as a public company. Any the company should consider deleting sale of stock to employees, directors and post-IPO plan should allow the company those provisions if they do not cease certain independent contractors under sufficient flexibility in terms of types of automatically in accordance with their a compensatory plan on a short-form awards and their terms and conditions. terms, keeping in mind potential tax and registration statement—Form S-8. Form The plan should state the aggregate accounting issues. The company should S-8 incorporates by reference company number of shares available to be issued also carefully review its equity valuation information from Exchange Act filings. The under it. The company needs to consider methods with respect to pre-IPO grants, prospectus delivered to participants need carefully shareholder dilution concerns and both to confirm proper accounting not be filed with the SEC and primarily estimated burn rates when determining treatment and, with respect to stock addresses the terms of the plan. this number. The company may also wish options or stock appreciation rights, to hire a firm specializing in stock plan to confirm that they were granted with (b) Section 162(m) of the Internal administration to handle the logistics of its exercise prices equal to (or greater than) Revenue Code equity compensation program. fair market value in light of Section 409A Following the IPO, the company will be Any adoption of new plans or and Section 422 of the Code. subject to Section 162(m) of the Code. changes to existing ones should occur The company may wish to make equity Under Section 162(m), the company may prior to completion of the IPO and, if grants in connection with the IPO to its not take a deduction in its U.S. taxes for possible, should be approved by the executives and other employees. These compensation paid to a “covered employee” shareholders of the private company. A grants would permit the employees to to the extent it exceeds $1 million for the plan that has been adopted prior to the participate in the increase in value of the taxable year (subject to certain exceptions). IPO may take advantage of grandfather company following the IPO. The company Covered employees include the CEO provisions under stock exchange listing will need to determine the amount and the and the three most highly compensated rules, enabling it to grant all of the stock type of equity award and may be required executive officers of the company (other reserved under the plan without seeking to disclose the aggregate amounts and also than the CEO and the CFO) on the last public shareholder approval of the plan specific amounts with respect to its “named day of the taxable year, as determined until it either runs out of shares or is executive officers”—its principal executive in accordance with the Exchange Act’s materially modified. In addition, if a plan officer, principal financial officer and the executive compensation disclosure rules. that grants employees tax-favorable three other most highly compensated “incentive stock options” pursuant to executive officers (and up to two former Transition relief: Section 162(m) Section 422 of the Code is adopted and executive officers) whose total compensation provides transition relief for a company approved by the shareholders of the for the last fiscal year exceeded $100,000— that becomes subject to Section 162(m) company prior to the IPO, it will not in the registration statement, as well as a through an IPO (so long as such company require further approval by shareholders description of the plan. was not previously part of an affiliated after the IPO until the earlier of 10 years group that included a company with from the adoption date or any amendment Other plans: The company could consider common stock registered under the of the plan to add additional shares adopting a stock purchase plan permitting Exchange Act). or change eligibility for participation. employees to purchase stock from the If compensation (cash or stock) is paid Pre-IPO plan adoption also provides an company through payroll deductions by the company pursuant to a plan or advantage under Section 162(m) of the either at the market price or at a discount, agreement that existed prior to the company Code, as discussed below. although this is not as common in becoming publicly held and was disclosed in If the company has previously granted connection with an IPO as equity incentive the IPO prospectus “in compliance with all compensation to its employees in the form plans. Stock purchase plans may be designed applicable securities law,” the compensation of equity awards pursuant to exemptions to allow for employee-favorable tax is not subject to the deduction limit until the from registration under the Securities treatment under Section 423 of the Code. earliest of the following: Act and Exchange Act, it should review Adopting a stock purchase plan prior to an • expiration of the plan or agreement; the prior grants to ensure that no action IPO provides grandfather benefits under • material modification of the plan or is required (or that any action that may stock exchange listing rules and Section agreement; be required is taken) by the company to 423 of the Code similar to those for equity • issuance of all employer stock and adjust the terms of the awards as may be incentive plans. In addition, if the company other compensation allocated under necessary or appropriate. For example, if has a defined contribution plan for its the plan or agreement; or the pre-IPO company is a limited liability employees (e.g., a 401(k) plan), following the • the first shareholders’ meeting at which company, the awards should be amended IPO, the company could consider making directors are to be elected after the end to refer to common stock, with any company contributions in stock or adding of the third calendar year following the further adjustments necessary to maintain a company stock fund as an investment year of the IPO.
NYSE IPO Guide 27 Preparing to go public
This transition relief also applies to (c) Section 16 of the Exchange Act decisions of the company’s board of any compensation received pursuant Upon the IPO, company directors and directors, and they do not impose additional to the exercise of a stock option or officers (as defined in Section 16) and fiduciary duties on the board of directors or substantial vesting of restricted stock 10% beneficial owners of company stock any committee. granted under such a plan or agreement, so will become “Section 16 insiders” subject The SEC rules also require a company long as the grant occurred on or before the to the reporting and short-swing profit to provide disclosure about compensation earliest of the specified events. provisions of Section 16 of the Exchange arrangements with executives to be Act. For more information about Section entered into in connection with an Performance-based compensation: 16 filings, see Section 7.3. acquisition, merger, consolidation or sale Performance-based compensation is not or other disposition of all or substantially subject to the deduction limit of Section (d) Executive compensation and other all assets of the company. These 162(m). To qualify as performance-based, arrangements arrangements are commonly referred to the compensation must be paid solely on The company should also review its as “golden parachutes.” Unless the golden account of the attainment of one or more employment, severance and change-in- parachute compensation arrangements preestablished, objective performance control agreements, if any, and consider were previously subjected to a say-on- goals, and the following requirements must the pros and cons of adopting or amending pay vote (whether or not approved by be satisfied: those agreements in light of the company’s shareholders), a nonbinding shareholder • Certain actions are taken by a board changed circumstances. When making advisory vote on the arrangements must compensation committee consisting its decision, the company should keep in also occur at the meeting at which the solely of two or more “outside directors” mind the detailed compensation disclosure company’s shareholders are asked to (as defined in Section 162(m)). that will be required both in the IPO approve the related transaction. • The performance goal: prospectus and, going forward, in its • is established in writing by the annual proxy statements and the intense (f) Clawback policies committee before 25% of the scrutiny that disclosure will receive. In The Dodd-Frank Act also requires performance period has elapsed and addition, the company should review any the SEC to publish rules (to be in no event later than the 90th day arrangements that may be considered implemented by stock exchanges) of the performance period; direct or indirect loans or other extensions prohibiting any company from • is substantially uncertain to of credit by it or its subsidiaries to any of listing a security if it fails to adopt be achieved at the time it is its executive officers or directors, as these a specified clawback policy. The established; must generally be terminated prior to clawback policy, which is triggered • is objective such that a third party effectiveness of the registration statement upon an accounting restatement due having knowledge of the relevant filed with the SEC to comply with SOX. to material noncompliance with the facts could determine whether it is financial reporting requirements of met; and (e) Say-on-pay voting the federal securities laws, requires • precludes discretion to increase SEC rules implemented under the Dodd- recovery of any incentive compensation the amount of compensation Frank Act require shareholder votes on from executive officers that was based payable that would otherwise executive compensation, or “say-on-pay.” upon the erroneous financial data. be due upon the attainment of The company is required to hold the This financial recoupment is required the goal. following votes at the company’s first from any current or former executive • The material terms of the performance annual meeting following its IPO: officer during the three-year period goal are disclosed to, and approved by, • Say-On-Pay Vote—a nonbinding preceding the date on which the a majority vote of shareholders before shareholder vote to approve the company is required to prepare the the compensation is paid, including compensation of the company’s named restatement, regardless of whether the performance goal criteria and the executive officers as disclosed and there was misconduct by the covered maximum amount of compensation described in the company’s most recent executive officers. (The Sarbanes-Oxley a participant could receive during a proxy statement. The vote must occur Act authorizes the SEC to seek similar stated period. at least once every three calendar years. recoupment from the CEO and CFO, but • Say-On-Pay Frequency Vote—a only if the restatement is the result of Although a newly public company nonbinding shareholder vote to approve misconduct, albeit not necessarily by will initially benefit from the IPO the frequency of the say-on-pay vote. the CEO or CFO.) Under the formula, transition relief, it will eventually need its The say-on-pay frequency vote must the clawback is calculated as the excess compensation committee to be comprised occur at least once every six calendar amount paid out to such executive of outside directors for purposes of years. officers over what would have been paid this performance-based compensation out based upon the restated results. exception and to conform its plans and These two votes are both nonbinding The SEC has not yet published practices to the extent necessary. votes that do not overrule the compensation rules implementing this requirement,
28 NYSE IPO Guide Preparing to go public
so adoption of a clawback policy is not effective program catch every instance of content, format and functioning of yet mandatory. Nonetheless, as a result criminal conduct; rather, the commission the compliance program. of shareholder proposals and good emphasizes the need for a program that • Provide code of conduct and corporate governance practices, many is “generally effective in preventing and relevant policy training to the companies have begun to implement detecting criminal conduct.” The FSG board. The FSG do not require and publicly disclose clawback policies, set forth seven factors used to evaluate that the board complete the same although not necessarily based on a program’s effectiveness, including training program administered to the Dodd-Frank model. Accordingly, written standards, board oversight, high- the organization’s employee base. a company preparing for an IPO may level personnel assigned to program, due Rather, the FSG state that the want to consider implementation of a diligence, training and communication, board should be “knowledgeable clawback policy. monitoring and auditing and enforcement. about the content and operation It is important to note that these are of the compliance and ethics 2.5 NYSE Governance Services: considered minimum requirements. program.” Reviewing and verifying your program, Any program that fails in one of these • High-level personnel assigned overall meeting regulatory standards categories would not be deemed effective, responsibility for the program—assign NYSE Governance Services although the FSG do allow the size of the responsibility for the compliance company to determine the formality of its program to an appropriate high-level In anticipation of an IPO, a company program. individual. should review and verify its internal In order to assess a company’s • Note that the FSG specifically readiness from an ethics and compliance readiness for an IPO from an ethics and require that the individual(s) given standpoint, specifically taking into compliance perspective, it should take into operational responsibility have account the requirements of the seven account the requirements of the seven adequate resources, appropriate “hallmarks” set forth by the U.S. Federal “hallmarks” set forth by the FSG, review authority and direct access to the Sentencing Guidelines for Organizations, and update the company’s ethics and governing authority or subgroup as amended (FSG).15 Compliance with compliance program and confirm that the thereof. Many companies have the FSG is vitally important since it organization meets all requirements for a gotten themselves into trouble can lead to a reduced sentence for truly effective program. (e.g., Fannie Mae) when senior organizations convicted of a federal crime To address these hallmarks while management has attempted to if the organization can demonstrate preparing for IPO, the company should interfere with the compliance that, notwithstanding the violation, it consider the following: officer reporting directly, for had an effective ethics and compliance • Written standards—develop example, to the chair of the audit program in place. In addition, each listed appropriate written standards, policies committee without “clearing” the company must have a code of conduct and procedures. If the company report through senior management and ethics complying with SEC rules already maintains a code of conduct first. Under the stipulations of the and market listing requirements that is or other policies addressing ethics and FSG, this is not adequate. applicable to all directors, officers and compliance issues, review and verify • Additionally, the FSG require that employees. Therefore, having a truly that all areas are up-to-date and reflect anyone who the organization knew “effective compliance and ethics program,” best practices, as appropriate. or should have known had engaged as set forth by the FSG, is one of the • Board of directors oversight— in illegal activities or other conduct most important first steps in planning an delegate oversight responsibility inconsistent with an effective organization’s IPO. to a subcommittee (e.g., the Audit compliance and ethics program According to the FSG, an effective Committee or the Corporate should not be included among the compliance program is one through Governance Committee) and adopt group of individuals charged with which an organization exercises “due or amend committee charters, as responsibility for the compliance diligence to prevent and detect criminal appropriate. program. A robust program under conduct” and otherwise promotes “an • Ensure that a compliance officer the FSG would perform background organizational culture that encourages is regularly reporting to a checks upon hire and additional ethical conduct and a commitment to subcommittee of the board (i.e., at screening upon promotion and compliance with the law.” It is important every regularly scheduled meeting would require annual conflict of to note that the FSG do not require that an and more often as necessary) and interest certifications in which that the subcommittee is regularly those individuals responsible both reporting to the full board (i.e., at for oversight and operations of the every regularly scheduled meeting compliance program would disclose 15 See generally United States Sentencing and more often as necessary), any government, vendor, customer Commission, Guidelines Manual (“USSG”), and Chapter Eight –Sentencing of Organizations both of which have had detailed or competitor conflicts, board (Nov. 2010). discussions as a group about the memberships and substantial gifts
NYSE IPO Guide 29 Preparing to go public
and criminal history. Those forms would be vetted on an annual basis to make certain the individuals responsible for setting an ethical tone were not themselves creating problems for the company. • Training and communication— periodically issue communications surrounding the ethics and compliance program and conduct effective ethics and compliance training throughout the company. • Monitoring and auditing—periodically monitor and audit the organization’s ethics and compliance program to determine its effectiveness. Measure the performance of the ethics and compliance program through benchmarking and internal data review. • Enforcement—build effective incentives and disincentives into the company’s compliance program. • To date, many companies have not incorporated incentives into their compliance program. Those that have generally consider ethical behavior as a component of annual performance reviews (with full disclosure ahead of time) and in promotion decisions. • The FSG require that a company take appropriate disciplinary measures for either engaging in criminal conduct and for failing to take reasonable steps to prevent or detect that conduct. Thus, a robust code will detail a variety of consequences and make certain that some sort of punitive action is an option both against the individual committing the criminal conduct and against his or her supervisor. • In the event criminal conduct is detected, the company should document its response—and, in particular, any changes that were made to the code or program in response to that conduct. The FSG expect compliance programs to be living entities that adapt and change over time. ●
30 NYSE IPO Guide 3 The IPO process
NYSE IPO Guide 31 The IPO process
3.1 Process timeline (b) Weeks 2 to 5: any litigation and compliance with local, J.P. Morgan (Investment Banking) Drafting: The principal document that is state and federal laws and regulations. created when going public is a registration The process of planning and executing an statement and has the dual purpose of Legal and other documentation: In addition IPO is time-intensive and, for a domestic registering the securities with the SEC to assisting with drafting the registration issuer, typically takes 14 to 16 weeks and acting as a marketing document statement and participating in due from organizational meeting to closing, when selling the IPO to investors. The diligence, the company’s and underwriter’s though the exact time taken can vary drafting of the registration statement is a counsel will work with the underwriters, widely and depends on market conditions, collaborative process among the company, the company and the auditors to draft and the complexity of the transaction, the the underwriters (typically led by the complete the following documentation: company’s readiness prior to embarking lead bookrunner(s)), the company’s and • underwriting agreement; on the IPO process and many other underwriters’ counsel and the company’s • lock-up agreements for existing factors. Achieving this timeline requires auditors. The company relies heavily on shareholders (typically signed before significant preparatory efforts, in the bookrunners to craft an appropriate filing of the registration statement); particular to ensure the required financial marketing story and consults closely with • legal opinions; disclosure is available on a timely basis its auditors when preparing the financial • comfort letter; and such that drafting of the principal disclosure. • press releases announcing the filing, document can proceed as outlined below. launch and pricing of the transaction. There is typically a large team Due diligence: The purpose of due diligence of professionals involved in the IPO is twofold: first, and most importantly, Determine listing venue: The company, process, including the company, legal to ensure the accuracy, completeness with the assistance of the bookrunners, counsel, auditors and underwriters, and truthfulness of the company’s should determine whether it is eligible to among others. The key workstreams are registration statement; second, to provide list on the NYSE or another exchange, hold drafting of the registration statement, the underwriters (and certain other discussions with the exchange and reserve due diligence (business, financial offering participants) with a so-called a ticker symbol. and legal), preparation of transaction due diligence defense against liability documentation and other marketing arising in connection with any material (c) Week 6 materials (e.g., roadshow presentation). misstatements and/or omissions in the Valuation update with the investment The preparation process can be broken offering disclosure. Due diligence is bank: It is prudent to have relatively down into the following key stages: conducted by all members of the working frequent valuation updates with the group and is iterative in nature, continuing bookrunners, particularly as market The pre-filing phase right up to closing of the IPO, though it conditions shift and as the company should be substantially complete by the achieves key milestones throughout the (a) Week 1 time of the initial filing of the registration IPO process. This ensures that all parties Organizational meeting: All key statement. are regularly updated and aligned on members of the IPO working group The underwriters and their counsel valuation expectations and avoids any meet to discuss the specifics of the will conduct extensive business and mismatch as the company progresses offering, including timing, key tasks, financial due diligence on the company, toward launch of the IPO. and roles and responsibilities for the focusing primarily on the company’s IPO process. The meeting is typically operations, procedures, financials (both Legal and other documentation: held at the company’s headquarters historical and prospective), competitive Continue drafting and negotiating legal or company counsel’s offices, with position and business strategy, as documentation and comfort letter. 20 to 40 people attending. The lead well as on the management team and bookrunner(s) typically prepares an key board members. As part of this Syndicate equity research analyst briefing: organizational book that details all of process, the underwriters will have At some point prior to the initial SEC the aforementioned items. This meeting detailed discussions with the company’s filing, it is customary for the company is usually combined with a presentation management, customers, suppliers and to provide a briefing to the underwriters’ from the company’s CEO, CFO, general any other relevant parties, and will review equity research analysts. This will typically counsel and key divisional managers on agreements with and documentation be a modified form of the company the company’s business. All together, relating to any of the aforementioned presentation delivered by management these meetings typically last a day, at parties, workforce, creditors or other to the working group at the beginning of the end of which the working group related parties. the IPO process. It will be followed by will have a good understanding of the Counsel to the company and the an iterative process between the research company’s business, financial position underwriters will also conduct legal due analysts and management as they develop and any key issues affecting it, as well diligence, which is primarily documentary their understanding of the company, as a clarity on the critical path for in nature and focuses on verifying the its business model, and their views on execution of the IPO. company’s legal records, material contracts, valuation.
32 NYSE IPO Guide The IPO process
Underwriter internal approvals: Prior to Agree on offering structure: The company, The marketing/execution phase filing the initial draft registration statement in conjunction with the lead bookrunner(s), with the SEC, or otherwise making public should determine the appropriate proceeds (f) Week 14 the underwriters’ names in connection to raise in the IPO in order to be well Registration statement and other with the IPO, the underwriters will capitalized for 18 to 24 months after the documentation: Having cleared all SEC typically need to clear internal committees. IPO, taking into account its strategic goals, comments and amended the registration This involves presenting the company as outlined in the registration statement. In statement to reflect any stock split and to an internal committee, a review of the addition, the company should approach its the offering price range, finalize all other draft registration statement disclosure and shareholders and discuss the extent to which documentation, including underwriting discussion of any issues that came to light they may wish to sell part of their holdings agreement, comfort letter and launch press during the due diligence process. in the IPO. In doing so, the company will release. be mindful of any IPO participation rights SEC submission of draft registration granted to shareholders under registration Roadshow preparation: Finalize the roadshow statement: To commence the process of SEC rights and other similar agreements that presentation, hold roadshow rehearsals and review of the registration statement, the may exist with existing stock holders. make all logistical preparations for roadshow company must file it with the SEC, together launch. Finalize legal documentation. with various exhibits. Under the JOBS Act, (e) Weeks 9 to 13 emerging growth companies have the option Receiving and addressing SEC comments: (g) Weeks 15 and 16 of making a confidential submission, as The SEC takes approximately 30 days to Launch IPO: File an amendment to the opposed to a public filing, and many EGCs complete its initial review of the draft registration statement with price range take advantage of this option, as discussed registration statement, at which point it will (the so-called “red herring”): Conduct further in Section 4.3. Companies that elect respond to the company and its counsel via management presentations to the confidential review must make a public filing a formal comment letter in which it makes bookrunners’ equity sales forces, and of the draft registration statement at least 21 certain observations on the company’s commence the roadshow, consisting of days before the start of the IPO roadshow. draft disclosure and invites the company between 8 and 12 days of investor meetings. to address these by making revisions and The waiting period filing a series of amendments, to its draft Pricing and closing: Having built a book registration statement. The initial comment of demand, the bookrunners will agree (d) Weeks 7 to 8 letter is the beginning of an iterative process on the offering price with the company Roadshow presentation and marketing with the SEC, which typically requires at and shareholders and, having executed strategy: While the IPO working group least three amendments and can last up to the underwriting agreement, proceed to awaits comments from the SEC on the six weeks, depending on a number of variables. allocate the IPO to investors. The following draft registration statement, it is prudent day, the company begins publicly trading on to further develop the marketing story for Legal and other documentation: the NYSE, rings the opening bell and hosts the IPO roadshow. The lead bookrunner(s) Continue drafting and negotiating legal other key marketing events associated with will generally spearhead this process, documentation and comfort letter. being a public company. Three business while working closely with the company days later, the IPO closes, at which point to create a short, detailed slide deck to be Roadshow presentation: Continue refining stock is delivered to investors against shown to investors during the roadshow. the roadshow presentation and rehearsals payment of the offering price, and various This presentation is typically 20 to 30 with CEO/CFO and any other members of legal opinions are delivered by counsel. slides in length and details the offering, the roadshow team. the company’s products and services, key (h) Aftermarket selling points, industry trends and growth Valuation and price range discussions: Depending on the trading performance opportunities, competitive positioning and Continue periodic valuation discussions of the stock, the underwriters may either financial performance. with the underwriters and formulate a intervene to “stabilize” the stock in order For EGCs, as discussed further in Section preliminary price range to be provided to smooth out short-term volatility (in the 4.3, another topic of discussion with the confidentially to the SEC as an indication case of a stock that falls below issue price bookrunners is whether to take advantage of where the offering price range will post-IPO) or exercise the greenshoe (in of the JOBS Act provisions allowing them to be. This often involves a share split or the case of a stock that trades comfortably “test the waters” prior to launch of the IPO, consolidation to achieve the desired range. above issue price post-IPO). in order to assess potential demand for the offering and identify and address any issues Agree on marketing strategy: The company 3.2 SEC registration that investors may raise. and the bookrunners should decide which Cleary Gottlieb Steen & Hamilton LLP regions and specific cities to visit on the Legal and other documentation: IPO roadshow, the length of the roadshow Before undertaking an IPO, the company Continue drafting and negotiating legal and which investors to target as potential must file a registration statement with documentation and comfort letter buyers of the IPO. the SEC, and it must be declared effective
NYSE IPO Guide 33 The IPO process
by the SEC. The registration statement The preliminary prospectus—often which generally requires an affirmative includes the prospectus that is provided called a “red herring” because of the declaration by the SEC staff. Before to prospective investors and other red legend on the cover indicating its providing this declaration, the staff material that is also publicly available. The preliminary nature—is the principal reviews the registration statement, registration statement is the company’s instrument for marketing the shares during provides comments and requires that its responsibility, even if the IPO is made up the waiting period. Copies of the preliminary comments be addressed to its satisfaction. entirely of shares being sold by existing prospectus are distributed to the salesforce The comments are provided in written shareholders (a “secondary” offering) and of the underwriting and selling syndicate comment letters. The company’s response the company will not sell any shares or members and provided to prospective generally takes the form of an amendment receive any proceeds. buyers. It is substantially complete, except to the registration statement, accompanied The preparation of the registration for the key points that are determined at by a response letter explaining how the statement is a principal focus of the IPO the end of the marketing period: the price, company has addressed the matters raised process. It has three different aspects: the actual proceeds, the underwriting in the staff’s comment letter. • Regulatory—The registration statement commitments and related matters. Although SEC review of an IPO registration must comply with detailed SEC rules the price is not yet available, the preliminary statement is very thorough, and the governing its content and will be subject prospectus includes an estimated range for process of responding to the comments is to intensive review by the SEC staff. the final price. a major driver of the timing of the IPO and • Marketing—The prospectus, which is The “final” prospectus, with final often the content of the disclosure. The part of the registration statement, is information on pricing and underwriting, staff usually provides the first comment the central item in the marketing of the must be filed within two business days after letter within four to six weeks of filing. offering, so it must effectively convey pricing. It is often delivered to investors as After that, the amount of time required the arguments for investing in the well, though this is no longer required. to reach effectiveness can vary widely, company. depending on the nature of the comments • Liability protection—A materially (b) Gun jumping and the work required to resolve them. misleading statement or omission can The law regulates offers of securities (and Difficult accounting comments can take result in liability to purchasers for the particularly written offers) as well as sales. months to resolve and can substantially company, the underwriters and other During the quiet period, no offers may be change the information content of the participants, so particular care should be made, whether written or oral. During the prospectus. taken with the contents of the registration waiting period, no written offers may be In some IPOs, it may be useful to raise statement and the prospectus. made except by means of the preliminary issues with the SEC staff before the first prospectus. Violations of the restrictions filing by requesting a prefiling conference. Reconciling these three aspects of the on offers during each stage are sometimes This is most common where there is registration statement is an important referred to as “gun jumping” and can result a question of accounting or financial challenge for the IPO working group. in the SEC imposing a delay or “cooling- presentation that will shape the financial Somewhat different rules apply to off period” to allow the effects of the statements or where an accommodation the registration process for an emerging impermissible offer to dissipate. under the SEC’s rules will be needed. The growth company (described in Chapter 4) These rules can take an IPO participant SEC staff is willing to provide this kind of and a foreign private issuer (see Chapter 9). by surprise, particularly because of the guidance in advance, subject to reviewing The remainder of this chapter describes broad definitions given to the terms the implementation in the filing. Often a the registration process for a U.S. domestic offer and written. For example, under prefiling conference leads to an exchange company that does not qualify as an EGC. some circumstances a discussion of the of letters to document the precise company’s business prospects could be contours of the staff’s guidance. (a) Statutory framework construed as an offer, and a discussion The first filing of the registration The IPO process can be divided into with a journalist who plans to publish statement in an IPO is typically a “quiet three main stages based on the regulatory could be construed as a written offer. filing,” meaning that the preliminary framework set forth in Section 5 of the Because the terms are so broad, offering prospectus, although publicly available, Securities Act. Before the registration participants must be careful to distinguish is not actually sent to investors. It may statement is filed there is a “quiet period,” between permissible communications and omit the price range, but if so it must be when no offers are permitted. Between illegal offers and avoid any conduct or amended to include a price range before filing and effectiveness of the registration communications that could be construed the marketing can begin. Only after the statement, there is a “waiting period,” as impermissibly conditioning the market SEC comment process is complete (or when offers may be made, but written for the securities to be offered. nearly so) does the marketing of the offers are subject to content regulation offering begin, using the preliminary and filing requirements. Only in the third (c) SEC review and declaration of prospectus included in the most recent stage, after the registration statement effectiveness amendment of the registration statement. becomes effective, are sales to investors The IPO cannot be completed until The declaration of effectiveness permitted. the registration statement is effective, is not actually required until the
34 NYSE IPO Guide The IPO process
underwriters are ready to complete (e) Filing and confidentiality They are based on the aggregate offering sales to investors, after the marketing is The company must file the registration price of the securities registered. For the complete and the IPO has been priced. statement electronically using the SEC’s SEC’s 2013 fiscal year, they stood at $136.40 The usual practice in an IPO is for the electronic document system, EDGAR. In per million dollars, so for a $100 million registration statement to be declared order to do so, the company must have IPO they would amount to $13,640. effective just before pricing. This is a central index key (CIK) number, which The fee must accompany the initial achieved by requesting “acceleration” of is an account number obtained from the filing, but since the price and size of the effectiveness, as otherwise effectiveness SEC for filing purposes. The financial offering are not yet known, the amount would occur pursuant to a statutory printer will typically handle the mechanics is based on good-faith estimates. The timeline that may not coincide with of filing. Although documents are filed SEC will not refund fees if the total dollar the offering timeline. The company electronically, paper “courtesy copies” are value actually offered falls short of the then has up to 15 business days after usually provided to the SEC reviewing amount registered, so the company should effectiveness to file the final prospectus staff. take care not to overestimate, though the reflecting the pricing and underwriting Once it has been filed, the registration company may be able to use excess fees details. Occasionally, however, this statement is available to the public, to offset filing fees for future registration final prospectus is filed in a “pricing as is each subsequent amendment. statements up to five years after the IPO. amendment” just before the declaration Correspondence with the SEC staff On the other hand, if the total dollar value of effectiveness. concerning the registration statement is actually offered exceeds the amount on also filed through EDGAR, but it is not which fees were paid, the company must (d) Contents of registration statement made publicly available immediately. amend the registration statement and pay The registration statement for an IPO is on Instead, the SEC makes it all publicly additional fees. It is not unusual in an IPO Form S-1 for a U.S. issuer. The registration available a short time—generally 45 days— to pay additional fees during the process statement must be signed on behalf of the after the IPO. The SEC will not ordinarily as the estimated dollar value is refined, company and, in their individual capacities, review an IPO registration statement of a but it is important not to be surprised by the company’s principal executive domestic issuer that is not an EGC until at the last minute by the need to pay officer or officers, its principal financial it has been filed. As a result, the back and additional fees. officer and its controller or principal forth between the company and the SEC is accounting officer. It must also be signed generally a matter of public record. 3.3 Prospectus by a majority of the board of directors, The public nature of SEC filings Cleary Gottlieb Steen & Hamilton LLP although usually every director signs. can present problems for the company, The principal sections of the because sometimes the exhibits or (a) Required disclosures registration statement are a simple cover the comment correspondence include The prospectus constitutes Part I of the page, the prospectus (called Part I in the material that the company would prefer registration statement used to register SEC’s forms) and Part II. The contents of to keep confidential. If public disclosure an IPO with the SEC and is also the the prospectus are discussed in Section 3.3. would result in competitive harm to the central document used to market the Part II contains additional information company, it may submit a request to the IPO to prospective investors. It contains that must be publicly filed with the SEC staff for confidential treatment for disclosures about the company’s SEC but need not be provided to portions of material contracts included business, results of operations, financial prospective purchasers. It includes as exhibits to the registration statement. condition, management and other issues. certain undertakings on the part of the The grounds for confidential treatment The financial and business information company that are required to implement are narrow, however, and may not cover included in the prospectus is very similar SEC policies, signatures, consents from everything the company considers in scope to what is included in an annual auditors, counsel and other experts and sensitive. The SEC staff processes report on Form 10-K for a U.S. issuer. some additional disclosures required by confidential treatment requests filed with However, the level of detail is often much the SEC’s forms. IPOs concurrently with the review of the greater in an IPO prospectus than in the The most important element of Part II registration statement. All issues must be periodic reports of established public is the requirement to file exhibits. resolved and the confidential treatment companies. These include charter documents, the request must be complete before the An IPO prospectus must meet all underwriting agreement, employee benefit acceleration of effectiveness of the requirements of the applicable SEC form plans, a list of subsidiaries and opinions of registration statement. (Form S-1 for a U.S. issuer), but it is counsel. They also include the company’s presented as a freestanding document material agreements, which can include a (f) Filing fees and does not include the text of the form wide range of agreements relating to, for The company must pay a filing fee to the itself or even follow the order of items example, employment arrangements, joint SEC at the time the registration statement in the form. Instead, the organization ventures, licenses, financing, acquisitions is filed. Registration fees are a major source of an IPO prospectus is typically based and arrangements with suppliers or of the agency’s funding and are established on a combination of the SEC’s form, the customers. by the SEC based on annual revenue targets. expectations of the SEC staff and market
NYSE IPO Guide 35 The IPO process
customs developed in prior IPOs. Against margins of each page and is consequently features, often described as its strengths this background, there is some limited often referred to simply as the “box.” It and its strategy. This section then goes scope for innovations in organization usually describes the offering and briefly on to describe the business in full. The or presentation based on the particular describes the company, with a focus on its SEC’s forms provide broad guidance circumstances or investment thesis of the most distinctive features. The summary on how to describe the company’s company. description of the company is usually business, but most of the content of the The balance of this chapter discusses treated as the most important part of discussion is based on common sense some of the major elements of the the prospectus from a marketing point and on a review of what other comparable prospectus for a U.S. domestic issuer that of view. companies have covered. The forms is not an EGC, but space does not permit specifically contemplate the following an exhaustive review. For information Financial information: A typical IPO topics: about prospectus requirements for an prospectus provides the most important • principal products produced and EGC, see Chapter 4, and for certain financial information three times. services rendered and methods of differences applicable to a foreign private These requirements are discussed in distribution; issuer, see Chapter 9.5. detail in Section 2.2. The prospectus • sources and availability of raw must include audited financial materials; Prospectus drafting style: Under statements and, depending on the age • intellectual property; the SEC’s rules, all information in a of the audited financial statements, • dependence on single customers or prospectus must be presented “in a clear, unaudited interim financial statements. suppliers; concise and understandable manner,” It must also include selected financial • competitive conditions; and the cover page, back page, summary information covering five full years, if • material effects of the regulatory section and risk factors section must the company has been in existence that environment; follow “plain English principles.” In its long. There is also summary financial • research and development rules and elsewhere, the SEC has fleshed information in the summary box. In expenditures; and out what these requirements mean, the selected financial information • number of employees. including such features of good expository and the summary, information from writing as short sentences; definite, the financial statements is often Management’s discussion and analysis: concrete, everyday language; use of the accompanied by other key statistics Management’s discussion and analysis active voice; no legal jargon; no double about the company’s operations or is among the most important sections negatives; and tabular and bullet point performance. of the prospectus. It takes its name from presentations. The prospectus must also include a the beginning of the cumbersome title More generally, prospectus drafting capitalization table. This summarizes the used in the SEC’s rules, “Management’s should avoid bullish rhetoric and “puffery” company’s capitalization as of a recent Discussion and Analysis of Financial by using neutral language, being balanced date and shows how the capital structure Condition and Results of Operations.” and complete and avoiding any factual will be affected by the IPO and the (The corresponding item for a foreign statements that cannot be substantiated. application of the IPO proceeds. private issuer is called “Operating and An overly cautious approach is not Financial Review and Prospects” but is necessarily desirable either, and wholesale Risk factors: A prospectus must set still referred to as MD&A.) repetition of risks and qualifications is forth under the caption “Risk factors,” MD&A serves to provide investors unnecessary. Discussions of the business right after the summary box, the most with the information necessary to outlook, or of the company’s future significant factors that make the offering understand the company’s financial performance, must be handled with speculative or risky. It should include condition, changes in financial particular care. These kinds of “forward- a discussion of the most significant condition and results of operations. looking statements” are usually necessary, risk factors for the company, not an Complementing the financial statements, but they are limited in scope to limit exhaustive list of every conceivable risk. the MD&A explains the company’s potential disclosure liability. They must The discussion should be concise and well performance and its financing to be carefully worded so that descriptions organized, with headings that adequately investors “as seen through the eyes of of the company’s beliefs and expectations communicate each risk described, and management” (as the SEC has put it). In will not be mistaken for statements should avoid boilerplate. addition to discussing performance in of fact, and they are accompanied by past periods, the MD&A must address discussions of the factors that could cause Business of the company: The business any known ways in which future actual outcomes to differ from those section of the prospectus sets forth performance could differ and identify anticipated. a straightforward discussion of the trends and uncertainties that may company’s business and operations. affect the company going forward. It Summary “box”: The prospectus must This section usually begins with a should discuss each segment separately include a summary. This is typically brief overview and continues with a if material to an understanding of the presented with a border around the presentation of the company’s distinctive business as a whole.
36 NYSE IPO Guide The IPO process
Three elements are the core of every if any, as may be necessary to make the of relevance to the company’s offering and MD&A: required statements, in the light of the may provide a roadmap for how best to • Overview—There should be a summary circumstances under which they are made, address these issues. Judicious borrowing discussion of the most important not misleading. from comparable sources provides a issues affecting the company’s past helpful shortcut in what can otherwise be and future economic performance. Industry guides: The SEC requires an arduous process. This discussion is ordinarily at the special disclosures from companies in After the bulk of the drafting and due beginning, and it varies widely in scope certain industry sectors, as set forth in diligence has been conducted, the core and breadth. five industry guides. In particular, banks working group distributes a draft of the • Discussion of results of operations— and bank holding companies, casualty registration statement to all directors There must be a detailed comparative insurers and mining companies must and key officers and, depending on the discussion of results for each of the supply enhanced disclosure subject to the circumstances, also to selling shareholders past three years and any subsequent requirements of the guides. Compiling and other key shareholders. The interim period. This discussion must the information necessary to comply with underwriters should satisfy themselves zero in on the major drivers of financial the industry guides can be a substantial that the company has established adequate performance and on the factors that undertaking requiring specialized procedures for collecting and evaluating might cause future results to differ expertise. comments on the document from those from those in past periods. persons to whom it has been furnished. • Discussion of liquidity and capital (b) Drafting process This is particularly important for MD&A resources—There must be a full Drafting logistics: Primary responsibility and for any forward-looking statements discussion of the company’s for drafting the prospectus, other than that are included in the registration liquidity, its funding requirements the financial statements, usually falls statement. and its anticipated sources of funds. to the company’s counsel, working with This discussion must focus on the company personnel. Underwriters and Financial printer: A financial printer company’s ongoing requirements more their counsel usually draft the plan of should be selected early in the IPO than on its past performance. distribution, which describes contractual planning stages. Drafts of the registration and regulatory aspects of the IPO. statement will undergo several revisions In addition, MD&A must address Sometimes underwriters and their counsel over the course of the due diligence several other specifically mandated also prepare first drafts of sections that period and as comments from the SEC disclosures, including a table of will be key to the marketing effort, such staff are incorporated into the document. contractual obligations and a discussion as the description of the company’s At the beginning stages of the process, of any off-balance-sheet arrangements. strengths and strategy that leads off the the company’s counsel will take the lead summary box. in reflecting any such changes in the Other matters: The following additional The core working group reviews, registration statement. However, as the topics concerning the company must also comments and participates in drafting registration statement nears completion, it be addressed in the prospectus: sessions that include representatives is the role of the financial printer to: • dividend policy; of the company and its auditors, the • work with the company to ensure that • material legal proceedings; company’s counsel, the underwriters the registration statement is formatted • directors, senior management and and their legal counsel. These drafting in the way required by the SEC and any advisors; sessions are often conducted at in- other regulatory institutions; • related-party transactions (see person meetings, though they can also be • process requested changes to the Section 7.5); held by videoconference or conference registration statement until the final • terms of the shares being offered; and call. In addition to advancing the draft, draft; • principal property. the drafting sessions serve as a core • prepare EDGAR-suitable versions component of the due diligence process of documents to be submitted The prospectus will include a description by allowing the core working group to go electronically to the SEC on the of the offering, including the proposed use meticulously through all content of the company’s behalf; and of proceeds, dilution resulting from the prospectus. • print and distribute hard copies of offering, underwriting arrangements and “Benchmarking” is an important the preliminary prospectus and final selling shareholders, if any. aspect of the drafting process. It involves prospectus. The requirements of the applicable determining what comparable issuers SEC form do not limit what should be disclose in their prospectuses and periodic In choosing a financial printer, several included in a prospectus. In addition reports and what issues the SEC staff has factors should be considered. An IPO may to the information expressly required raised in comment letters to such issuers. require the participation of constituents to be included, a general rule under the A review of comparable disclosure and in multiple countries and time zones. The Securities Act requires the company to issues raised in comment letters can help financial printer should have a sufficiently include such further material information, identify the significant disclosure issues broad and secure distribution network
NYSE IPO Guide 37 The IPO process
and equipment that is accessible 24 auditors, any selling shareholders and the industry, research reports on industry hours a day. Customer service should be underwriters. Controlling shareholders and competitors, trade publications); reliable and capable of supporting a deal of may also be liable. Chapter 8 contains a • meetings with auditors and obtaining international scope. The financial printer further discussion of the risk of liability auditor comfort letters on financial should make use of technology tools to facing directors and officers. information; streamline delivery of the project, which The company itself faces strict • third-party reports, where appropriate; may require making use of best practices liability, but underwriters, directors and in manufacturing concepts, analytical and officers may assert a defense if they • involvement of specialized counsel, techniques, process management and performed a reasonable investigation and where appropriate (e.g., issues of standardized procedures. Following believed the registration statement and intellectual property, mining rights or the IPO, the financial printer should be prospectus were materially accurate and regulatory matters). equipped to handle annual compliance and complete. This defense is often referred future transaction needs. The benefit of to as the “due diligence defense.” The In carrying out business due diligence, using the same financial printer for future applicable liability standards—and some underwriters and their counsel should needs is that it reduces the time required subtleties applicable to the liability of conduct extensive interviews with for data collection and ensures that former particular IPO participants—are discussed management. Specific questions about project knowledge is properly applied. more specifically in Section 8.1. the business should be asked. Moreover, In practice, the due diligence process additional information may be gleaned (c) Due diligence investigation requires an organized approach to verifying and inconsistencies identified by asking The process of verifying that the the information in the prospectus and different members of management information in the prospectus and the registration statement and to asking the same questions. Back-up data for registration statement is materially questions about the company. Key general industry data and statistics should also complete and accurate is broadly referred questions to explore at the beginning of be requested and reviewed. Specialized to as “due diligence.” While the guiding the process include the following: consultants may be called upon to assist in purpose is to limit the risk of liability, • What are the strengths and weaknesses the investigation where the nature of the the accuracy and completeness of the of the company’s business plan? Is the business or a particular issue warrants it. prospectus are essential goals for other company’s management capable of Although the investment bankers reasons as well. For the company and its executing the plan? and their staff will conduct the lion’s personnel, they provide the foundation • What internal or external events or share of the financial due diligence, it is for applying best disclosure practices trends could jeopardize success? important for the lawyers to be actively and building the confidence of investors. • Is there anything that, a year or involved in the process, to understand For underwriters, a robust due diligence two from now, with the benefit of the financial status of the company and exercise is required under a formal internal hindsight, the company might wish it identify possible problems presented in approval or commitments process designed had disclosed? the financial statements. to protect against reputational risks and to meet other institutional goals. An Financial and business due diligence: Legal due diligence: Underwriters’ underwriting firm has a vital reputational Financial and business due diligence counsel will generally take the lead interest in the soundness of the company’s involves extensive review and discussion in conducting legal due diligence by business plan and a disclosure document of the company’s historical financial preparing a document request list that that completely and accurately describes information, operations, current business, exhaustively identifies materials they the risks associated with that plan. Similar business plans, projections and other data. wish to review. During the preparation reputational concerns apply to directors It is generally carried out through: process, it may be helpful to review and shareholders. In addition, due diligence • formal due diligence sessions with key document request lists for companies can help identify business issues that members of management; in the same industry or from the same need to be addressed, such as necessary • informal meetings with key members country. The list should be used as a third-party consents and waivers for the of management; checklist and aid to organizing the due transaction. • drafting sessions; diligence process, rather than an inflexible Although these additional goals are • facility visits; set of bureaucratic requirements or limits important, the due diligence process is • preparation and review of forecasts; for the due diligence investigation. driven by the risk of liability. The parties • “sensitivity” analysis; Legal due diligence will often involve that may be liable if there are material • discussions with key customers, the following: misstatements and omissions in the suppliers, creditors and investors; • discussions with company personnel prospectus and registration statement • review of securities analyst reports; about the company’s legal affairs; (including documents incorporated • review of industry information and • closing documents, including by reference) include the company, disclosure regarding comparable officer certificates, public authority its directors, the officers who sign the companies (e.g., SEC filings and annual certificates such as certified charters registration statement, the company’s reports of other companies in the same and good standing certificates; and
38 NYSE IPO Guide The IPO process
• document review by the company’s and process on which offering participants convenient PDF format, and parallel access underwriters’ counsel, including: rely. Opinions usually cover such matters for each of the review groups. Moreover, • charter documents of the company as observance of corporate formalities, the use of a virtual data room eliminates and its material subsidiaries; existence of the company and material the need for travel and increases • minutes of meetings of subsidiaries and matters relating to efficiencies by making documents available shareholders, the board of directors the securities themselves. They may around the clock. and key committees, and materials also address compliance with material The following points can be important prepared for board and committee contracts, among many other matters. factors in selecting a virtual data room meetings; The negative comfort letter generally provider: • material contracts, including says that nothing has come to the • Established track record—The provider shareholders’ agreements and joint attention of counsel that would cause should have proven technology and a venture agreements, and forms of counsel to believe that the registration strong customer-focused background. contracts; statement or prospectus is false or • Leading technology—The ideal solution • filings, correspondence and other misleading in any material respect. should integrate leading technology, communications with supervisory support industry standards and work and regulatory authorities; Identifying potential problems: The due with globally accepted data formats. • materials relating to intellectual diligence process also aims to identify • Project management expertise— property, including licenses, potential impediments to the transaction. Confidentiality is paramount, as is the patents and trademarks; Examples include contractual rights provider’s ability to understand the • materials relating to pending of another party that the IPO could transactional business environment litigation, including counsel’s trigger or modify, because it results and assign project managers who litigation letters to auditors; in a change in the company’s share are educated and experienced in the • auditors’ letters to management; ownership. Provisions of this kind specific transaction at hand. • D&O questionnaires; and may exist in financing documentation, • Global production facilities—Choosing • other documents that may agreements with or among the company’s a provider with document-scanning further the legal due diligence shareholders (e.g., preemptive or facilities in cities around the world investigation. registration rights) or other important will ensure that accelerated document contracts or governmental authorizations. capture is quick and efficient. Corporate governance due diligence: The process should also identify risks • User support—It should be possible to Underwriters and their counsel typically to future financial performance or make changes and address questions review the company’s corporate governance competitive position and limitations immediately, for all users and in policies and Sarbanes-Oxley compliance on operational or financial flexibility. multiple languages. programs. Issues to be considered may Examples include upcoming expiration • Security—Security processes on include: or renewal dates, or early termination application, staff and infrastructure; • the company’s disclosure controls and provisions, in customer or supplier SSAE 16 Type II, multilocation data procedures and internal controls; contracts, government authorizations or hosting with zero-downtime network • the company’s code of ethics, IP licenses. guarantee; database replication exemptions to the code and past at multiple locations; and a core waivers; Paper data room v virtual data room: A competency in handling sensitive • the independence of the board of secure repository for the documents to be financial and business information are directors; reviewed during the due diligence process critical. (A SSAE 16 Type II service • the company’s policy on handling is critical. The company or its counsel may auditor’s report (or a SOC 1 Report) whistleblower complaints; host a “paper data room,” in which hard includes the service auditor’s opinion • the company’s document retention copies of proprietary business documents on the fairness of the presentation of policy; and and financial data are made available for the service organization’s description • nonaudit services provided by the inspection. The paper data room has of the system, the suitability of the company’s independent auditors. obvious limitations, given that participants design of the system to achieve the may be spread across several cities, states specified control objectives, and Legal opinion and negative comfort letter: or countries. Not only is inspection limited whether the system was operating It is typically a condition to closing the to the hours of operation of the host but effectively during the period under IPO that counsel for the company and review of documents for out-of-town review.) the underwriters provide both a legal participants is inconvenient. • Rapid deployment—Top-tier providers opinion and a negative comfort letter, The “virtual data room” provides should be able to provide the tools to or “Rule 10b-5 letter.” The due diligence an excellent solution to the challenges create indexes in minutes, not days, and investigation provides counsel with the presented by a traditional paper data room. enable document review in real time as basis for these letters, and the letters Virtual data rooms can offer secure, web- documents are captured, processed and in turn form part of the due diligence based access to documents, particularly in posted.
NYSE IPO Guide 39 The IPO process
• Simplified user rights—Management Shaping the investment thesis: Perhaps an appropriate “price range” with which of user rights should allow for easy the most important contribution that to market the offering, which is typically restriction and access functionality the bookrunners make during the IPO $2 wide and falls in the teens (e.g., quickly and easily. process is helping the company shape its $14–$16). The company will often need • Data management—Multiple file investment thesis. From the registration to execute a stock split—or more uploads should be possible, to save statement that is filed with the SEC to the commonly a reverse stock split—to time. roadshow presentation that is delivered to solve for this desired price range. • Collaboration tools—Tools such investors, the marketing message that the as e-mail alerts, document notes company uses during the IPO is critical Key players in the investment bank: and Q&A capabilities enhance the to its initial success as a public company. • Investment banking coverage: The collaborative efforts of reviewer Through intensive diligence and drafting investment banking coverage team groups. sessions, the bookrunners will become consists of industry experts who • Site customization—There should be well versed in the company’s strategy typically own the client relationship. enough flexibility to customize the site and key selling points and will assist the This team will be the key point of to the owner’s specific requirements company in effectively communicating contact for the company throughout its and to integrate corporate branding. those messages to investors. The life cycle for any investment banking • Intuitive interface—This should be registration statement and the roadshow advice or assistance it may need, simple enough that next-to-no training presentation are the two most important including on the IPO, mergers and is required and users can quickly find marketing documents, allowing investors acquisitions, debt and capital structure. documents. to quickly absorb the equity story and As such, the team will be or become • Expanded rights management—This evaluate their investment decision. experts on the company, its needs, its should be robust enough that the data strengths and areas for development, room owner can administer the site for Marketing the transaction: While as well as its overall vision and strategy. those seeking complete control. developing the marketing materials, the The coverage team will act as a liaison bookrunners will also develop a cohesive with the company and the equity capital 3.4 Underwriting, marketing, and sale marketing strategy for the company. In markets professionals, who will be the J.P. Morgan (Investment Banking) order to maximize the success of the captains of the IPO process, as well as offering, the bookrunners will determine any subsequent equity issuance that is (a) Underwriting the most important regions to visit with desired. Role of the bookrunners: The company the goal of reaching the largest number of • Equity capital markets: The equity should carefully choose the joint high-quality investors that will become capital markets team sits between bookrunners for the IPO and, in particular, meaningful long-term shareholders for the investment banking team and the lead left bookrunner, because of the the company. For EGCs, another topic the syndicate, sales and trading, and significant role that they play throughout of discussion with the bookrunners is research functions, acting as a liaison the process. As the quarterback of the IPO, whether to take advantage of the JOBS between the private and public sides the lead bookrunner advises the company Act provisions allowing them to “Test the of the investment bank. This team on all facets of the IPO process, assists the Waters” prior to launch of the IPO, in order advises the company on all of the company in shaping its investment thesis to assess potential demand for the offering execution-related decisions, liaises to be used while marketing the transaction, and identify and address any issues that with research to collect public-side guides the company with investors while investors may raise. feedback, and coordinates with the on the road and develops the optimal sales and trading functions on market pricing recommendation for the company. Setting the price range: Prior to being and investor color. mandated and throughout the IPO • Syndicate: Within most equity capital Advising the company: There are many preparation process, the bookrunners markets groups lies a syndicate complexities in an IPO process, including: will keep the company apprised of function, which is the main point • IPO sizing, including the primary market conditions and trading valuations of contact during the roadshow. versus secondary component; of its key comparables, as well as The syndicate coordinates with • leverage levels and overall capital the subsequent implications for the sales in entering investor orders structure at and post-IPO; company’s proposed IPO valuation. The into the book, speaking directly • co-manager selection; bookrunners will use a combination with investors regarding questions • comparable company selection; of comparable companies’ value, broad or concerns, developing the • valuation; market conditions and recent IPO value roadshow and marketing strategy • roadshow presentation and investment to determine the appropriate value for and ultimately assisting in a pricing thesis development; and the company. Once the appropriate recommendation. • marketing strategy and roadshow equity value range is determined, the • Sales and trading: The sales force acts logistics. bookrunners will advise the company on as the front line of the investment
40 NYSE IPO Guide The IPO process
bank in dealing with investors, calling • New York; hedge funds) that like to participate in clients in order to schedule meetings, • Boston; IPOs as a matter of practice and would soliciting feedback on the transaction • Mid-Atlantic (Philadelphia, Baltimore); not be seen on the roadshow. In addition, (both qualitative and quantitative) and • Mid-West (Chicago, Minneapolis, Europe is often the first region visited ultimately entering orders. It works Kansas City, Denver); during a roadshow and European accounts closely with the traders in order to • Texas (Dallas, Houston); therefore tend to come into the order book determine supply and demand and • West Coast (San Francisco, Los early in the process. execute trades for the investors. Angeles, Salt Lake City, Seattle); When the book begins to build, • London; investors will fall into two camps: Those Role of the co-managers: The co-managers • Frankfurt/Milan; and without a price limit (market order) and on an IPO are typically significantly less • Hong Kong/Singapore. those that have scaled orders at various involved in the day-to-day advisory role prices. For example, if the IPO filing range for which the bookrunners are responsible. A typical roadshow day involves: is $16 to $18 per share and Investor A has a They are, however, involved in the majority • five to seven one-on-one meetings and/ market order of 1 million shares, the order (if not all) of the diligence conducted. or conference calls; stands at 1 million shares at $16, $17, $18 The co-managers’ research analysts will • a group breakfast and/or lunch; and and potentially even above the filing range. also take part in all analyst diligence that • travel to the next day’s city. A scaled order by Investor B, in contrast, is conducted. The primary role of the may indicate 1 million shares at $16, co-managers is to underwrite additional Each investor meeting typically 750,000 shares at $17 and 500,000 shares shares in the offering, provide additional lasts 30 to 45 minutes and can take the at $18. The goal of the bookrunners is to research coverage post-IPO and assist in format of either a formal management get as many market orders as possible in market making once the stock is public. presentation of the roadshow slides with order to maximize price for the company, subsequent Q&A or simply informal while still balancing appropriate value for (b) Roadshow Q&A, depending on the investor’s investors and ideally achieving a Day 1 The roadshow is the pivotal portion of familiarity with the prospectus and/ trading “pop” of approximately 15%. Retail the IPO process, where the company or the roadshow slides. Investors have orders are also important to the order (accompanied by representatives from the access to the management presentation book, but typically retail demand is not a bookrunners) conducts a series of one- (audio and video), as well as the driver of overall pricing, as retail investors on-one and group meetings with investors roadshow slides via NetRoadshow, a are “price takers.” who will potentially purchase the shares system by which the bookrunners make Key points are emphasized to being offered in the IPO. Several weeks these documents available to relevant investors throughout the roadshow in prior to launching the roadshow, the investors utilizing a password-protected order to indicate the strength of the bookrunners will work with the company system. The SEC also requires similar order book and therefore the potential to determine the length and scope of the information to be made available to success of the IPO. Key terms include roadshow and to identify specific investor retail investors via retailroadshow. “level of subscription” or “subscription targets. com, where only the management slides rate,” which shows the number of shares Once the prospectus has been filed are available. Both systems make the in the order book relative to the number with the price range on the cover, management slides available during the of shares being offered. When the the roadshow typically launches with marketing period only; upon pricing, all offering is oversubscribed, investors will a management presentation to the materials are taken down and no longer know that the demand for the offering bookrunners’ sales force. The bookrunners accessible. After each investor meeting, is high and that their order will likely be will also create an internal sales force the sales force person responsible for cut back. The amount of price sensitivity memo that will be used by the sales force. covering each respective account will in the book is also a key benchmark. The memo is used as a “cheat sheet” follow up with the investor to get Another key metric of success for the by the salesperson when speaking to feedback on the meeting, the company, company is the “hit ratio,” which is the investors and gives him or her sufficient and modeling/valuation and whether it is percentage of investors with which the background to answer general questions. inclined to place an order. company held a roadshow meeting that The bookrunners handle all roadshow subsequently placed orders. The goal of logistics for the company. The roadshow (c) Book-building process the company and the bookrunners is to typically lasts 8 to 12 days, depending The goal of the bookrunners is to convert achieve as high a hit ratio as possible, on the size of the IPO, the scope of accounts into the order book as early as indicating that the management team has the business and the wishes of the possible. On an IPO roadshow, it is not successfully told a compelling story to management team, among other things. uncommon for accounts to begin coming investors on the road. The roadshow typically consists of into the book in small sizes during the For most IPOs, the majority of orders some combination of the following cities/ first day or two of the roadshow. Typically, will come in the last two to three days regions globally: these are smaller accounts (frequently of the roadshow. On pricing day, the
NYSE IPO Guide 41 The IPO process
bookrunners will “scrub” the demand to to purchase the IPO shares and resell identify which orders are “real” as opposed them to investors at the IPO price. The to those that have been placed to “game” bookrunners begin the allocation process the allocation process. The overall demand overnight, determining exactly how in the order book is known as gross much stock (if any) to allocate to which demand, while the actual shares that the accounts. The goal of the allocation bookrunners will look to allocate is known process is to create a high-quality, long- as allocable demand. term, focused shareholder base for the company. Once allocations to each account (d) Pricing, trading and closing have been agreed upon by the bookrunners The pricing meeting typically includes and the company, the syndicate “breaks” the company and key selling shareholders, prior to the market opening the day after as well as the bookrunners. In advance pricing and allocations are communicated of the offering, the board establishes a to each of the individual investors. pricing committee to formally approve the On the first trading day, the NYSE offering. When pricing a deal, numerous will coordinate a time at which the newly factors that occurred over the roadshow public stock will officially open. The are taken into account-general market Designated Market Maker (DMM) is conditions, the performance of the overall responsible for opening the stock at that market and the company’s peers during the time. In addition, the stabilization agent roadshow will all affect levels of pricing is the bookrunner chosen to open the and demand. trading in the stock after the offering and Additionally, new issuance activity to provide support to the stock price. The and the performance of recent precedent market will look to the stabilization agent transactions will have an overall effect as the syndicate bid in trading support on the company’s IPO price, either for the offering. The stabilization agent positively or negatively. After reviewing may commit capital to provide liquidity in the roadshow summary—which includes the common stock market if the stock or an overview of accounts with which market comes under pressure immediately management met, the hit ratio/success after the offering and can also use the rate from these meetings and key feedback short position created by the IPO over- themes, as well as gross demand, allocable allotment (typically 15%) to repurchase up demand and price sensitivity in the order to 15% of the shares offered in the event book—the bookrunners will communicate the shares fall below the offer price. the price per share recommendation The IPO will officially close three days to the company and give the pricing after the first trading day of the stock committee time to deliberate on the (T+3). At that point, all of the funds will be recommendation. The ultimate goal of wired, stock transfers will be completed, the pricing recommendation is to achieve the legal documentation will become the best possible price for the company unconditional and the IPO will officially while allocating to the highest-quality close. ● shareholder base and ensuring that the investor base is achieving attractive valuation and will receive an IPO “pop” on the first and subsequent days of trading. It is in the best interests of the company, key beneficial shareholders and the bookrunners that the stock trades well in the aftermarket. Once the company and its pricing committee have formally agreed on an IPO price with the bookrunners, the underwriting agreement is executed by the company, any selling shareholders and the underwriters, pursuant to which the underwriters make a firm commitment (subject to certain customary conditions)
42 NYSE IPO Guide 4 The IPO on-ramp under the JOBS Act
NYSE IPO Guide 43 The IPO on-ramp under the JOBS Act
4.1 The JOBS Act: Emerging growth • the last day of the fiscal year in which of “say-on-pay” votes), certain other company status it achieves $1 billion of gross revenues; required shareholder actions and Fenwick & West LLP • the last day of the fiscal year that certain proxy statement disclosures; includes the fifth anniversary of its • exemptions from mandatory audit firm (a) Background IPO; rotation and any auditor’s discussion In April 2012, President Obama signed into • the date on which it has issued more and analysis requirements; and law the JOBS Act. One of the aims of the than $1 billion in nonconvertible debt • relief from the requirement to comply JOBS Act was to increase the number of during any previous rolling three-year with any update issued by the FASB to companies electing to complete an IPO and period (excluding issuances in A/B debt its Accounting Standards Codification to provide those companies a transition exchange offers); or until the date that a company that is a period, or “on-ramp,” to the public markets, • the date on which it is deemed to private company is required to comply allowing them to focus resources on growth be a “large accelerated filer” (which with such new or revised accounting of their businesses before having to expend requires, among other things, having standard if such standard does not resources toward complying with many of common equity held by nonaffiliates apply to private companies. the regulations often cited as costly and with a market value of $700 million burdensome for newly public companies. or more). In this regard, EGCs that are foreign The so-called IPO on-ramp provisions, private issuers and that reconcile their which are contained in Title I of the JOBS 4.2 Advantages of emerging growth home country GAAP financial statements Act, reduce a number of existing financial company status to U.S. GAAP may also take advantage disclosure, corporate governance and other Fenwick & West LLP of the extended transition period for regulatory burdens on a new category of complying with updates issued by the FASB issuer, referred to as an “emerging growth (a) Overview to its Accounting Standards Codification company.” The IPO on-ramp provisions of the JOBS in their U.S. GAAP reconciliation. Act offer EGCs a number of advantages (b) Qualifying as an emerging growth during the IPO process, including: (b) Confidential submissions company • confidential submission and review of EGCs have the option to confidentially Subject to certain exceptions, an EGC IPO registration statements; submit to the SEC a draft registration is defined as an issuer of securities that • reduced financial statement audit and statement for confidential, nonpublic had gross revenues of less than $1 billion disclosure requirements; review by the SEC prior to public filing. during its most recently completed fiscal • reduced executive compensation This allows an EGC to explore the year. An issuer would qualify as an EGC disclosure requirements; possibility of an IPO without exposing any even if its gross revenues exceeded $1 • the ability to engage in oral or written confidential information to its competitors billion in years prior to its most recent “test-the-waters” communications or the market generally until 21 days fiscal year. with certain types of potential before the date on which it begins to Gross revenues are measured with investors to gauge interest before or conduct its roadshow (see Section 3.4(b)) reference to total revenues as presented after filing; and and without risking the embarrassment on the income statement presentation • liberalization of the use of research associated with pulling the IPO should the under U.S. GAAP (or IFRS as issued by the reports and easing of restrictions on EGC do so. IASB, if used as the basis of reporting by analyst communications. The confidential submission process a foreign private issuer). If the financial is only available for EGCs that have not statements of a foreign private issuer are The IPO on-ramp provisions of the already completed a public offering of presented in a currency other than U.S. JOBS Act also reduce the costs and burdens common equity securities, including dollars, total annual gross revenues for of being a public company for EGCs after offerings under employee benefit plans purposes of this test should be calculated completion of their IPOs by providing: or pursuant to a resale registration in U.S. dollars using the exchange rate • an exemption from the public statement. EGCs that have completed as of the last day of the most recently accounting firm attestation to issuer public offerings of debt securities may completed fiscal year. When calculating internal controls required by Section use the confidential submission process. gross revenues, financial institutions may 404(b) of the Sarbanes-Oxley Act; Foreign private issuers may also be exclude gains and losses on dispositions of • scaled-back financial and compensation eligible to submit their draft registration investment portfolio securities. disclosure requirements for future statements on a nonpublic basis under registration statements, periodic existing policies of the SEC’s Division of (c) Length of transition period reports and other reports to be filed Corporation Finance; however, the benefits An issuer that is an EGC as of the first day with the SEC; of this policy are not available to foreign of that fiscal year will continue to maintain • exemptions from “say-on-pay” private issuers that take advantage of any that status until the earliest of: votes (and votes on the frequency benefit available to EGCs.
44 NYSE IPO Guide The IPO on-ramp under the JOBS Act
(c) Scaled disclosures While these changes are designed to requirement of SOX. It should be noted, EGCs may “scale back” financial and reduce costs, EGCs may find that providing however, that, as explained in Chapter 2, compensation disclosures in their IPO the traditional level of historical financial EGCs will still be required to establish and registration statements and subsequent disclosure is helpful in the IPO marketing maintain disclosure controls and procedures filings under the Exchange Act. In particular, process. In the first year subsequent to the and internal controls, and their principal IPO registration statements for EGCs may enactment of the JOBS Act, most EGCs executive officer and principal financial contain: have still presented financial statements officer will still be required to certify Form • two years of audited financial for a full three years and also five years of 10-Q and 10-K filings. statements, including those of acquired selected financial data. businesses, rather than the three-year 4.3 Process timeline requirement described in Section 2.2(a); (d) Test-the-waters communications Fenwick & West LLP • selected financial information for the As discussed in Section 3.2(b), issuers years including and after the earliest must avoid illegal offers and not engage in The time-intensive process of submitting audited period presented (i.e., as little communications and activities that might confidentially and executing an IPO as as two years of selected financial be viewed as impermissibly affecting the an EGC can take the 12 to 16 weeks from information), rather than the five-year market for the securities to be offered. The initial filing to effectiveness it typically requirement described in Section 2.2(a); JOBS Act amends Section 5 of the Securities takes for a non-EGC issuer to complete • MD&A for the periods covered by the Act to add a new Section 5(d), which the process described in Section 3.1. audited financial statements (i.e., as permits EGCs to engage in oral and written As with IPOs of non-EGC issuers, the little as two years plus “stub” periods), communications with institutional or highly exact time taken to complete an IPO for rather than the periods described in sophisticated prospective investors to gauge an EGC can vary widely and depends on Section 3.3(a); and their interest in a contemplated securities market conditions, the complexity of the • the streamlined and simplified offering before or during the “quiet period” transaction, the EGC’s readiness prior to compensation disclosures required of or during the “waiting period” described in embarking on the IPO process and many smaller reporting companies, meaning Section 3.2(a). These communications are other factors. Like the process outlined in that that the registration statement not a substitute for the traditional roadshow Section 3.1, the IPO process for EGCs can need not include, among other things, a and book-building processes described in be broken down into the following stages. detailed compensation discussion and Section 3.4(b) and (c). While practices in analysis section or tabular information this area are evolving, issuers should pay (a) Prior to official IPO process launch for more than three executive officers and careful attention to the timing, content and Decision to go public: While the EGC certain executive compensation tables. delivery mechanism of each communication. should still evaluate its internal readiness, In particular, written communications are including industry position and growth With respect to the scaled executive subject to SEC review and could complicate prospects, it also has the flexibility to compensation disclosure requirements, the IPO process if they are inconsistent with assess investor interest in a contemplated EGCs must still consider whether there the prospectus or roadshow presentation. offering of its securities, to determine is additional, material compensation The SEC has been requesting copies of any whether it is ready to go public. disclosure that would be useful to “testing-the-waters” communications made investors to understand how the EGC’s in reliance on Section 5(d) as well as any Testing the waters: The EGC and its executive compensation programs operate. research reports. advisors should consider whether to EGCs may follow all or some of these engage in test-the-waters communications “scaled” disclosure provisions, except in (e) Other benefits with “qualified institutional buyers” or their initial filing or submission they must The “IPO on-ramp” provisions make “accredited investors” to gauge interest in a decide whether to take advantage of the becoming a public company more attractive contemplated offering of its securities. extended transition period for complying by reducing costs and burdens for EGCs with any of the FASB’s updates to its after they go public, often by simplifying Internal controls: Once the decision has Accounting Standards Codification. If an and streamlining disclosures. One of the been made to prepare for an IPO, the EGC decides to take advantage of such an most significant of these benefits is an EGC should still take the actions other extended transition period, it may later exemption from the requirement contained issuers take: select an appropriate board of choose to reverse its election. Although in Section 404(b) of SOX to obtain an directors, prepare audited financials (with the JOBS Act refers to domestic company internal controls attestation and report from a qualified independent registered public rules and forms, a foreign private issuer a registered independent public accounting accounting firm), and begin establishing that qualifies as an EGC may comply with firm while the issuer remains an EGC. For internal controls. the scaled disclosure provisions to the many, perhaps most, companies seeking to extent relevant to the form requirements complete an IPO, this will delay by at least Selection of advisors: The EGC should still for foreign private issuers. three years the need to comply with this carefully select its IPO advisors, including
NYSE IPO Guide 45 The IPO on-ramp under the JOBS Act
the right investment bank and counsel its overall readiness to complete an IPO those submissions public at the time of the experienced in the industry and types of before embarking on the IPO process. initial public filing. initial public offerings of the EGC. Legal and other documentation: In Valuation update with the investment (b) Week 1 addition to the prospectus, the EGC bank: As is the case in traditional IPOs, it is Organizational meeting: The traditional and underwriter’s counsel will work prudent to have relatively frequent valuation organizational meeting would still occur with the investment bank, the EGC and updates with the investment bank. in the case of an IPO for an EGC. However, the auditors to draft and complete the if an EGC is uncertain of its ultimate documentation outlined in Section 3.1(b) (e) Weeks 7 to 8 timing for its IPO, it may decide to work (e.g., underwriting agreement, comfort Testing the waters: The EGC and its more informally with a few underwriters letter, etc.) The primary differences in the advisors should consider whether to to prepare for an eventual formal kickoff documentation of traditional IPOs and engage in test-the-waters communications of the IPO process with the organizational those of an EGC include: with “qualified institutional buyers” or meeting. • the underwriting agreement will “accredited investors” to gauge interest in contain additional representations the contemplated offering of its securities. (c) Weeks 2 to 5 and warranties relating to a company’s In addition to helping the EGC gauge Drafting: The EGC would still prepare the status as an EGC and representations investor interest in the offering, such same Form S-1 registration statement and and covenants relating to test-the- communications could provide valuable prospectus. The drafting process is also waters communications; and information and experiences and impact largely the same as for traditional IPOs. In • the lock-up agreements for existing the crafting of the marketing story for the general, the contents of the document are shareholders no longer need contain impending roadshow. same as those outlined in further detail in what are known as “booster shot” Section 3.2(d). The contents are different provisions—where the typical 180- Roadshow presentation: The preparation in the following ways: day lock-up period can be extended if of the roadshow presentation and the • The financial statements may include the EGC issues an earnings or other roadshow itself is not notably different for two (rather than three) years of audited material press release or if material EGCs than it is for companies engaging financial statements and selected news about the EGC is released prior to in traditional IPOs. Before finalizing the financial statement information for the the expiration of the lock-up period. key roadshow messages, the EGC has the previous two (rather than five) years. ability to take advantage of the testing-the- • The MD&A of the EGC’s performance Determine listing venue: The EGC should waters provisions of the JOBS Act to help need not cover more than the past two still determine earlier in the process further refine the roadshow messaging. (rather than three) years plus any “stub” whether it is eligible to list on the NYSE or periods; other exchange and reserve a ticker symbol. Discuss offering structure: The EGC and • The compensation disclosure and the investment bank should determine if analysis for executives need not include (d) Week 6 there will be more than sufficient investor more information than is required of Confidential submission: An EGC demand for the contemplated offering a smaller reporting company, meaning may elect to submit a draft Form S-1 of its securities so that the EGC can that the document need not include, registration statement to the SEC determine whether to make the decision among other things, compensation confidentially, rather than making a to publicly file the registration statement. discussion and analysis or tabular public filing. In general, draft registration The EGC should also solicit interest from information for more than three statements submitted through the selling shareholders on any potential executive officers and may omit certain confidential submission process are the shares that they may want to sell as part compensation-related tables such as same as registration statements filed of the IPO in accordance with any notice the grant of plan-based awards, and outside of it. However, they need not be requirements to the shareholders. option exercise tables; and signed or include the consent of auditors • The EGC must make affirmative and other experts, although the EGC must (f) Weeks 9 to 13 disclosure in the registration statement provide a signed copy of the report of the Receiving and addressing SEC comments: as to whether it will elect to “opt independent registered public accounting The SEC comment process for confidential out” of new accounting standards firm with any submission. Confidential submissions takes a similar amount of that are not also applicable to private submissions must be made via the SEC’s time as for traditional IPOs—with the companies. EDGAR filing system with the tag “DRS” SEC taking approximately 30 days to or, in the case of subsequent submissions, review and provide comments on the Due diligence: The due diligence process “DRS/A.” Once the initial public filing is initial submission. Subsequent rounds for an IPO of an EGC is the same as that made, there is no need to file the prior of comments can take a range of time, for traditional IPOs. Because this process confidential submissions as exhibits, as the depending on the complexity of the issues is time-intensive, an EGC should consider EDGAR system will automatically make and additional disclosures included by
46 NYSE IPO Guide The IPO on-ramp under the JOBS Act
the EGC. Comment letters and related While it remains to be seen how much of correspondence for completed IPOs of an impact the “IPO on-ramp” provisions EGCs are made public within a few months will have on the number of issuers who of the effective date of the registration prepare to go public, many traditional statement. IPO practices are changing as EGCs take A Form S-1 registration statement advantage of the ability to “test the waters” and all prior amendments should be filed prior to their IPOs and the confidential publicly with the SEC at least 21 days submission process. Many EGCs are before the roadshow launch. benefiting from being able to explore an IPO without disclosing confidential Legal and other documentation: information to its competitors or Lock-up agreements and Financial the market generally, and avoid any Industry Regulatory Authority (FINRA) embarrassment associated with pulling the questionnaires should be widely circulated IPO should the EGC do so. to directors and officers of the company After EGCs have had a longer period of shortly before the public filing if the EGC reporting as public companies, disclosure and the underwriters have elected not practices may continue to evolve. After to circulate those on a more widespread only one year of life under the JOBS Act, basis while the EGC was still submitting EGCs may face pressure from investors confidential drafts. to increase the amount of disclosure they provide, particularly in the areas of Marketing strategy: Continue to executive compensation. consider engaging in test-the-waters There may be more benefits in store communications. for EGCs. The JOBS Act provides a plan for future changes to existing disclosure (g) Week 14 requirements to modernize and simplify Finalize offering size and structure and the registration process and reduce convey valuation information to the SEC the costs and other burdens associated in order to resolve any issues regarding with these requirements for EGCs for valuation of the EGC’s common stock in the purpose of further streamlining the prior equity transactions, such as grants of registration process to making it more employee stock options. efficient and less burdensome for the SEC and for prospective EGCs. ● (h) Weeks 15 to 16 • File a Form S-1 amendment with the red herring prospectus that includes price range and offering size. • Launch roadshow. • Price the IPO. • The next day, the EGC begins publicly trading on the NYSE, rings the opening bell and hosts other key marketing events associated with being a public company. • Close the IPO.
4.4 Conclusion Fenwick & West LLP
The JOBS Act has helped relieve some of the burdensome requirements smaller companies face in accessing the U.S. capital markets and made going public more attractive by reducing the associated costs and burdens for a period of transition while these companies grow.
NYSE IPO Guide 47
5 IR and communications
NYSE IPO Guide 49 IR and communications
5.1 Preparing an IPO communications updates to executive biographies and Additionally, they must understand strategy the creation of company fact sheets, that compliance with disclosure rules FTI Consulting which can be posted to the website. and internal control requirements is Additionally, the company should everyone’s responsibility and that there There is a strong temptation to view IPO review its press release strategies are repercussions for the individual communications as a listing-day event, to maximize opportunities for a and the organization for not adhering meticulously planning for the inevitable consistent flow of announcements to these rules. Training and education publicity surrounding day-one trading. In during the quiet period (i.e., establish on the IPO process—articulating the reality, preparation should begin well before a baseline of new product/client expected milestones—as well as setting the registration statement is filed to ensure announcements, key milestone clear expectations about what it means consistent messaging and a strong baseline updates and other news to avoid the to be part of a public company, will of communications before the “quiet appearance of “gun jumping” during the help eliminate confusion. period” begins. registration period). • Business partner communications— Although the IPO prospectus will • Website—many prospective investors outreach to this group is very much be the primary selling document for the and covering reporters will visit the contingent upon the degree to which offering, investors and media will look company’s website, so it is important relationships with business partners as broadly as possible for further insight that the site reflects the image the are expected to change following the into the company, its business and its company wishes to convey, that listing, if any. A company may be competitive position. The company should corporate information is easily required to disclose information about therefore conduct a thorough assessment accessible and that all data points its top vendors or customers in its of its brand and reputation, as perceived are consistent with those provided registration statement and subsequent by customers/clients, employees, vendors, in the IPO registration statement. filings with the SEC following the IPO. regulators, industry analysts and other key In addition to reviewing the site for In these cases, outreach to inform stakeholders as early as possible in the IPO accuracy, the company should consider partners of the required disclosure process so that any remedial actions can adding information about its mission, or to communicate any changes in be taken before it becomes constrained vision, and values; an online media interaction with them may be advisable. by quiet period rules. Generally, kit; executive biographies; lists of Additionally, management may want to communications made more than 30 historical accomplishments and other consider communicating to business days before the filing of the registration reference documents. These materials partners more generally around the statement will not be considered will be important media and investor IPO listing to promote the message impermissible “gun jumping,” as long as relations tools to bridge the gap when of “business as usual” or to reinforce they do not talk about the offering. communicators are unable to speak the benefits (e.g., growth, investment, In particular, the company should directly with their constituents. change in capital structure) of the review any public commentary about • Marketing materials and other transaction. its financial results or growth prospects customer communications— to identify discrepancies between what the company should review its Among the company’s most previously was disclosed/anticipated and marketing materials and customer important tasks in building out a the information that will be presented in communications to ensure that communications platform as it prepares the upcoming SEC filings. messaging and statistics are to go public is the development of a The company’s communications consistent with the language in the comprehensive strategy to interface with review should include the following: IPO registration statement. Equally a crucial new audience—the investment • Media relations activities—the important, it should train public-facing community. The way in which the IPO will attract attention from an employees (e.g., receptionists, sales company communicates to the financial expanded media universe focused force, customer service representatives markets significantly impacts its status on performance, growth potential and others) to respond to external in its industry, the perceived value of its and other financial events. While inquiries within the confines of SEC business, management credibility and the majority of the work in building regulations and to forward questions ultimately the valuation of its securities these new media relationships begins outside their respective areas of in the markets. after the quiet period, the company responsibility to the appropriate Preparing for an IPO includes should ensure that key industry communications representatives. establishing protocols for how the reporters accurately understand its • Employee communications—as with company will engage with investors, what business strategies and differentiators any major change, an IPO can lead information and operating metrics it will in advance of the initial filing of the to employee uncertainty. Employees provide, how it will report its financial registration statement. Activities could may have questions about how the results and what communications channels include a series of reporter briefings IPO will affect their jobs, what new it will use. The IPO process will place the (assuming an appropriate news hook), opportunities are available and whether company under acute public scrutiny and a review of boilerplate language, they will be able to purchase shares. set in motion a whirlwind of activity. It is
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critical that preparations begin during the whether this information can be guidance policies of peers should pre-IPO phase to allow adequate time for included in the registration statement also be analyzed and factored into the benchmarking and planning, and so the to provide additional consistency. decision. company will be ready to go “live” by the Specific consideration should be • Online communications tools—the time the IPO prices. given to the metrics that peers use to investor relations section of the Key elements of an effective financial describe their businesses and provide company’s website is often the first communications strategy include the guidance on future performance, as landing spot for investors seeking following: well as additional supporting material more information about the company. • Consistency—investors will be they provide. Understanding and As such, it should be user-friendly, looking for new information in accommodating these standards—or interactive and easily accessible. every interaction with management, proactively addressing differences— Visitors accessing the site must be and any variations in messaging, will keep the company in sync with supplied with the information they content, tone or frequency/timing of what investors are accustomed to need to conduct initial due diligence communications can be seen as an receiving from other companies in on the company and help them advance indication of changes in the business the same industry and demonstrate their investment decisions about or outlook that could affect the a commitment to open and honest the stock. Information that can be company’s stock price. Consistency in communications. Additional financial dynamically updated regarding the communications is paramount, yet the and operating characteristics critical to business, key executives and strategy company must also allow sufficient understanding the nature and strength will help investors better understand flexibility to adjust to business of the business can and should be the company and its future prospects. conditions. provided. • Training—management teams without • Benchmarking—an important first • Nonfinancial disclosures—one public company experience should be step is establishing a framework for of the most frequent and visible trained to communicate with investors how the company will communicate communication opportunities is within the regulatory framework. to the financial community. Key the reporting of quarterly financial The market will respond favorably to this process is analyzing and results. In addition to meeting SEC to executives who are forthcoming benchmarking how industry-leading disclosure requirements, investors and open about their businesses. and peer companies communicate to expect management to interpret results However, engaging with investors in their financial audiences. Investors, and provide additional commentary real time subjects executives to the the media and other key stakeholders on business developments via the risk of making selective disclosures assign companies to peer groups earnings release and conference call. of material nonpublic information, against which they evaluate the These communications should go which is prohibited under Regulation company’s performance. It is beyond the prescribed financials and Fair Disclosure (FD). It is critical for therefore important to understand the financial metrics by incorporating executives to understand the parameters thoroughly the standards against business commentary, industry and of what they can discuss. Trainings may which the company will be segment trends and other qualitative also be helpful for executives unfamiliar evaluated—in terms of both peers information. with Wall Street to better understand and best practices. • Guidance—guidance continues to the different roles of the sell side and This benchmarking study should be a controversial topic within the buy side and how that may impact how encompass a full range of materials investment and corporate governance they interact with different individuals. scrutinized by investors, including communities. However, an important financial and regulatory filings, press driver of equity valuation is the Even as the company seeks to releases and transcripts or webcasts ability of investors to forecast future refine its communications strategies, of public events such as earnings earnings and cash flows. How the it is important to understand that conference calls, investor conferences company provides forward-looking investors will look well beyond its and analyst events, and should include commentary through guidance can direct shareholder communications for the timing of peer group reporting significantly affect the valuation of insight into its business prospects and as well as content. As a general rule, its stock. Research has demonstrated investment potential. In addition to the company will be judged on the that relatively frequent, accurate traditional investor relations, the company completeness, quality and accuracy of and granular guidance is associated should consider its corporate and media the information package it provides to with a lower cost of capital; yet the communications strategy as part of an the financial community. risk of not meeting expectations, entire communications approach. This • Financial and business metrics—the a possible duty to update and includes assessing news trends, building company should identify early in potential liability concerns demand relationships with reporters, influential the process the metrics and other careful consideration. To be aligned bloggers and industry analysts, and information it plans to provide to with investor expectations, and to understanding how peer companies are investors post-IPO and consider address any differences in disclosure, portrayed in the media.
NYSE IPO Guide 51 IR and communications
Developing strategies for • protect management’s credibility If an inadvertent disclosure of material disseminating positive announcements and reputation within the financial nonpublic information does occur, it is and managing difficult news will pay community. important for the company to make that long-term dividends, helping build the information public promptly. Regulation company’s brand, enhance its reputation, Since investors have no role in the FD defines “promptly” to mean as build management credibility and protect operations of the company, they rely on soon as reasonably practicable, but in valuation. Companies must have the management to protect their investment no event after the later of 24 hours or proper response mechanisms in place and keep them informed on the status of the commencement of the next day of to address crisis situations quickly and the business. This requires a commitment trading. (Regulation FD is discussed effectively, including those crises that may of management to engage the financial further in Section 5.4.) occur while the company is still in the IPO community in a credible, honest dialogue. quiet period. Developing and refining a core message Planning, vigilance and transparency Regulatory parameters for communicating platform: Essentially, the company’s are the most effective investor relations to the investment community: shareholders are placing a bet on its tools a company possesses. By developing Communications strategies must future success. Accordingly, ideal a comprehensive communications accommodate not only the information communications provide a roadmap to strategy that provides for consistent that must be filed with the SEC under the future and then maintain an ongoing communications, meets (or exceeds) securities regulations but also broader flow of information about the company’s peer standards and provides required communications “best practices” that progress in achieving its goals. Developing disclosures, the company can prepare, can be more complex and demanding. In and maintaining a core message platform pre-IPO, to thrive in a public environment particular, management must determine that clearly communicates the company’s and adapt efficiently to the many whether a corporate development or goals, market opportunities and growth surprises and challenges that will change in outlook is material and must strategies is critical for ensuring that inevitably arise. be reported; this determination can be the value drivers are well articulated difficult when there is uncertainty about and consistently delivered across its 5.2 Communicating with the market the future or a wide range of variability communication vehicles and channels. post-IPO around potential outcomes. Furthermore, These messages should build on those FTI Consulting Regulation FD provides that if management developed in the pre-IPO phase, with discloses material nonpublic information adjustments made as needed to dispel While an IPO marks a significant to some investors or analysts, it must make any lingering concerns or misperceptions milestone in a company’s history, it is only the same information available to everyone. about the company’s positioning in the beginning of an ongoing process of In practice, this requires management to the market, its performance within the building value for its shareholders. provide access to material information current economic climate and the issues The company’s operating performance simultaneously to all market participants, surrounding the industry as a whole. To will be an important driver of value necessitating careful attention to the ensure consistency, all audiences should be creation. However, financial markets in timing, content and delivery mechanism of considered when developing the message their role as a discounting mechanism each communication. platform. assign value to the company’s future One key example of how Regulation In cases where there is significant earnings and cash flows supported FD affects financial communications investor churn in the period following the by, among other things, intangible is the decision by many companies to IPO, it may be advisable to do a more factors such as investors’ confidence instate an earnings “quiet period” in the thorough vetting of perceptions to ensure the in the business model, their belief in weeks leading up to the reporting date, company is addressing the concerns of management’s ability to execute the during which they will not meet with the current investor base. Specifically, the stated strategy and their perceptions of or talk to investors. This quiet period company should conduct research that: the company’s credibility, transparency and the inability to respond directly to • ascertains the investment community’s and corporate governance structure. All a question come at the awkward time current views of the company, these intangibles are greatly influenced by when the company’s results are known management team, strategy and how the company communicates to the by management but not yet reported prospects; financial community. publicly. • analyzes drivers behind buying and From management’s perspective, the When companies have reported selling activity post-IPO; goals of investor communications are to: results and are ready to resume meeting • identifies areas of potential • optimize the value of the company’s with investors, they generally not only misunderstanding of the company’s equity (or conversely, minimize the file the earnings information with the positioning/prospects; and cost of equity capital) over time within SEC but also issue a press release using • compares its own communications the context of both the company’s a distribution service and post it to their efforts to those of the peer group to performance and macroeconomic and investor relations websites to ensure identify areas that may require further industry trends; and equal access for all interested parties. explanation going forward.
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Based on these findings, the company sufficiently ambitious so as to demonstrate earnings release, while others file it can tailor messages—and, in some cases, a robust business, yet achievable and later (particularly for year-end results). the actual financial disclosures—to realistic so they can be met consistently. These important communications move perceptions closer to the desired Expectations can be established by provide an opportunity to demonstrate state. Once refined, key messages should providing quantitative and qualitative openness and candor through the permeate all communications, including guidelines such as growth targets, margins way that management speaks to the presentations, fact sheets and websites, and market share over varying timeframes, company’s successes and challenges, targeted to investors. depending on the visibility into and how its strategy is succeeding and predictability of the business. Once these what investors can expect in terms Disclosure guidelines and processes: parameters are established, the company of future performance. Effective As the visibility and sponsorship of the must carefully consider whether a variance preparation is critical to ensure that company increase, the volume of incoming from expectations is material enough management has anticipated investor inquiries and demands on management to warrant proactive disclosures and, if questions and can either proactively time and attention will likely escalate. It is so, what constitutes the proper timing or reactively address issues, as important to understand that all audiences of the announcement and the forum for appropriate. are interconnected and information flows discussing it. For many IPO companies, the freely among them and that investors may It is important for newly-public initial earnings period brings unique act on information or perceptions that companies to understand that results challenges as they find themselves exist in any domain. This argues for close outside the anticipated ranges—be it reporting results for the first time coordination among all people charged on the upside or the downside—can while still in a quiet period. It is critical with speaking to the public. significantly impair management to effectively balance quiet period To ensure consistency of message and credibility for effectively communicating restrictions with the desire to set a protect against improper disclosure, it is with Wall Street and potentially lead to a strong precedent for transparency and strongly recommended that management misperception that the company’s results good corporate governance. establish at the very beginning a formal will be unpredictable or volatile, neither • Investor meetings—there are multiple disclosure policy and protocols to manage of which is constructive for the stock’s forums in which management can incoming inquiries about financial and valuation. Although many companies personally engage investors: investment topics, as well as the flow of mistakenly believe that earnings that beat • nondeal roadshows, where the outgoing information. This policy should expectations will propel their stock price company meets with institutions in include guidelines on when the company forward, the benefits are often short-lived, one-on-one or group meetings; will speak to investors, what information as they encourage shorter-term investors • sell-side brokerage firm and is allowed to be communicated and to bet on the company’s ability to beat investment bank investor which members of management or the sell-side analyst estimates, rather than conferences, often with a group investor relations team are authorized focusing on the long-term strategy and presentation, followed by one- to speak for the company. All employees value creation. on-one or small group breakout should be made aware of these guidelines meetings for more detailed and of their obligations to maintain the Forums for communicating with investors: discussions; and confidentiality of material nonpublic There are a number of important forums • company-sponsored events such information. The guidelines should be for conveying the company’s investment as analyst/investor days on-site reviewed regularly. and business propositions and maintaining or group meetings at company Importantly, disclosure policies should an ongoing dialogue with investors: headquarters to showcase the be designed not only to manage the flow of broader leadership team and information but also to ensure its quality, • Quarterly earnings—reporting company facilities—with companies accuracy, consistency and timeliness. In earnings to investors is perhaps the increasingly using webcasts at addition to ensuring reliable, rigorous most important medium for providing large-scale analyst/investor days communications, this will also help to commentary about the business to to expand the live and on-demand reduce the risks of liability that can arise the financial community. The typical global attendance at such events. from any materially false, misleading or earnings process includes a press incomplete public disclosures. release with financial data, or an Regardless of the format, these advisory directing investors to the meetings provide valuable opportunities Setting expectations: The company’s company’s website for details, as well to contextualize financial results, success will be measured by execution as a conference call and Q&A with explain growth strategies and develop against expectations, whether those are set sell-side analysts and institutional relationships with investors. Yet even through formal guidance, analyst estimates investors. The related SEC filing— under the best conditions, management or metrics disclosed during the IPO Form 10-Q or Form 10-K—is more cannot meet with all the best firms and process. If the company provides its own formal and much more extensive; some the best contacts at any one event. As guidance, these expectations need to be companies file it concurrently with the investor relations teams work to establish
NYSE IPO Guide 53 IR and communications
the meeting schedule for the period to management strength and market Beyond these efforts, there is an immediately after the IPO quiet period position, effective financial, business ongoing need to replenish the pipeline by is lifted, the priority should be to meet and trade media relations strategies identifying and courting new investors. targeted investors that are currently can influence investment decisions The ideal target group consists of long- underweighted in the company’s shares and provide a reputational cushion in term investors that have a track record for and “on-the-fence” targets that were difficult times. investing in the company’s industry and included in the IPO roadshow but did • Social and online media—media whose portfolio holdings have business not buy at the offering. These targets influence has been extended further as and financial characteristics similar to should then be supplemented with social media takes a more prominent those of the company. While there will appropriate long-term investors that did role in companies’ communication likely be interest from the company’s not participate in the roadshow. Building strategies—and particularly in covering analysts to market the company these relationships creates a new level the investor relations strategies of to prospective investors, management of potential buyers of the stock when companies in technology-centric should take responsibility for managing “bridge” institutions or insiders want to industries and those with larger retail the investor base and targeting potential sell their shares. investor bases. Each day, millions of new shareholders. • Press releases—even routine company people participate in live, passionate, announcements have the ability to authentic conversations via social Sell-side analysts: In order to increase impact the company’s stock price, and media forums and blogs. These visibility among the buy side, the company all press releases should be developed communications channels allow should develop sell-side sponsorship to with an eye toward what the content companies to engage directly with generate independent financial models, means for the business and how stakeholders, but they also come determine an appropriate multiple the news will be perceived by the with serious responsibilities in terms that will help to drive the long-term investment community. Whenever of disclosure requirements and the valuation of the company and help market possible, press releases should tie assumption that companies will the investment story to the buy-side news events to the company’s stated continue to communicate through investment community. Analysts are a strategy and demonstrate momentum good times and bad. It is essential that key component in the capital markets and and progress against its long-term online media strategies are executed they play a critical role in communications objectives. If the announcement will with the same level of foresight and between management and the investment impact the company’s expectations legal supervision as traditional media community. for the quarter or year, these issues strategies. Once public, management should also should be addressed in the strive to secure research coverage by announcement. Managing the shareholder base: Since nonsyndicate analysts, who will be viewed • Conference calls and webcasts— investors have differing perspectives on as more impartial. An ideal mix of analysts depending on the importance and what creates value in the markets, it is would include quality bulge-bracket firms complexity of the announcement, crucial to ensure that the investment that add credibility and cachet to the it may also be necessary to hold a style, holding period and industry focus company’s profile, combined with strong conference call or webcast for the of the company’s shareholder base are tier-two regional firms that take a more investment community. These allow aligned with, among other things, its active role in analyzing and covering the management to provide additional business model and the investment company. color on the event that prompted the proposition. Prioritizing management’s time with announcement, discuss how it will Managing the company’s shareholder analysts can be challenging, and there affect the company going forward base is an active process. Investors that are a multitude of things to take into and respond to questions. Clearly are poorly informed about the company account when deciding with which firms explaining complicated information or whose investment style is at odds with management should spend their time, and, when possible, allowing investors the investment thesis are more prone to including quality of research, quality of to pose questions that can be addressed sell their positions, creating downward marketing events and general opinion of in real time bolsters management’s pressure on the stock price and increased the company under coverage. credibility and mitigates the risk of market volatility. Furthermore, there Quality of research is a critical misunderstandings. is a natural attrition of shareholders as consideration, although the ability for • Financial, business and trade media— portfolio managers shift assignments a firm to provide truly unique research print and broadcast media allow the and market conditions change. Ongoing is rare, making this characteristic of company to communicate information diligence is required to identify the most increased importance. Number of to a much wider audience while important holders, monitor changes in companies in an analyst’s universe, also bolstering credibility through the composition of the shareholder base reputation with the buy side and an commentary by objective third parties. and engage holders in dialogue to help in-depth knowledge of the space are all Whether it is positioning financial keep them informed about the business factors to consider in determining the results or underscoring themes related and anticipate their future actions. quality of research.
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Additionally, management gets the as part of the IPO process creates a culture understand there will be a zero- majority of its face time with the investment of understanding that helps ensure clear tolerance policy on these issues. community through marketing events and consistent communication with all • To maintain consistency in their with the sell side, such as conferences and other stakeholder groups. communications with the market and nondeal roadshows, and, as such, firms that Unfortunately, IPOs are potentially avoid any inappropriate disclosure of are willing to work with management to disruptive from a cultural standpoint. material nonpublic information, the set up a quality schedule should be able to Executives and staff of private companies company should designate and train a spend time with management over those that have never previously been public are very limited group of spokespersons, that focus purely on short-term investors often accustomed to receiving financial whose role is to discuss business and high-paying clients. and operational data that can no longer and financial results with the public. When interacting with the sell side, it be shared under SEC regulations after the Employees should be instructed to is important to treat all analysts equally. company goes public, and some employees forward all external inquiries to these For instance, it may be beneficial to spend will be asked to take on modified roles. trained communicators and investor time with analysts that are neutral or To manage this transition, the relations representatives. underweight on the company to discuss company must realign its people around • In compliance with Regulation FD, their investment thesis and to understand its go-forward strategies and growth U.S. public companies must provide the drivers behind their rating. It is, prospects, while simultaneously preparing the financial community with equal however, typically preferred to market them for new communications constraints. and timely access to financial and with supporters of the company’s stock Employees should be educated about operational data. The company will because they spend the most time the rationale for a public listing, how now issue quarterly and annual promoting a company’s story with the it can benefit them (e.g., new career financial reports, and even more investment community. opportunities and employee stock purchase routine corporate announcements will plans) and—perhaps most critical—what assume increased importance. However, Conclusion: An investor once said, “We new responsibilities the company must many companies can no longer provide don’t shoot the messenger, we shoot the assume as a publicly traded entity. employees with the same level of cheerleader.” The financial community Compliance with SEC and exchange access to financial and operational data can be remarkably perceptive and rules needs to be a company-wide effort, they might have received in the past. insightful; information—especially that and employees must understand that even Employees need to understand this new which is market moving—flows through casual comments made to outside parties reality, know they are still important it rapidly and it has a long institutional (e.g., “I made a big sale today” or “Business and valued members of the team and memory. Regular, consistent and open has been picking up lately”) can take on have confidence that the company will communications with investors are additional meaning for the company’s new continue communicating with them as instrumental in achieving an appropriate financially-minded stakeholders. Under openly and honestly as possible going valuation and high regard for the the watchful eye of investors, financial forward. company’s management. analysts, regulators and financial and • Sarbanes-Oxley regulations require business media, employee actions have the public companies to maintain 5.3 Employee and business partner potential not only to affect the company’s transparency and accountability in communications corporate reputation, brand and stock documenting financial controls. In FTI Consulting price but also to subject the company many instances, these processes will and themselves to risk and liability from be established well ahead of the IPO. There are two other important stakeholder inappropriate disclosures. This risk has The listing provides an opportunity groups a public company should take into been exacerbated as employees engage in to remind employees of their consideration. Employees and business online chat rooms, blogs and other social responsibility to protect sensitive data, partners are integral to the success of media channels that accelerate the speed including client/customer information, a company, but new regulations and with which employee comments can reach performance statistics and any other compliance with the SEC may change a seemingly endless universe of potential information not available to the general the relationship with these stakeholders. recipients. public. Many companies may no longer be able to Key considerations that affect how • To be effective ambassadors of the provide the same level of operational and the company interacts with its employees company, employees must be given the financial transparency, and management during the IPO period and beyond include right tools and resources to properly teams need to educate employees and the following: represent the company. In addition to business partners of this reality, while • It is critical for employees to training, the message platform should maintaining their support during this understand securities laws and SEC be adapted to address employees as process. regulations prohibiting insider trading well as investors to eliminate confusion or tipping—particularly if they are and guarantee consistency. Employees: Employees are the company’s given opportunities to participate • To help the company meet the most valued ambassadors. Engaging them in the offering. Employees need to expectations of investors, it is essential
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that employees understand the various market professionals such as which prohibits selective disclosure (for company’s priorities and how each area financial analysts, investment advisors and a discussion of this topic as it applies to of the business drives success. Now broker-dealers to assist them in properly foreign private issuers, see Section 9.6): more than ever, management needs to understanding the company’s results and • Regulation FD focuses on what the engage employees on the company’s business trends. Open communication SEC believes to be the core issue— strategy and help clarify the overall with the market is encouraged by stock selective disclosure to those that will vision. When a company elects to exchange rules and will play a key role foreseeably trade on that information engage employees, research shows in the company’s ability to effectively or prompt others to do so. Accordingly, that the company will outperform its disseminate information into the market. it applies to communications with peers across several financial measures, These additional communications are market professionals (e.g., research including operating income, net income not, however, legally required, and when analysts, broker-dealers, investment and earnings per share.1 provided voluntarily, should be carefully advisors and managers and investment managed to comply with the legal companies) and with security holders framework and minimize potential legal that will reasonably foreseeably Business partners: Business partner risks. trade on the basis of the disclosed communications can also be an important information. The regulation does not part of an IPO. Maintaining a consistent Complete and accurate disclosure: The apply to communications with, among level of customer service is a priority company’s public disclosure must not others, media representatives, advisors during this process, and to the customer, contain misleading statements of material in a relationship of trust or confidence a public listing should appear to be a information and must include any with the company (e.g., legal advisors nonevent. additional information necessary to make and investment bankers), employees In most instances, interactions with the statements made not misleading. and government officials. vendors, customers and other business • The regulation applies to communications partners will not change following the Duty to update: If the company discovers by senior officials and officers, employees listing. However, a company may be that a public statement was materially or agents of the company who regularly required to disclose information about inaccurate or misleading when made, it communicate with market professionals its top vendors or customers in its should promptly correct the statement to or security holders. registration statement and subsequent reduce its risk of liability. Even if it was • The regulation applies to selective filings with the SEC following the IPO. In accurate when made, a forward-looking disclosures of material nonpublic these cases, outreach to inform partners of statement may need to be updated if information. “Materiality” is not the required disclosure or to communicate changed circumstances make it inaccurate further defined in Regulation FD, but it any changes in interaction with them may or misleading. U.S. courts have reached is the subject of extensive case law and be advisable. Additionally, management conflicting conclusions on whether this SEC guidance in other contexts. may want to consider communicating to kind of duty to update exists. • Whenever the company makes an business partners more generally around “intentional” disclosure of material the listing or after the IPO to promote Research analysts: Management should nonpublic information, simultaneous the message of “business as usual” or not participate in the preparation of public disclosure is required. A to reinforce the benefits (e.g., growth, analysts’ reports, because there is potential disclosure is intentional if the company investment, change in capital structure, liability if company officials become so knows or is reckless in not knowing etc.) of the transaction. “entangled” with a report that the report that the information being disclosed is can be attributed to the company. both material and nonpublic. Whenever 5.4 Legal framework for the company learns that it has made communications Selective disclosure and Regulation a nonintentional selective disclosure, Cleary Gottlieb Steen & Hamilton LLP FD (Fair Disclosure): When divulging it must make public disclosure of that material nonpublic information, company information promptly (generally within Following the IPO, the company will be officials may not disclose it selectively— 24 hours). required to produce a number of reports for example, exclusively to securities • Violations of Regulation FD are subject pursuant to SEC and stock exchange analysts or security holders—but rather to SEC enforcement actions, but do listing rules, as described in Section 6.1. must make the information available to not give rise to Rule 10b-5 liability or In addition to those reports, however, the general public. Selective disclosure private causes of action. They also do the company will want to provide regular can lead to liability for the company and not result in ineligibility for short- information to its security holders and for company officials themselves for form registration or the Rule 144 safe insider trading by persons receiving the harbor for resale of securities. disclosure. 1Crush, Peter,—Employee Engagement ROI— U.S. public companies are subject Public disclosure for purposes of Rules of Engagement. © 2008 Towers Perrin to the requirements of Regulation FD, Regulation FD can be made by filing or
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furnishing a Current Report on Form is subject to Regulation G, which requires given orally, telephonically, by webcast 8-K or by disseminating the information that the disclosure be accompanied or broadcast or by other similar through a method or combination of by a presentation of the most directly means, provide the most directly methods that is “reasonably designed comparable GAAP financial measure and comparably GAAP financial measure, to provide broad, non-exclusionary a quantitative reconciliation (by schedule with the required reconciliation, on distribution of the information to the or other clearly understandable method) the company’s website and include public.” The most common method is of the two measures. More stringent the location of the website in the by press release. If the company wishes requirements apply if the company uses presentation. Written materials to make public disclosure of material non-GAAP financial measures in a report (whether distributed electronically or nonpublic information by means of a filed with the SEC or in an earnings release, in hard copy) must include the most conference call or webcast, it must give and some non-GAAP financial measures directly comparable GAAP measure and adequate public notice, including the are not permitted in filed reports. the required reconciliation. date, time, subject matter and dial-in The following are some practical • Do not make specific forward-looking information for the call. Disclosure at guidelines for a company’s communications statements, unless: a shareholders’ meeting, even one that with the market: • you set out the assumptions on is open to the public, is not sufficient if • Designate one company executive to which the forecast is based; the meeting is not webcast or broadcast communicate with analysts. • you indicate the factors that could by electronic means, and the presence • Make each presentation to analysts on prevent the forecast from being of the press at an otherwise nonpublic the basis of a prepared text that has realized (both this and disclosure meeting does not render the meeting been reviewed by senior executives and of the assumptions can be done by public. Posting information to the by counsel. referring to a filed document that company website or use of social media • Do not disclose material nonpublic contains the relevant information); is also permitted if the company regularly information to analysts unless the • you make the statements to the uses the website or other media for that information is disclosed to the public public at the same time; and purpose and the company alerts the at the same time; this can be done by • you are always prepared to evaluate market to the distribution channel it permitting the public, on reasonable the need to update the statement plans to use and the information it may advance notice, to participate in when circumstances change. disclose through the channel. any call with analysts during which The SEC has aggressively investigated material nonpublic information may be 5.5 Market intelligence and surveillance cases under Regulation FD, resulting in discussed. Ipreo several enforcement proceedings. SEC • Refrain from responding to analysts’ personnel have indicated that they look inquiries in a nonpublic forum unless Sections 5.5 through 5.8 cover a group for egregious violations involving the the company is certain that the of advisory services and tools that allow intentional or reckless disclosure of response does not include material investor relations officers to stay informed unquestionably material information. nonpublic information. of ongoing market activity and perceptions, The enforcement actions also confirm • If asked about a matter that has not access the most detailed information that the SEC will look to market reaction previously been disclosed, simply say, possible on investment community as an indicator of the materiality of “No comment.” participants, effectively implement an selective disclosure. One significant • If requested by an analyst to review investor relations strategy to prospect for similarity among the enforcement a research report, do not comment new investors, manage interactions with actions is that visible and sometimes except to correct errors of fact. Do not the investment community efficiently dramatic changes in stock trading price comment in any way on an analyst’s and measure the success of their investor and volume occurred in the aftermath forecasts or judgments, including by relations efforts. These services and tools of the selective disclosures, and the saying you are “comfortable” with are used widely by investor relations SEC has stated that a very significant them, that they are “in the ballpark” officers individually and collectively at market reaction to selectively disclosed or other words to similar effect. To listed companies around the world. information requires public disclosure of avoid entanglement, be cautious Once a company successfully that information. about distributing analysts’ reports or completes the IPO process and begins including hyperlinks to them on the trading in the secondary market, Non-GAAP financial measures: Special company’s website information regarding that trading and the disclosure rules apply when the company • Avoid favoring one analyst over ownership changes that result are difficult presents certain financial information in another. to come by in the absence of a market a way that is different from the financial • Review public statements to identify intelligence and surveillance program. statement presentation under GAAP. any non-GAAP financial measures. To A market intelligence and surveillance Use of non-GAAP financial measures in a avoid the need to reconcile non-GAAP program should act as a company’s eyes public statement (whether written or oral) financial measures in presentations and ears to the investment market and
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serve as a fundamental service for investor with at least $100 million in equity United States, the settlement of a trade, relations officers at a majority of U.S.- assets disclose to the SEC their entire the time at which a buyer delivers cash listed companies. The type of information portfolios of equity securities and some to the seller and the seller delivers shares and support provided by this program on a equivalents on a quarterly basis. These to the buyer, occurs three days following regular basis include: filings, commonly referred to as 13Fs, a trade, which is known as T13. This • day-of-trading feedback from active are to state the investment managers’ transfer of assets almost always occurs market participants that provides color complete equity portfolios as of the end via DTCC. The issuer of the equity, and context on unusual volatility or of each calendar quarter. However, the the publicly listed company, has access trading volume; SEC allows investment managers 45 to these DTCC records for a nominal • updates on material institutional days following the end of each quarter annual fee. The market intelligence and ownership changes as they are to submit the filing. For example, an surveillance provider, who will gain uncovered and a systematic update of investment manager’s Form 13F stating access to the DTCC settlement records institutional ownership on a monthly its holdings as of June 30, 2013, would with an issuer’s permission, utilizes basis; not need to be submitted to the SEC DTCC settlement records as a roadmap • insights on the motivation behind prior to August 15, 2013. for the research process to uncover institutional ownership changes The second issue of fragmentation the ultimate buyers and sellers of the and the strengths, weaknesses, has been a steady topic of discussion at company’s shares. opportunities and vulnerabilities of the exchange operators, regulators, trading U.S.-listed companies are also at a structure of the shareholder base; and firms, institutional investors and publicly disadvantage in that there is no regulation • access to resources—human, data- traded companies themselves. Equities mandating that custodians holding the oriented and technical—that an in the United States now get traded on company’s shares via DTCC disclose investor relations officer can leverage to more than 50 venues, which include the identities of the investors behind extend the capabilities of the investor multiple exchanges, private alternative their DTCC accounts. This means that relations team. trading systems (commonly referred the market intelligence and surveillance to as “dark pools”) and internally at provider must utilize its expertise to Publicly traded companies in the specific broker-dealers. Additionally, understand the multitude of relationships United States are considered by the the size of the average trade in a U.S.- between institutional investor portfolios investment community to be among listed equity has been in steady decline and each DTCC nominee to get an initial the most transparent in the world. The over the past 10 years and has moved understanding of who may be buying or investor relations profession is well from an average size of more than 1,000 selling shares. The inability to access advanced and the quality of communication shares to less than 300 shares today. information via custodians requires the from companies to investors is second The fragmentation of the market overall market intelligence and surveillance to none. The transparency provided to and the fragmentation of the actual provider to then engage in an outreach companies listed in the United States by transactions have made understanding or survey process to the institutional the investment market, however, lacks the drivers of day-to-day trading in community to gain information on the timeliness and its opaqueness continually equities challenging. current holdings of their portfolios. frustrates investor relations officers whose The role of a company’s market Although institutions are not required organizations are in continuous need of intelligence and surveillance provider to disclose this information, many are information regarding the trading and is to overcome the hurdles put in comfortable doing so to a credible and ownership of their equities. place by SEC regulations relating to established market intelligence and The two principal areas of frustration institutional ownership and today’s surveillance provider who will also in terms of information flow for publicly equity market structure. To do this, the furnish a letter of authorization from the traded companies are: market intelligence and surveillance issuer stating its role in conducting this 1. the time lag in the disclosure of provider undertakes a thorough research research. institutional ownership positions with process that starts with a complete Identifying the buyers and sellers of the SEC; and understanding of the registration of a U.S.-listed equity is an ongoing and 2. the fragmentation of equity trading ownership of a company’s security iterative process for any market intelligence in the United States and the resulting via the Depository Trust & Clearing and surveillance provider. Given the inability to get a clear signal from the Corporation (DTCC). The vast majority lack of mandated disclosure rules in market to determine drivers of trading of investors, institutional and retail alike, the United States outside of Rule 13f-1, on a daily basis. hold equities in “street name” via banks an issuer should not expect that every and brokers that act as custodians of institutional position reported by a market Let’s first address the time lag their assets. These custodians, in turn, intelligence and surveillance provider is in the reporting of institutional have accounts at DTCC that allow for an exact accounting. However, the issuer ownership. SEC Rule 13f-1 mandates the electronic transfer of assets when should expect high-quality information. that institutional investment managers equities are bought and sold. In the Most issuers define accuracy of market
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intelligence and surveillance information as section, are both fundamental to investor regional focus or even a global follows: relations. Just as fundamental to investor perspective—as well as transparency • Ownership trends are accurate (i.e., relations is the strategy and execution on the inputs to the process. firms reported as purchasing shares are of outreach to prospective institutional 2. Evaluate the current shareholder base: in fact buying the stock). shareholders and the assessment of the helping to identify risk within existing • Ownership positions are within a 1/2 investment opportunity and portfolio risk positions, as well as opportunity range of 20% (i.e., a firm being reported that is inherent in the company’s current available from current shareholders as buying 900,000 shares when it institutional shareholder base. Investment (either the ability to expand positions actually bought 800,000 shares is managers continue to place a high level in existing portfolios or the ability to acceptable). of importance on gaining access to the build new positions in new portfolios • There is transparency and a senior management teams of publicly managed by the same firm). conviction level with each position. listed companies. These interactions play 3. Identify potential investors: delivering A credible market intelligence and a critical role in the research process that both qualitative and quantitative surveillance provider will give detailed could lead to investment (or divestment) information describing not just background on material position in the stock or peer companies. Given the match between the company’s changes in order for the issuer to the importance of these interactions to investment story and the portfolio but understand its accuracy, as ownership the investment community, the investor also the communication conduits with information is often shared with relations officer is often deluged with the firm (who are the decision makers senior management teams and the meeting requests directly from investment and how to approach them). board of directors. managers or through sell-side brokerage 4. Communicate with current and firms, which provide “corporate access” as a potential investors: offering just- Identifying ownership changes, key service to its investment management in-time information to support the while important, is just one aspect of clients. Of course, the investor relations company’s interactions in any format a market intelligence and surveillance officer’s time and the senior management (conferences, nondeal roadshows, program. The provider should be the team’s time are not unlimited (a business analyst days, phone conversations). company’s connection to the capital needs to be run!) and not all investment 5. Monitor and measure effectiveness of markets and act as an extension of its managers are equally worthy of time and outreach: including both backward- investor relations team. Feedback from attention. looking and forward-looking advice on market participants, such as traders, An effective investor-targeting program the communication process, including sell-side analysts and buy-side portfolio requires five processes: identifying “success stories” as well as managers and analysts, should be 1. understanding the company as an those situations where your time may expected. This feedback should assist investment; have been used better. the company and its senior management 2. evaluating the current shareholder base; team in understanding the primary 3. identifying potential investors; A provider of targeting and outreach drivers behind both short-term trading 4. communicating with current and advice will help guide a company to a plan and longer-term institutional ownership potential investors; and that best utilizes the investor relations trends. Additionally, a credible market 5. monitoring and measuring officer’s and the management team’s time intelligence and surveillance provider effectiveness of outreach. and puts the officer in front of the most has a broad client base, a deep talent pool appropriate and impactful investment and access to a variety of data sources. Each of these is an ongoing process, managers. The type of analysis and Combined, this exposure, expertise and and an effective provider will be able to reporting provided generally includes: access to data will allow a company to contribute to the actions the IR team • Top-down/Strategic: leverage the team to understand and conducts in each step, as well as help to • Global analysis of the market-by- implement best practices across a variety optimize the usage of scarce resources market opportunity for additional of investor relations functions, such as in maintaining communication with the investment from prospective internal and external communications as investment community. The investor investors; well as investor outreach, and will allow it relations officer should look for a • A view of positions within to be at the forefront of market issues and provider of services that can contribute your current shareholder base developments. by providing both information and potentially at risk. advice at each step: • Bottom-up/Tactical: 5.6 Investor targeting and outreach 1. Understand the company as an • Just-in-time money center analyses Ipreo investment: the flexibility to view the prior to any non-deal roadshows; company’s investment story in the • Analysis of attendees and meeting Knowing the owners of the stock and same context as potential investors interest at brokerage-sponsored their motivations, as described in the managing diverse strategies—relative events to prioritize exposure to the market intelligence and surveillance to industry-specific fundamentals, best investors;
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• Detailed premeeting briefing on When conducting an initial perception Equally important is choosing the current exposure and portfolio study, a third party will host a series appropriate study participants to ensure trends for each investor in advance of conference calls with the investor receiving unbiased, comprehensive of an interaction. relations officer to better understand the feedback. Participants to be interviewed company’s strategic direction, what was are typically dispersed among five In concert with an effective investor- discussed during the pre-IPO roadshow, segments: current buy-side institutional targeting provider, the investor relations what has been accomplished since the holders, potential buy-side institutional officer will be able to confidently approach IPO, as well as its current disclosure investors, recent buyers and sellers, the investment community with the and communication practices. This current sell-side analysts and potential knowledge that time and resources are understanding allows the perception sell-side analysts. Global investors, being used effectively. feedback consultant to design an effective focusing on North America, the United questionnaire and ask appropriate probing Kingdom, Continental Europe and Asia, 5.7 Market perception feedback questions during the telephone interviews. should also be included, as participants’ Ipreo The goal is to keep the questions open- expectations often vary by region. ended to allow the participants to freely When creating the participant list, The market intelligence and surveillance discuss the critical factors driving their those investors should be chosen that and investor targeting and outreach investment or rating decisions. Themes to are familiar with the company as well functions provide critical data and insights cover may include: as the management and IR teams. on the current and potential states of • Overall view as an investment: The optimal places to locate this the shareholder base, which are both competitive strengths, weaknesses, information include the company’s imperative to running an impactful IR risks, opportunities, reasons for a pre-IPO roadshow agenda, recent program. Perception feedback provides a stock’s discount, suggestions for meeting schedules, conference call and largely qualitative complement that will achieving a premium, events that would webcast participant lists, as well as enable an in-depth assessment of the cause a decrease/increase in position, notes entered in the investment investment community’s view on various fundamental metrics used to assess the community database and CRM. facets of the company. The key to gaining stock, relative valuation; The consultant will also provide valuable feedback from investors and sell- • Business and capital allocation guidance on the most favorable times side analysts is the utilization of a third strategies: confidence in the current to conduct a study. Avoid launching the party to conduct the research. Not only will strategy and business model, strategic interviewing period if a major company a third party bring expertise to the design concerns, how investors would prefer announcement is expected to affect and execution of perception research but the company to utilize their excess participants’ opinions or during earnings the indirect connection it has with the cash, what the potential growth areas season, major holidays or well-attended company will foster an environment that are for the company; industry conferences. allows for the free exchange of thoughts • Earnings and guidance: reaction to Once the interviews are complete, and opinions. Perception feedback can be latest earnings release, expectations expect the consultant to provide a used in advance or after major events, such for the full year, biggest challenges comprehensive analysis of the study as an investor day or quarterly earnings going forward from a results results that includes in-depth, topic-by- announcement, to assess expectations or perspective, opinion on information topic summaries, which are supported by judge performance. Perception feedback presented; verbatim comments from the participants. can also be used on a more routine basis • Peer and industry intelligence: The final study will also identify any in order to keep a constant finger on the preferred investment choice in the disconnects between what the company is pulse of investor opinion. Regardless of the space, best-in-class disclosure and communicating and what the investment option chosen, expect the following from communication practices for the community is hearing and include the market perception feedback providers: sector; actionable, best-in-class communication • assistance and guidance on the topics • Senior executive team: overall opinion recommendations to address the that should be covered and the design of senior management’s strategic investment community’s concerns. Based of the questionnaire; vision, execution, credibility, capital on these findings and recommendations, • consultation with regard to the management, corporate governance the company can tailor its disclosure and participants most applicable for the structure and expectations for messages to shift perceptions closer to the study and the timing of the project; shareholder interactions; preferred state. • a comprehensive analysis of the study • IR efforts: overall satisfaction with Companies most commonly utilize results that provides a synthesis of IR’s articulation of the company story, large-scale perception studies annually the feedback topic-by-topic and puts accessibility, credibility, frequency in order to get an in-depth assessment forth recommendations to address and content of communication and of investor sentiment. These studies the concerns held by the investment addressing misperceptions in the are a terrific benchmarking tool, and the community. marketplace. results, in part or in their entirety, are
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typically a component of the information • a robust CRM system to manage and Should there be a one-on-one meeting reviewed by the company’s board of report on the team’s interactions with with this investor? Should this investor be directors. all participants in the investment provided access to the CFO or CEO? These community, including: are all critical questions that need to be 5.8 Investment community database • ability to easily manage, input and answered on an ongoing basis by investor and CRM track one-on-one meetings, group relations professionals to properly manage Ipreo meetings, phone calls and e-mails; their own time and the time of their • ability to customize CRM data management team. One of the biggest challenges faced by points to best fit the company’s For a company that has successfully investor relations professionals is not issues and requirements; completed the IPO process, the first only the amount of investor intelligence • list management tools; step in using its investment community and data they are inundated with on • e-mail distribution; database is to seed historical investor a daily basis but also the challenge of • one-click reporting to view activities with the itineraries from the obtaining the high-quality information items such as event itineraries, IPO roadshow. Additionally, the notes that is required to plan and implement institutional and contact profiles from the IPO roadshow meetings should smart strategy and tactics. In order to and post-roadshow feedback also be brought into the system. The navigate the sea of data effectively, a global reporting; IPO is a perfect opportunity to utilize investor community database and CRM • management-ready reports that the support of the database provider to are required. A global database system highlight the effectiveness of IR understand best practices for managing will provide access to a wide array of and executive meetings with the the data, leveraging their tools to import information from the desktop and from investment community; the company’s data and establishing the road. Critical elements of a database • ability to export data and reports customized views and data tags relevant system include: into Excel, Word, and PDF formats; to the company’s story. The activity • a secure web-based environment that • integration of proprietary CRM data from the IPO will provide a perfect allows for individual log-in credentials data with surveillance ownership foundation for future investment among team members along with information, investor targeting and community interactions. the ability to share information and perception feedback information. Another opportunity for getting collaborate across the team; immediate value from the database is to • support of dedicated, knowledgeable The investment community database utilize the final share allocations provided by and global account management team and CRM system are typically the the investment banking team. The database that provides 24/7/365 access; central tool utilized by investor relations provider will be able to map the investment • access to global investment community departments of any size to coordinate firms on the allocation list with the data and analytics including: and manage activities on a daily basis. A investment firms in the database and import • detailed contact and background database system has the ability to grow the number of shares that were purchased information on investment staff at along with investor relations needs and by each firm at the time of the IPO. This buy- and sell-side firms; requirements. At its core, a database will allow tracking the progression of the • comprehensive information on the system provides the user with a wealth of shareholder base from day one of trading background, investment styles and information that is critical and essential through to the time it is first updated by investment approaches of buy-side to any IR professional. For instance, when the surveillance provider or by ownership institutions at the firm and fund an incoming call or meeting request is updated via public filings and beyond. levels; received from an unfamiliar investor, An investment community database • complete portfolio information for the database user can quickly pull up also allows moving beyond the current every publicly listed equity around the investment firm by name, review ownership of stock to access the global the world; its background, investment philosophy, portfolios of investment managers and • detailed, global fixed-income activist history, portfolio composition funds from around the world. The owners portfolio information; and metrics such as investment style and of the company’s peer group can be easily • advanced screening capabilities portfolio turnover. Additionally, the user tracked and the strengths, weaknesses enabling access to the information can also view background information and opportunities of each company’s required; such as employment history, coverage ownership profile can be analyzed. The • sell-side research reports and details and educational background of the database will also allow the user to run detailed earnings estimates; analyst or portfolio manager making the detailed screens of investors by categories, • calendar of investment community call. This data educates the user as to the such as location, investment style, events as well as real-time and investor’s relevance and allows the user portfolio turnover, or recent buying and corrected transcripts of results and to make an informed decision about the selling activity in a particular stock or investor presentations; amount of time he or she will provide to across a sector or peer group. Investor • real-time market data and news; the investor. Is a phone call sufficient? screening will enhance the user’s ability
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to make informed decisions on upcoming market intelligence and surveillance, investor relations activities. investor targeting and market perception Nothing can replace the personal feedback. By employing one provider for interactions that investor relations all of these services, the user will be able officers and management teams have to seamlessly integrate critical real-time with the investment community. and client-specific intelligence with the However, e-mail communication and database information and CRM activity, other methods of distribution to broad allowing more powerful analysis and audiences are necessary. The database a deeper qualitative understanding of should allow the user to easily create current and prospective investors. and edit lists of investment staff so that The database should also allow quick regular distributions, such as quarterly access to sell-side research reports and results, and one-time events, such as earnings estimates for not only the investor days, can be easily managed. company’s stock but also for that of peer These investor lists can then be utilized companies and others. The sell-side to quickly send a uniform e-mail to a remains an important input into investor broad distribution group along with a sentiment, and integrating this information personalized salutation, embedded links into the investment community database is and graphics. critical. Additionally, a calendar of events, Tracking interactions with the such as investor conferences and the investment community is certainly a earnings calls of peer companies, is critical worthwhile endeavor, as it will inform in that it enables better planning and future interactions with that investor. management of the company’s own events. Additionally, by closely tracking Access to the verbatim transcripts of these interactions, the ownership and other data events is also a standard requirement for a available in the system can be utilized to database tool. run reports following investor relations An investment community database activities in an effort to measure the and CRM system are tools that are critical success of an event through real-world for a one-person IR department or a metrics. A sell-side investor conference is large IR team located in offices around an example. the world. The one-person department Companies are often bombarded by can use the database to leverage limited requests from the sell-side to attend their resources and access critical information; conferences. If the company has accepted the larger IR team can additionally use an invitation to a conference, a database the database as a tool for collaboration user would be able to preview its series and internal communication. Regardless of meetings with investors not only of the size of the department, it is hard from a qualitative perspective (Who are to imagine conducting investor relations these firms and what are they all about? in the absence of a global investment Is this firm a hedge fund?) but also from community database and integrated CRM. ● a quantitative perspective (How many shares of the company’s stock do they own? What’s their average turnover? What is their exposure to the company’s sector?) Following the conference, as ownership data streams into the database, the user will be able to run reports to assess the impact of meetings from an ownership perspective (Did any potential investors initiate a position? How did the existing shareholders react?) The data from these reports can be used the following year to assist in investor relations planning, including decisions on which conferences to attend. Another key attribute of an investment community database is the integration of information from the provider of
62 NYSE IPO Guide 6 Obligations of a public company
NYSE IPO Guide 63 Obligations of a public company
6.1 Reporting and compliance Reporting Public float each fiscal year. A nonaccelerated filer must requirements category file Form 10-K no later than 90 days after Cleary Gottlieb Steen & Hamilton LLP • Large $700 million or the end of the fiscal year. This deadline accelerated filer more shortens to 75 days for an accelerated filer (a) Periodic and other reports and 60 days for a large accelerated filer. After the IPO, the company must file • Accelerated filer $75 million or The contents of Form 10-K are largely regular “periodic” and other reports more (but less similar to the IPO prospectus, with several with the SEC in accordance with the than $700 million) important differences: requirements of the Exchange Act, which • Internal control over financial for U.S. companies include: reporting—Beginning with the second • Nonaccelerated All others Form 10-K filed by the company, Form filer Periodic reporting: 10-K must include a management • Annual report on Form 10-K report on the effectiveness of internal • Quarterly reports on Form 10-Q control over financial reporting and The large accelerated filer and a related auditors’ attestation, as Current reporting: accelerated filer categories also require described in more detail below. • Current reports on Form 8-K at least 12 calendar months of reporting, • Disclosure controls and procedures— including at least one Form 10-K, so Disclosure about management’s Stockholder meetings and proxy that after the IPO, the company will be evaluation of the effectiveness of solicitations: a nonaccelerated filer for the first year. disclosure controls and procedures, • Proxy statements In many cases a nonaccelerated filer as described in more detail below, is • Rule 14a-3 “glossy” annual report will also qualify as a smaller reporting also required, without any transition company, with scaled-back information period. The periodic reports contemplate requirements. The thresholds to enter • Certifications—The company’s CEO a system of “integrated disclosure,” in and exit these reporting categories are and CFO must certify Form 10-K, as which portions of the various reports different from those used for the initial described in more detail below. may be incorporated by reference into determination. Emerging growth companies • Unresolved SEC staff comments— other reports to avoid repetition. may also take advantage of scaled-back An accelerated or large accelerated This incorporation by reference is not information requirements (see Chapter filer must include disclosure of any required but is very common in U.S. 4), and there are some differences for unresolved SEC staff comments on its company reports, particularly Form foreign private issuer reporting as well (see periodic or current reports that the 10-K and the proxy statement. Section 9.6). The remainder of this chapter company received at least 180 days Incorporation by reference is also a describes the reporting requirements for before the end of the fiscal year. concept that permits more streamlined a U.S. domestic company that does not • Stock repurchases and use of disclosure for securities offerings, qualify as an emerging growth company. proceeds—The company must disclose in particular after the company has The general legal framework for its stock repurchases (for more been public for at least a year and is communications described in Section 5.5 information, see Section 6.3), as well as eligible to use a registration statement also generally applies to the company’s the use of the proceeds from the IPO. on Form S-3 for public offerings. required reporting, including the need for • Incorporation by reference from proxy Existing and future reports that the complete and accurate disclosure, the duty statement—Most of the required company files with the SEC will be to update and the rules related to non- disclosure about the company’s incorporated into Form S-3, keeping GAAP financial measures. For information management and governance the information current and eliminating about the financial statements that are arrangements, including the detailed the need to include detailed disclosure required for the company’s various disclosure of executive compensation about the company in a prospectus reports, see Section 2.2. arrangements, is typically incorporated for an offering. The SEC does not automatically review by reference from the proxy statement. The timing and some of the required these regular reports, but it is required • XBRL—The financial statements content of these reports will depend to review each company’s reports at least contained in Form 10-K must also be on the company’s reporting category, once every three years, and it may provide filed in an exhibit using the XBRL which is largely based on the size of its comments to improve disclosure or interactive data format (see Section 2.2). worldwide “public float,” or the market remedy noncompliance at any time. • Mine safety disclosure—A company value of the voting and nonvoting with mining operations in the United common equity held by nonaffiliates, as Annual report on Form 10-K: A U.S. States is required to include certain of the last business day of the most recent company must file an annual report on health- and safety-related disclosure second fiscal quarter: Form 10-K with the SEC after the end of about those operations.
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• Sanctions-related disclosure—The summarizing all of the company’s equity Form 10-Q largely consists of company must disclose certain compensation plans. In addition, as unaudited interim financial statements activities relating to Iran, materials described in Section 2.4, at the first annual and the related MD&A. It also includes likely to be used for human rights meeting after the IPO and from time to time disclosure about effectiveness of abuses and transactions with persons thereafter, the company must hold say- disclosure controls and procedures, designated for their support of terrorist on-pay and say-on-pay frequency votes. changes in ICFR (but not a full assessment activity or the proliferation of weapons If the agenda includes the election of as in Form 10-K) and CEO and CFO of mass destruction. directors, the proxy statement must be certifications, as well as information accompanied or preceded by an annual about risk factors, legal proceedings and Proxy statement and “glossy” annual report. This can be the Form 10-K but company stock repurchases, among other report: Following the IPO, a U.S. company more typically is a separate “glossy” report things. As for Form 10-K, the financial will be subject to the proxy rules under with pictures and other investor-friendly statements must also be included in XBRL the Exchange Act. The company must information, which is also often used for format. furnish a proxy statement to stockholders other investor relations purposes. Some before soliciting voting authority for a companies choose to combine the two, Current reports on Form 8-K: The U.S. matter submitted to stockholders’ vote. creating a “wrap” for Form 10-K to create securities laws generally do not require The stock exchange listing rules typically the “glossy.” current reporting of all material company require a listed company to hold a regular For proxy solicitation purposes, the events, unlike in some other jurisdictions, annual stockholders’ meeting, for which annual report (also known as the “Rule unless the company is buying or selling the company will solicit proxies, so 14a-3 annual report”) must contain securities or makes other disclosure for most companies prepare an annual proxy audited financial statements, MD&A, which information about the material event statement. selected financial data and disclosure is needed to make that disclosure complete The proxy statement must contain about market risk, stock prices and and accurate. Instead, a U.S. company must information about the stockholders’ dividend payments, as well as a brief file a current report on Form 8-K with the meeting, the matters to be considered description of the company’s business, a SEC only for certain specified events and (including stockholder proposals, stock performance graph and a list of the generally within four business days. The if any) and voting procedures. The directors and executive officers. more common, day-to-day events that company should be sure to consider any Until recently, the proxy statement trigger this reporting include: requirements imposed by its charter, and annual report had to be mailed • an earnings release or other bylaws or state law, in addition to SEC and to all stockholders; however, the SEC information about historical results of stock exchange requirements. “e-proxy” rules permit the company operations and financial condition; The most common item on the to post proxy materials on a publicly • the entry into or amendment or meeting agenda is the election of accessible website and mail only a notice termination of a material definitive directors. In this case, the proxy to stockholders. This process is known as agreement; statement will contain much of the “notice and access.” The stock exchanges • a significant acquisition or disposition same disclosure about the company’s also used to require a physical mailing of of assets (which may also require pro management and governance an annual report to stockholders but now forma financial information); arrangements that was included in the permit website posting, and the NYSE • the creation of a material direct IPO prospectus, including the detailed recently eliminated the need for a press financial obligation or a contingent off- disclosure of executive compensation release about the posting in most cases. balance-sheet obligation or a related arrangements and the compensation Although e-proxy procedures are less triggering event; discussion and analysis. There are also expensive, many companies still choose • costs associated with exit and disposal several items that were not included in to physically mail these documents to activities or material impairments; the IPO prospectus, including officer and stockholders, primarily for investor • unregistered sales of equity securities director compliance with Section 16 filings relations purposes. or material modifications of the rights (for more information, see Section 7.4) of security holders; and information about code of ethics Quarterly reports on Form 10-Q: A U.S. • a change in accountants; compliance and waivers. company must file quarterly reports on • various governance items, such as Other typical agenda items include the Form 10-Q with the SEC after the end the departure or election of directors approval or ratification of the company’s of each of the first three quarters of each and executive officers, results of auditors, which requires disclosure about fiscal year. A nonaccelerated filer must stockholder votes, amendments to fees paid to the auditors, and the adoption file Form 10-Q no later than 45 days after charter documents and amendments to or amendment of equity compensation the end of the fiscal year. This deadline or waivers of the code of ethics; and plans, for which the material terms shortens to 40 days for accelerated and • for mining companies, certain health- must be described together with a table large accelerated filers. and safety-related disclosures.
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Form 8-K is also used for information method that constitutes compliance with Once Section 404 reporting is disclosed to ensure compliance with Regulation FD (discussed in Section 5.5), required, the company’s Form 10-K must Regulation FD (discussed in Section 5.5), although the NYSE encourages use of a include a management report containing: as well as for other information the press release. The company may generally • a statement of management’s company considers important for exercise judgment as to the timing of a responsibility for establishing and investors. public release on corporate developments maintaining adequate ICFR for the where disclosure would endanger the company; Form SD (Specialized Disclosure): As company’s goals (e.g., in the MD&A • a statement identifying the framework required by the Dodd-Frank Act, the context) or provide information helpful to a used by management to evaluate the SEC has adopted new rules that require competitor. effectiveness of ICFR; specialized disclosure on a new Form These events generally also require • an assessment by management of the SD beginning in May 2014 (but covering notice to the NYSE. The NYSE also effectiveness of ICFR as of the end of activity in 2013). There are two principal requires that the company submit an the most recent fiscal year, including types of disclosure required by these annual affirmation concerning compliance a statement as to whether ICFR is rules. First, a company must file Form SD with the NYSE’s corporate governance effective; and if certain “conflict minerals” or certain listing standards within 30 days of a • a statement that the auditors of the of their derivatives are necessary to company’s annual shareholders’ meeting financial statements included in the the functionality or production of its (or the filing of the annual report on Form report have issued an audit report on products. Second, a company involved in 10-K), as well as interim affirmations the effectiveness of ICFR. the commercial development or extraction in the event of certain governance of oil, natural gas or minerals must file changes and a notice if the company The auditors’ report must also Form SD to disclose payments it makes becomes aware of any noncompliance be included in the Form 10-K. Any to governments in connection with those with the corporate governance listing material weaknesses in ICFR must be activities. requirements. disclosed, and management and the auditors may not conclude that ICFR is Press releases: In addition to SEC reporting (b) Disclosure controls, internal controls effective if there are one or more material requirements, the stock exchanges and certifications weaknesses. U.S. companies must also impose reporting requirements on listed One of the most significant challenges disclose material changes in ICFR in the companies. It was these rules that in part for the company after going public is quarterly reports on Form 10-Q. drove the issuance of press releases to the required control framework and A newly public company typically need announce annual and quarterly results, related disclosures. Perhaps the best- not comply with the Section 404 reporting which most companies do generally as known element of that framework, often requirements until its second Form 10-K a matter of good investor relations (see accompanied by considerable cost, is after the IPO. In addition, a nonaccelerated Section 5.2). management’s report on the effectiveness filer need not provide the auditors’ Stock exchange rules typically require of ICFR and a related auditors’ attestation. attestation report. timely disclosure of material events This requirement was imposed as a result beyond those covered by Form 8-K. of Section 404 of the Sarbanes-Oxley Act Disclosure controls and procedures: For example, under NYSE rules, a listed and is often referred to as “Section 404 The company must also maintain company is expected to: reporting” or even “SOX reporting” (although “disclosure controls and procedures” • release quickly to the public any news SOX provided for much more than this). designed to ensure that information or information that might reasonably Separately, management is also required to required to be disclosed under the be expected to materially affect the report on the effectiveness of disclosure Exchange Act (discussed above) is market for its securities; and controls and procedures, and the CEO and recorded, processed, summarized and • act promptly to dispel unfounded CFO are required to certify the company’s reported in a timely and accurate rumors that result in unusual market periodic reports. manner. They will overlap with ICFR, activity or price variations. but disclosure controls and procedures Internal control over financial reporting: cover both financial and nonfinancial Examples of events that the NYSE ICFR is a set of processes designed to information. expects would result in prompt disclosure provide reasonable assurance of the As for ICFR, disclosure controls and include annual and quarterly earnings, reliability of financial reporting and the procedures must be designed by, or under dividends, record dates, mergers, preparation of financial statements in the supervision of, the CEO and the CFO, acquisitions, tender offers, stock splits, accordance with GAAP. These procedures who must include statements about them shareholder meetings, major management must be designed by, or under the in their certifications (discussed below). changes and any substantive items of an supervision of, the CEO and the CFO, Management must evaluate and disclose unusual or nonrecurrent nature. These who must include statements about them the effectiveness of disclosure controls announcements may be made by any in their certifications (discussed below). and procedures quarterly.
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Sample summary annual reporting cycle for U.S. large accelerated filer (calendar year-end)
January February March • Press release announcing Q4 earnings • Submit SEC no-action requests to • File preliminary proxy with SEC (unless call/webcast (c. 1 week in advance). exclude stockholder proposals from it contains only certain specified matters) • Q4 earnings release and Form 8-K. proxy (at least 80 calendar days before at least 10 calendar days before definitive • Q4 earnings call/webcast. definitive proxy filed). proxy filed, but review may take up to • File Form 10-K (no later than 60 days 30 days). after fiscal year end—i.e., by March 1 • March 31—Q1 quarter end. or 2). • File “glossy,” if incorporated by reference into Form 10-K, and print/post on website.
April May June • Press release announcing Q1 earnings • File Q1 Form 10-Q (no later than 40 days • Annual stockholders’ meeting. call/webcast (c. 1 week in advance). after quarter end—i.e., by May 10). • June 30—Q2 quarter end. • Q1 earnings release and Form 8-K. • May 31—File Form SD (if applicable). • Q1 earnings call/webcast. • File and post/mail definitive proxy (no later than 120 days after year-end if incorporated into 10-K; at least 40 days before annual meeting if using e-proxy “notice and access”).
July August September • Press release announcing Q2 earnings • File Q2 Form 10-Q (no later than 40 days • September 30—Q3 quarter end. call/webcast (c. 1 week in advance). after quarter end—i.e., by August 9). • Q2 earnings release and Form 8-K. • Q2 earnings call/webcast.
October November December • Press release announcing Q3 earnings • File Q3 Form 10-Q (no later than 40 days • Deadline for stockholder proposals call/webcast (c. 1 week in advance). after quarter end—i.e., by November 9). (120 days before date of prior year’s • Q3 earnings release and Form 8-K. • Notify stockholder proposal proponents of proxy statement). • Q3 earnings call/webcast. eligibility or procedural defects in proposal • Send directors’ and officers’ (within 14 days of receiving proposal). questionnaires to board members and executive officers (for proxy preparation). • December 31—year-end.
Disclosure controls and procedures Many companies choose to create CEO and CFO certifications: As a result of should generally be documented in a disclosure committee as part of their SOX, the company’s periodic reports must writing and tailored to reflect the disclosure controls and procedures. This include two types of certifications by the operations of the company and its committee is responsible for considering CEO and CFO: Section 302 certifications particular risk profile. The starting the materiality of information and and Section 906 certifications. These point for creating a system of disclosure determining disclosure obligations on a certifications must reproduce the required controls and procedures should be an timely basis and typically includes: statements exactly—they may not be inventory of the company’s existing • the principal accounting officer or changed in any respect, even if the change practices. The company should develop controller; appears inconsequential in nature, although its disclosure controls and procedures in • the general counsel or other senior certain portions of the certifications will consultation with its auditors and outside legal officer with responsibility for not be required until the company is counsel and ensure their compatibility disclosure matters; subject to Section 404 reporting. with the company’s internal controls and • the principal risk management officer; and Under Section 302, each Form 10-K other compliance policies and procedures. • the chief investor relations officer. or Form 10-Q (but not Form 8-K) must
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include statements by the CEO and CFO, by the company must be accompanied by a sufficient to provide reasonable assurances or persons performing similar functions, statement by the company’s CEO and CFO that: certifying that: (or equivalent thereof) certifying that: • transactions are executed in accordance • he or she has read the report; • the report fully complies with the with management’s authorization and • based on his or her knowledge, requirements of the Exchange Act; and recorded as necessary to permit the the report contains no material • the information contained fairly preparation of financial statements in misstatements or omissions; presents, in all material respects, the conformity with the applicable criteria • based on his or her knowledge, financial condition and results of and maintain accountability for assets; the financial statements and other operations of the company. • access to assets is permitted only financial information fairly present in accordance with management’s in all material respects the financial (c) Foreign Corrupt Practices Act authorization; and condition, results of operations and A significant source of new compliance • recorded accountability for assets is cash flows of the company as of and requirements for the company following compared with the existing assets at for the periods presented in the an IPO is the Foreign Corrupt Practices reasonable intervals and appropriate report; Act of 1977, as amended, and the action is taken with respect to any • the CEO and the CFO are responsible International Anti-Bribery and Fair differences. for establishing and maintaining Competition Act of 1998 (collectively disclosure controls and procedures and referred to as the FCPA). Two sets The SEC has adopted two rules ICFR for the company, and have: of provisions under the FCPA are intended to promote compliance with the • properly designed the disclosure applicable to a SEC-reporting company. FCPA. The first rule prohibits all persons controls and procedures or caused One set, the accounting provisions, from directly or indirectly falsifying any such disclosure controls and requires the company to keep accurate book, record or account of any company procedures to be designed under books and records and to maintain a subject to the FCPA. The second rule their supervision; system of internal accounting controls. generally bars the company’s directors • evaluated the effectiveness of the These accounting provisions are and officers from making material disclosure controls and procedures in addition to the internal control misstatements, or omitting material as of the end of the period covered requirements and disclosure controls facts from statements they make, to by the report; and procedures described in Section accountants in connection with audits • presented in the report their 6.1(b) and are designed to eliminate of the company or examinations of the conclusions about the effectiveness the ability of companies to conceal company’s financial statements or SEC of the controls and procedures unlawful payments (although the filings and bars directors, officers and based on that evaluation; and accounting provisions can be violated if persons acting under their control from • disclosed in the report any change no bribery is involved). The other set, coercing, manipulating, misleading or in the company’s ICFR that the antibribery provisions, prohibits fraudulently influencing the auditors if occurred during its most recent the bribery of non-U.S. government the person engaging in the conduct knew fiscal quarter (the fourth fiscal officials, who include: or should have known that doing so could quarter in the case of an annual • officers and employees of a foreign render the company’s financial statements report) that has materially affected, government, or of any government materially misleading. or is reasonably likely to materially department, agency or instrumentality The accounting provisions also apply affect, the company’s ICFR; and (e.g., a state-owned enterprise), or of a to subsidiaries when the company owns • the CEO and CFO, based on their public international organization (e.g., or controls more than 50% of the voting most recent evaluation of ICFR, have the World Bank); or power of the subsidiary. disclosed to the audit committee and • any person acting in an official the company’s auditors: capacity for or on behalf of any such Antibribery provisions: The FCPA • all significant deficiencies and government department, agency or prohibits the company from using the material weaknesses in the design instrumentality, or for or on behalf mails or any means or instrumentality or operation of ICFR which are of any such public international of U.S. interstate commerce (including reasonably likely to adversely affect organization. between the United States and any foreign the company’s ability to record, country) to corruptly make an offer, pay, process, summarize and report Accounting provisions: The FCPA promise to pay or authorize the payment financial information; and requires the company to maintain books, of any money, gift or anything of value to • any fraud (whether or not material) records and accounts that, in reasonable a foreign official, a foreign political party involving persons having a significant detail, accurately and fairly reflect the or an official thereof. It further prohibits role in the ICFR of the company. transactions and dispositions of the candidates for foreign office from doing assets of the company and to devise and any of the following to obtain or retain Under Section 906, each periodic maintain an adequate system of internal business for or with, or directing business report containing financial statements filed accounting controls. This system must be to, any person:
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• influence any official act or decision; Examples of such actions include obtaining Halliburton in 2009, $400 million against • fail to perform their official duties or permits, processing visas and providing BAE Systems in 2010, $219 million against secure any improper advantage (e.g., a tax police protection. “Routine government JGC Corporation in 2011 and $60 million rate lower than one allowed by law); or action” does not include a decision by a against Pfizer Inc. in 2012. • use their influence with a foreign non-U.S. official to award new business government or instrumentality thereof or to continue business with a particular 6.2 Listing standards to influence any act or decision of that company. NYSE government or instrumentality. The FCPA also has two affirmative defenses: When a company’s shares are listed The types of payments described • The payment at issue was lawful on the NYSE or NYSE MKT, investors above cannot be made or offered through under the written laws of the foreign generally expect compliance with ongoing a third party if the payor knows that all country; or financial standards, disclosure policies and or a portion of the payment would be • The payment was made for a corporate governance practices designed to made or offered to a non-U.S. official. reasonable, bona fide business purpose, promote integrity and accountability. The company may be deemed to “know” such as travel and lodging expenses, of improper payments to intermediaries for the promotion, demonstrations or (a) Financial and distribution standards even without actual knowledge of a explanation of a product (e.g., paying The NYSE and NYSE MKT have bribe. A person is considered to “know” the reasonable expenses of a non-U.S. established quantitative and qualitative of improper payments if circumstances official who comes to the United States standards for initial listing of U.S. and exist, or if the person has a firm belief that for a demonstration of a company non-U.S. companies. The financial they exist, indicating that the prohibited product). standards for operating companies conduct is substantially certain to listing on the NYSE or NYSE MKT are occur. Conscious disregard or deliberate Enforcement and penalties: The FCPA is summarized in the appendices. Standards ignorance of known circumstances that enforced by the U.S. Department of Justice reflect the different types of issues and should reasonably alert one to the high and the SEC. Penalties can be severe, issuers. Listed companies must meet probability of a bribe can lead to liability. and enforcement has been aggressively continued listing standards on an ongoing If the company ignores warnings or “red expanded in recent years: basis. These too are summarized in the flags” indicating that its funds were • Accounting provisions—If convicted appendices. If companies fall below being used to bribe foreign officials, the of knowing violations, individuals continued listing standards, generally they company may be subject to prosecution. may be sentenced to up to 20 years’ are afforded a period of time to return to The nature of those red flags varies imprisonment and fined up to $5 compliance. Please see the appendices for depending on the circumstances, but million for each violation, while more details. enforcement authorities likely will expect companies may be fined up to $25 companies to be particularly vigilant when million for each violation. (b) Governance requirements active in industries (e.g., the oil business) • Antibribery provisions—Convicted In addition to these quantitative listing or geographical areas (e.g., certain individuals may be sentenced to up to standards, the company must meet NYSE countries in Africa) known for corruption, five years’ imprisonment and up to a or NYSE MKT corporate governance listing or with parties that have a history of $250,000 fine for each violation. The standards, as applicable. The company ethical problems. company employing the individual may must comply with corporate governance The antibribery provisions apply to not pay this fine on the employee’s requirements at the time of listing and any acts of the company involving U.S. behalf. Convicted companies may be throughout the life of its listing. As with interstate commerce. If the company fined $2 million or twice the applicable the quantitative standards, different is located or has its principal place of gross gain or loss, whichever is greater, standards are applicable to different types business in the United States, it is subject for each violation. of issuers. In addition, for a company to the antibribery provisions regardless listing in conjunction with an IPO, certain of any other tie to the United States. When settling FCPA cases in recent of the corporate governance requirements Individual directors or employees of years, the U.S. Department of Justice can be phased in. Governance requirements the company who are U.S. citizens or has frequently required companies to for NYSE MKT listed companies, designed residents are subject to the antibribery hire an FCPA compliance monitor that to accommodate smaller companies, differ provisions regardless of any other periodically reports to the government from NYSE requirements. connection with the United States. on the company’s efforts to improve its To learn more about the NYSE and anticorruption policies. NYSE MKT financial, distribution and Exclusions from FCPA: The FCPA contains In the past few years, the size of the governance requirements, please refer an important exception: it permits so- penalties imposed for FCPA violations to the complete requirements outlined called “grease” payments. A grease payment has significantly increased, including a in the New York Stock Exchange Listed is a payment whose purpose is to facilitate $800 million penalty against Siemens Company Manual, the comprehensive or expedite “routine governmental action.” in 2008, $579 million against KBR and rulebook for listed companies, which can
NYSE IPO Guide 69 Obligations of a public company
be accessed online at http://nysemanual. • Single broker or dealer—On a given transferring the risk of changes in the nyse.com/LCM/Sections/, or to the day, the company must make all share price to the investment bank and NYSE MKT Company Guide, which can be repurchases either through one broker generally permitting immediate accounting referenced at http://wallstreet.cch.com/ or from one dealer. recognition of the repurchase for earnings MKT/CompanyGuide/. Alternatively, • Timing—No repurchase should be per share purposes. contact the NYSE or NYSE MKT directly. effected at the opening of the stock The company cannot benefit from exchange on which the stock lists or the Rule 10b-18 safe harbor when using 6.3 Trading and repurchases within the last half-hour of trading on accelerated share repurchase plans, Cleary Gottlieb Steen & Hamilton LLP that stock exchange. because the rule protects only traditional • Maximum price—No repurchase open-market stock repurchases and not Many public companies repurchase their should occur at a price exceeding the the forward contracts upon which such shares from time to time—for example, higher of the last sale price for the plans are based. to offset dilution from stock option securities and the current bid price for exercises or generally to return value to the securities. (c) Rule 10b5-1 plans stockholders. These repurchases, as well as • Volume—The total volume of As discussed in Section 8.1, insider sales of the company’s stock by directors, repurchases by the company or any trading liability is triggered by the sale officers and other affiliates, should be affiliated purchaser on any given day or repurchase of a company’s shares by a carefully structured so as not to give must not exceed 25% of the trading party that trades while aware of material rise to potential liability under the U.S. volume for the security. However, once nonpublic information about the company. securities laws. each week, the company may instead This liability could apply to a transaction effect a single purchase of a “block” of by the company or its officers, directors (a) Tender offers securities. or other insiders. One way to conduct Any tender offer by the company for its trades in the company’s securities during equity securities is subject to Section The safe harbor provided by Rule a “blackout” window (e.g., in advance of 13(e) of the Exchange Act and Rule 13e-4 10b-18 is not available at any time the company’s earnings release), without thereunder. Whether a stock repurchase during which the company is engaged risking violation of the prohibition against constitutes a tender offer depends on in a “distribution” of its securities in insider trading, is to enter into a Rule a complex, fact-specific inquiry. If the the United States and does not protect 10b5-1 plan. company does conduct a tender offer, it against liability under Rule 10b-5 if the A Rule 10b5-1 plan is a contract to must comply with extensive disclosure company repurchases its securities while purchase or sell securities established and other obligations, including opening in possession of material nonpublic prior to any trades. The plan must have the tender to all holders of the class of information. been adopted in good faith during an open the securities sought in the offer and The company will often disclose trading window and without knowledge of paying the same price to all holders whose planned repurchase activity in its material nonpublic information. It may also securities are purchased. The company can periodic reports or earnings releases and be modified only at those times, although it avoid the tender offer rules by conducting may be required to disclose significant can be terminated at any time. The insider repurchases of its equity securities either repurchase transactions by press release. may not influence the person or entity through customary market transactions The company’s periodic reports must also responsible for executing the plan, which is or in individually negotiated private include specific disclosure about all of its generally an investment bank. transactions (in either case, in accordance stock repurchases over the period covered Anyone that is routinely exposed to with the provisions of Rule 10b-18, by the report. material nonpublic information that a discussed below). reasonable investor would use to buy, Accelerated share repurchase plans: sell or hold shares of company stock is (b) Stock repurchase programs The company may use accelerated share a candidate for a Rule 10b5-1 plan. This Another concern when the company repurchase plans to buy back shares from includes the company itself, directors, repurchases its stock is that this will the market. A typical accelerated share officers and other employees and large be viewed as market manipulation (see repurchase involves the combination shareholders. Section 8.1 for further discussion about of a buyback of common stock from an market manipulation and related liability). investment bank, which typically borrows (d) Resales by affiliates Rule 10b-18 under the Exchange Act the shares from investors, and a forward Company securities held by affiliates, provides a safe harbor from this liability. contract with the investment bank on the including officers, directors and large As a result, companies generally adhere company’s common stock. Settlement stockholders that are treated as having to the provisions of Rule 10b-18 when of the forward contract is indexed to the the ability to directly or indirectly control repurchasing stock and in particular when company’s common stock. Accelerated management or policies of the company, conducting a program of repurchases over share repurchase plans allow the company are considered “restricted,” and resales a period of time. Rule 10b-18 requires the to exchange a fixed amount of money must either be registered with the SEC following: for shares of its stock immediately, or be effected pursuant to an exemption.
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Securities acquired by a nonaffiliate in a expansion of director responsibility • the way in which the company audits private transaction are also considered has arisen from several key events, for implementation of the compliance restricted securities for a period of up to including the enactment of the FSG. The program and for substantive violations, one year. implementation of the FSG, however, was especially in high-risk areas; and Rule 144 under the Securities Act is a only the start of the rapid development of • employees’ perception of the company’s common exemption used by affiliates to director oversight responsibility of culture of compliance, including fear resell their company securities, with the ethics and compliance programs. The of retaliation for reporting suspected following requirements: decisions in In re Caremark International misconduct, and whether employees • Holding period—The affiliate must Inc. Derivative Litigation1 and Stone v. believe that management is committed hold the shares for at least six months Ritter,2 two rounds of amendments to to compliance. before resale. One exception is for the FSG, the widespread acceptance and shares obtained pursuant to a written application of Department of Justice Just as vital is providing adequate compensatory plan or contract. In that (DOJ) guidance for the prosecution of resources and authority to the person or case, Rule 701 under the Securities organizations and expanded application of persons responsible for the day-to-day Act allows resale under Rule 144 the responsible corporate officer doctrine operations of the program. While the FSG without any holding period. This resale all provide that directors must now and general best practices do not dictate must occur at least 90 days after the exercise greater oversight and control of a particular structure or level of authority effective date of the IPO. compliance than ever before. for the person or persons responsible • Volume limitation—In any three-month Despite these fundamental changes, for compliance, at a minimum such period, sales by the affiliate may organizations often fail to adequately individuals must have access to the board not exceed the greater of 1% of the support directors with the vital resources of directors and be of sufficient rank to company’s total outstanding shares or and expertise they need to exercise effectively carry out their duties. the average weekly reported volume effective, ongoing oversight of an ethics An organization’s code of conduct is in the securities on the exchange during and compliance program. Even if an the cornerstone of any successful program. the four weeks preceding the sale. organization has robust ethics and But the code, along with any stand-alone • Current public information—The compliance practices below the director compliance policies, is a living document company must have filed all required level, failure to retain directors who are that must be regularly reviewed and reports with the SEC on time. knowledgeable about the content of the periodically updated. The code must speak • Manner of sale—The sale must be program, and who exercise reasonable to the culture of the organization and be made through a broker-dealer or in oversight of the implementation and accessible to all employees in their native certain other specified transactions effectiveness of the program, will render language and at their appropriate reading through a stock exchange. the program “ineffective” in the eyes level. of regulators, prosecutors and federal The FSG state that an effective In some cases when using Rule 144, judges. compliance and ethics program should an affiliate must file Form 144 with the Boards should periodically receive take reasonable steps to periodically SEC and the stock exchange on which the information about: communicate its standards, procedures securities trade. • the structure and resourcing of the and other guidelines by utilizing compliance program and whether thorough training programs and other 6.4 Ongoing compliance obligations the compliance officer has sufficient communication tools. Efficient, yet NYSE Governance Services authority to implement the program; comprehensive, training is essential for • the structure of the company’s any ethics and compliance program and is The IPO is not the end of the story with reporting system and the company’s the most effective way for organizations respect to ethics and compliance—in policies regarding responding to to ensure their employees understand fact, it is only the beginning. Once listed, suspected misconduct; the standards to which they are held. a company will experience far greater • the types of compliance training that Training must be periodically evaluated public scrutiny and will have a range of employees and others are required to and reviewed to ensure the content and continuing obligations with which to complete and any modifications to presentation is accurate and produces comply. Any weakness in its systems those training requirements; results. Organizations must establish or failure to comply with regulations • the company’s risk assessment comprehensive, risk-based training could cause public embarrassment to process and results and the methods plans that take into account changing management, reputational damage and developed by the company to demographics and operational and potential fines for the company and prioritize and address the risks legal factors. It is equally essential that individuals involved in the failure. identified therein; organizations regularly communicate During the last two decades, the a message of ethics and compliance to role that directors play with respect employees at all levels of the organization. to oversight of a company’s ethics and Employees take their cues on culture 1698 A 2d 959 (Del. Ch. 1996). compliance program has expanded. The 2911 A.2d 362 (Del. 2006). and compliance from their managers, so
NYSE IPO Guide 71 Obligations of a public company
it is vital that managers and supervisors be involved in the communication of compliance standards and discussion of ethical culture. Organizations should undertake a data-driven approach to monitoring and auditing their compliance program. A company should be collecting data on the program that includes, but is not limited to, training, reporting, culture assessment and knowledge assessment and should utilize appropriate external benchmarking tools to assess performance. The FSG require that organizations provide an anonymous reporting mechanism; additionally, organizations must ensure that open-door reporting— and a commitment to nonretaliation—is encouraged and properly communicated. All organizations must ensure that investigations and discipline are consistent and as transparent as possible; this reinforces organizational justice and encourages reporting. Organizations should also seek creative and objective measures for performance and incentivize ethics and compliance at their organizations, as recommended by the FSG. Corporate compliance practices have undergone enormous change in a relatively short period of time and best practices are continually developing. The level of scrutiny of a board’s monitoring—or failing to monitor—the activities of a corporation has increased dramatically. The challenge for boards, executive officers and compliance officers now is to view the increased scrutiny and enhanced standards not merely as a host of new legal requirements but as an opportunity to review and enhance their corporate governance and compliance practices, setting a true “tone from the top.” ●
72 NYSE IPO Guide 7 A public company and its shareholders
NYSE IPO Guide 73 A public company and its shareholders
7.1 Proxy statement and annual meeting eligibility to vote) and the meeting date, without specific instructions from Morrow & Co., LLC and management will communicate this their clients. Usually, member firms are information to all appropriate parties. permitted to vote on the ratification of (a) Annual meeting requirements The length of time between the record auditors without specific shareholder Every public company in the United States date and meeting date is set by state law instructions. A professional proxy is required to have an annual meeting, at (in Delaware, for example, the record date solicitation firm not only can help with which shareholders can cast their vote, can be no more than 60 days prior to the timing and mechanical requirements either in person at the meeting or by proxy meeting and no less than 10 days prior to for the meeting but can also provide beforehand. At a minimum, shareholders the meeting). advice on the presentation of items to are given the opportunity to vote on the shareholders for optimal readability election of directors of the corporation Communication: To ensure that the and the likelihood of achieving the and are also given the opportunity to process runs smoothly, all parties involved requisite vote for the proposal to pass. provide their advisory vote on executive need to work closely together to achieve The recent addition of the requirement compensation for the previous year the common goal. Parties involved include to include a shareholder vote on (commonly referred to as “Say on Pay”). the issuer, the company’s transfer agent, executive compensation (Say on Pay) Most annual meetings are fairly the proxy solicitor (if one is used) and has added another level of complexity to formal affairs, well scripted and planned outside counsel. annual meetings. Other issues, such as in advance. Generally, the venue for the increasing support for certain shareholder meeting is chosen by the company and is Notification of record date and meeting proposals, the increasing influence of usually suited to the number of holders date (broker search): SEC rules require that institutional and activist investors, and expected to attend the meeting. Some all street name holders (brokers, banks and the views of proxy advisory firms have companies hold the meeting at the same other custodians) be given advance notice made planning for the annual meeting a place every year, and others choose to of the record date and meeting date, and more complex and longer process than rotate the meeting site to accommodate this notice must be given a minimum of 20 it has been in the past. Companies with shareholders; the choice is up to business days prior to the record date. The nonroutine ballot items (such as equity management and the board of directors. notice sets forth the name of the company, plans or shareholder proposals), and There has been some movement toward the Cusip number of the security(ies) even those with “ordinary” agenda items, holding “virtual” annual meetings, with entitled to vote, the record date and the should consider retaining a professional no physical site for holders to attend; annual meeting date; it is sent to brokers, proxy solicitation firm to help navigate instead, it all takes place on the Internet. banks and their agents, as applicable, and the proxy process. Most companies have chosen not to take affords them the opportunity to respond this option; they use the once-a-year with the number of sets of material they 7.2 Providing shareholders with proxy opportunity to meet shareholders in will need to forward to their beneficial material person, and many shareholders seem to holders to allow them to vote at the Morrow & Co., LLC prefer it that way. meeting. This also gives the issuer the opportunity to determine the total number (a) Material preparation (b) Timeline of copies of material that will be needed to Materials to be provided to holders: In The timing of the annual meeting is be printed. If the company retains a proxy order to solicit votes from shareholders for generally determined by the company’s solicitor, the solicitor will take care of the the annual meeting, the issuer is required fiscal year-end, and meetings are typically broker search. In the absence of a proxy to provide holders with a proxy statement held at the same time each year. A number solicitor, the transfer agent will generally and form of proxy that allows holders of important events in the preparation for, handle the search notice. to vote. In addition, the annual meeting and lead-up to, the annual meeting require materials must either be accompanied compliance with state laws, government Analyze the need for a proxy solicitor: by, or preceded by, an annual report. regulations and other regulatory agency Recent changes to NYSE regulations These documents must be filed with the policies, as well as stock exchange listing (which govern member firms, such as SEC concurrently with the mailing. In requirements, if applicable. brokers, and not just listed companies) some cases (which can be discussed with have changed the voting landscape for counsel), the proxy may need to be filed (c) Preparation public companies. The most important in preliminary form, depending on the Determine agenda and dates: Management change involves the election of directors; proposals to be presented to shareholders. and the board of directors, working previously, member firms (brokerage The proxy statement, in addition to together, will determine any other firms) were permitted to vote on the meeting applicable legal requirements, is items to be presented to shareholders in election of directors in the absence of also an advocacy piece for management’s addition to the usual items and determine instructions from the underlying owners position. Clarity of presentation and ease the timing for the annual meeting. The of the shares. However, since January 1, of reading are key to ensuring that holders board will set the record date (the date 2010, brokers are no longer permitted take the time to read the material that is of stock ownership that determines to vote on the election of directors being sent to them.
74 NYSE IPO Guide A public company and its shareholders
In addition to the proxy statement opportunity to request a printed copy of the Three methods of voting are typically and annual report, the issuer will need to proxy materials, and instructions on how offered to shareholders to make their provide shareholders with a form of proxy to do so must be included with the Notice. choices known: (1) traditional mail-in, (generally referred to as a proxy card) The issuer is obligated to honor requests for where a holder signs a card and mails to allow holders the ability to cast their paper copies of the material for up to one it in a postage-paid return envelope; vote. The format of the proxy is generally year after the meeting. Use of notice and (2) telephone voting, whereby a holder coordinated with the issuer’s transfer access requires that the notice be sent calls a toll-free number and enters the agent to ensure that returned proxies at least 40 days prior to the meeting date, and control number that appears on the proxy will be readable by the transfer agent’s the site hosting the material must be live form and specifies his or her choice; and computer systems. In-house counsel will and available at the time the Notice is (3) Internet voting, whereby a holder goes also generally ensure that the form of mailed. Failure to meet the 40-day time to a specified site and enters the control proxy meets applicable legal requirements. frame would cause the company to revert to number and specifies the voting choice. its normal delivery procedure. Issuers may The holder will also have the option to (b) Material distribution use Notice and Access, or they may choose sign up for electronic delivery of material Web hosting of materials: Since January to use Notice and Access for certain holders for future meetings. 2009 all companies soliciting proxies and mail full packages to other holders. This under SEC rules are required to post determination can be made in coordination Professional proxy solicitation firm versus annual meeting material to the Internet with the proxy solicitor and will include in-house solicitation: A large number of and notify shareholders of availability. consideration of the items on the ballot, the public companies in the United States hire However, the issuer cannot merely link to vote requirements for each proposal and a professional proxy solicitation firm to the SEC’s EDGAR website—a link must the number of shareholders to be affected. help them with all aspects of their annual be provided to a site that is cookie-free meeting. A proxy solicitor can handle the and may be hosted either by the issuer or Householding: To further reduce the mechanical aspects of the solicitation (such by an outside party. Whoever is chosen number of printed annual reports and as overseeing the distribution and mailing to host the site, it is important that all proxy statements required, the SEC of material), provide guidance on the requirements for accessibility and privacy permits issuers to mail one set of materials presentation of information in the proxy protection are met. when two or more shareholders with the statement and work to ensure that all same last name live at the same address. shareholders are afforded the opportunity Electronic distribution of materials: SEC Separate proxy cards are included for each to vote. A solicitor can also provide advice rules allow issuers to distribute proxy registration, however. on the likely voting outcomes on many material electronically to shareholders that proposals to be presented to shareholders have already consented to such delivery. Full-set mailing: An issuer may also and will work closely with management Shareholders are offered the opportunity to choose to mail a full package to all holders; to coordinate solicitation efforts. The access their documents electronically, which the package includes the annual report, solicitor will also provide daily voting offers printing and postage cost savings. proxy statement, proxy card and return reports to keep the company apprised of Consents may be promoted via hard- envelope. The choice can be made to mail the status of the voting on a real-time copy communications such as the proxy all packages by one class of mail (typically, basis, so there will be no surprises at the card, proxy statement and annual report. either first class mail or standard (formerly time of the meeting. Shareholders can also sign up for electronic bulk) mail). The choice will, as with Notice delivery of material for future mailings and Access, depend on the size of the Proxy solicitation team: At most public when they vote online. shareholder base, share distribution of companies, the conduct of the annual holders and the ballot items to be voted on. meeting is the responsibility of the Notice and Access: The SEC allows issuers corporate secretary’s office, working in to send holders a simple notice providing (c) Phase three: solicitation and voting conjunction with the general counsel information on how to access their proxy Generally, less than 30% of retail and legal staff. In addition, the investor materials—without prior consent for (noninstitutional) shareholders vote in relations department may also be electronic delivery. If an issuer chooses to response to the initial proxy material involved, to assist in garnering support use Notice and Access, the form to be used distribution; institutional holders have a from institutional investors with whom in mailing is prescribed by the SEC and must much higher rate, with U.S. institutional it has a close working relationship. With include the issuer’s name, date of meeting investors typically voting over 90% of their the current requirement to provide and a brief description of items to be voted positions. In cases where contentious or shareholders with an advisory vote on, among other items. A link to the proxy high-vote proposals are on the ballot, it on executive compensation, it is not material and voting site is included in the may be helpful to achieve higher turnout uncommon for the human resources notice, along with a control number specific from retail holders. In general, retail holders department to also be involved. The to the holder to access the site, and an issuer support management more often than not proxy solicitor will work closely with may NOT include a proxy card with the and can provide an additional margin of the company in coordinating outreach to mailing. Shareholders must also be given the support for a management proposal. shareholders, both institutional and retail.
NYSE IPO Guide 75 A public company and its shareholders
To determine whether an issue is all U.S.-listed companies, and many Schedule 13D requires disclosure of: controversial or to obtain a vote, the foreign ones, to institutional investors. • the identity of the acquirer (or each corporate secretary and corporate legal While the views and recommendations member of the group), including its counsel should retain a proxy solicitation of these firms are influential, they are management, directors and controlling firm. With recent changes to regulations not necessarily dispositive, and most entities; and the growing influence of proxy major institutions have their own voting • the source and amount of funds used to advisory firms, achieving successful policies and guidelines in place that acquire the securities; voting percentages is becoming a more govern how they will vote on specific • the purpose of the acquisition, challenging task. issues. Many will also subscribe to one or including any plans or proposals the more of the proxy advisory firms proxy acquirer may have for future purchases Shareholder profile: In order to analysis services and use them as a guide or sales of target stock or for any conduct an efficient and effective proxy in helping to make their voting decisions. changes in the target management solicitation, it is important to know the Most institutional investors are required or board of directors, or any major composition of the shareholder base. A to publicly disclose their voting record corporate transaction affecting control proxy solicitor can determine the amount once a year, on Form NP-X, with the SEC. of the target, such as a tender offer or of shares held by institutional holders, Some institutional investors will also business combination; retail holders and insiders (including have one of the advisory firms vote their • the amount and percentage of target shares held in company plans). With proxies, based on the advisory firm’s securities held by the acquirer and this information, a determination can recommendations. details about transactions in such be made on the nature and extent of the securities during the 60 days prior to solicitation needed and also whether an 7.3 Ownership reporting by filing of the Schedule 13D (or, if shorter, outreach campaign to retail holders is shareholders for the period since the most recent necessary and beneficial. Cleary Gottlieb Steen & Hamilton LLP Schedule 13D filing); and • the nature of any arrangements to Executing an effective campaign: With After the IPO, the company’s major which the acquirer is a party relating to knowledge of the shareholder base, the shareholders (or groups of shareholders the target’s securities. corporate secretary and staff can position acting together) will be required to comply the messaging in the proxy statement. with certain reporting requirements under Documents relating to the financing The proxy statement is not just a means the Exchange Act. These requirements of the acquisition and any contemplated to satisfy SEC and state law disclosure are in addition to those applicable to extraordinary transaction involving the requirements but is also a public officers, directors and 10% shareholders company must be filed as exhibits to the company’s most broad and direct investor under Section 16 of the Exchange Act. Schedule 13D filing. relations tool. The company’s management usually Schedule 13D filings can be quite long Corporate governance practices are encounters these requirements in two and complex. In the event of a contest for important for many shareholders, and ways. First, a company with a controlling control, there can be litigation challenging this is a trend that continues to grow in or principal shareholder will often monitor the accuracy of the filing, and especially importance. A company’s governance that shareholder’s compliance with these of statements describing the acquirer’s practices should be presented in the best requirements. Second, filings under purpose and plans. Filers often try to possible light, since many investors will these requirements occasionally provide preserve as much flexibility as possible by take these practices into account when important information about transactions describing a wide variety of options. making their voting decisions. The board by major shareholders. A report on Schedule 13D must of directors is responsible for deciding be amended “promptly” (which can what practices are best for the company as Schedule 13D filers: Pursuant to Sections mean almost immediately in some a whole, while also taking into account the 13(d) and 13(g) of the Exchange Act and the circumstances) in the event of a material views of their shareholders. Meeting with related SEC regulations, each person (or change in the information disclosed in the investors regularly, and understanding group of persons acting together) acquiring schedule, including a change in—or, in their concerns as well as those of the any voting equity securities registered the view of the SEC, the selection of one proxy advisory firms, will help address under the Exchange Act as a result of particular purpose from—the previously potential conflicts before the annual which such person or group beneficially disclosed plans. Any acquisition or meeting. owns more than 5% of such securities, disposition of 1% or more of the relevant within 10 days of the 5% threshold being class of securities is deemed material Third-party proxy advisory firms: The crossed, must file a report on Schedule for this purpose, while a lesser change in two major proxy advisory firms are 13D with the SEC and send copies to the holdings may be material, depending on Institutional Shareholder Services (ISS) company and relevant stock exchanges. As the circumstances. and Glass, Lewis & Co. These third-party discussed below, some shareholders may proxy advisory firms provide analysis be able to file instead on Schedule 13G, Schedule 13G filers: An existing and voting recommendations on virtually which requires less information. shareholder that already owns more than
76 NYSE IPO Guide A public company and its shareholders
5% of the company at the time of the IPO A nonqualified passive investor must thereunder generally prohibit such insiders is required to file a report on Schedule file its Schedule 13G within 10 calendar from effecting short sales and taking 13G within 45 days of the end of that days of crossing the 5% threshold. It short positions in derivative securities calendar year. Thereafter, the shareholder must also amend its filing “promptly” if with respect to the company’s shares. In must amend its report within 45 days of it acquires beneficial ownership of more connection with the IPO, the company the end of each calendar year to reflect than 10% of the subject class of securities. should determine who, in its view, are its any changes, as of that year-end, in the After it exceeds the 10% threshold and “executive officers” for Section 16 and reported information. It must convert to so long as its percentage of beneficial proxy purposes. reporting on Schedule 13D within 10 days ownership remains below 20%, an It can be challenging to manage all of of its ownership percentage increasing by additional amendment to the nonqualified the moving parts included in filing Forms more than 2% in any 12-month period, but passive investor’s report on Schedule 13G 3, 4 and 5 with the SEC. The company it need not amend its Schedule 13G or file a must also be filed “promptly” to reflect can take complete control of the filing Schedule 13D merely by reason of a change any increase or decrease in beneficial process by utilizing a web-based filing in its intentions or plans. ownership of more than 5% of the class of solution, which allows it to file the There are two other types of investors subject securities. forms directly from its own computers. that may report on Schedule 13G instead If a nonqualified passive investor Alternatively, it can outsource the of Schedule 13D, provided that they have increases its ownership above 20%, it filings to a financial printer that has the acquired shares in the ordinary course of must file a Schedule 13D within 10 days resources and experience necessary to business without the purpose or effect and is prohibited from purchasing any ensure that these filings meet the tight of changing or influencing control of the additional shares or voting the securities SEC deadlines. company: subject to the Schedule 13D filing until • a “qualified institutional investor” that 10 days after the filing. Similarly, both Summary of Section 16 for foreign private falls with certain specified categories of a qualified institutional investor and issuers: Directors and officers of a U.S. institutions; and a nonqualified passive investor must company with a class of equity securities • a “non-qualified passive investor” convert to a Schedule 13D within 10 days registered under the Exchange Act, and that does not fall with the specified of their intentions being no longer passive beneficial holders (whether or not U.S. categories but beneficially owns less and are prohibited from purchasing any holders) of more than 10% of any class than 20% of the shares. additional shares or voting the securities of equity securities of such company, subject to the Schedule 13D filing until 10 generally must file reports regarding Schedule 13G requires much more days after the filing. their ownership of such securities. They limited information than Schedule 13D. Comparable non-U.S. institutions are also subject to short-swing profit The principal disclosures required by may be permitted to report their recapture provisions designed to recapture Schedule 13G include: beneficial ownership on a short-form for the benefit of the company profits • the identity of the holder; Schedule 13G to the same extent as their realized on purchases and sales of equity • the basis for its eligibility to use U.S. counterparts, subject to certain securities registered under the Exchange Schedule 13G; conditions. Act within any six-month period. These • the amount and percentage of target requirements do not apply to directors, securities that it holds; and 7.4 Reporting by insiders officers and large shareholders of foreign • the identity of the persons on whose RR Donnelley private issuers. behalf it owns the securities or that compose an acquiring group. Certain “insiders,” including executive Excerpts on other Section 16 information: officers, directors and investors owning A number of transactions in securities A qualified institutional investor over 10% of the shares of the company, in which an insider has a pecuniary generally need not file its Schedule 13G will generally be required to file disclosure interest are exempt from reporting under until 45 days after the end of the calendar reports under Section 16(a) of the Section 16(a). For example, an increase or year in which the acquisition occurred, and Exchange Act regarding changes in their decrease in the number of securities held only if it remains above the 5% threshold beneficial ownership of the company’s as a result of a stock split or stock dividend at the end of the calendar year. Thereafter, shares within two days of the transaction applying equally to all securities of a class the filing must generally be amended on the SEC’s EDGAR system. The reports and an acquisition of securities pursuant annually. It must also be amended within must also be available on the company to a dividend or interest reinvestment 10 days of the end of the first month in website. They will also be subject to the plan are exempt from reporting under which the qualified institutional investor’s “short-swing profit recapture” provisions Section 16(a), subject to certain conditions. direct or indirect beneficial ownership under Section 16(b) of the Exchange Act In addition, changes in beneficial interest exceeds 10% of the class and designed to limit insiders’ ability to reap ownership pursuant to transactions thereafter within 10 days of the end of any profits from any purchases and sales that are exempt from short-swing profit month in which its interest increases or within six months of each other. Section recapture under Section 16(b) are generally decreases by more than 5% of the class. 16(c) of the Exchange Act and the rules reportable on Form 5 rather than Form 4
NYSE IPO Guide 77 A public company and its shareholders
(although certain of such transactions 7.5 Related party transactions company from best accomplishing its must be reported on Form 4, pursuant to Cleary Gottlieb Steen & Hamilton LLP financial or strategic goals. Rule 16a-3(f)). • Some related party transactions are To the extent that an exemption It is not uncommon, pre-IPO, for the prohibited—Under the securities exists from the reporting requirements of company to do business informally laws, the company is prohibited from Section 16(a) in respect of any transaction with family members or without giving making loans to directors or executive in a security, the short-swing profit due consideration to whether certain officers. Any such loans would have recapture provisions of Section 16(b) transactions are done on an arm’s-length to be unwound prior to the company’s likewise do not apply to such transaction basis. Once the company conducts its IPO. Other related party transactions (see Rule 16a-10). Rule 16a-10 does IPO, however, it needs to be careful about can cause a director not to be not apply in the reverse; an exemption so-called “related party transactions” considered independent for service on from the short-swing profit recapture because they can present potential or the company’s compensation or audit provisions of Section 16(b) does not actual conflicts of interest and create committee for tax or securities law automatically provide an exemption the appearance that decisions are purposes. from the reporting requirements of based on considerations other than the • Stockholders care—Related party Section 16(a). best interests of the company and its transactions signal a possible conflict An insider must file Form 4 with the stockholders. of interest to investors. They can call SEC and with each national securities into question whether the company exchange on which any security of the Definition: The SEC defines a “related puts the best interests of the company company is listed within 10 days of party transaction” as: and its stockholders first, tarnishing the end of each month in which any • any individual or series of transactions, the legitimacy of management and reportable change in position occurs with including any financial transaction, damaging valuation of the company’s respect to any security as to which it has arrangement or relationship; securities. a direct or indirect pecuniary interest. • in which the company participates; • The SEC cares—The SEC considers Every transaction during such month • where the amount involved exceeds disclosure regarding related party must be reported, even if acquisitions $120,000; and transactions as integral to a materially and dispositions during such month • in which any related person had or complete picture of financial even out. will have a direct or indirect material relationships with the company. For purposes of beneficial interest. As a result, securities regulations ownership, a person can be deemed to require detailed disclosure on these own beneficially not only securities A “related person” includes: transactions in proxy statements, owned directly by such person but • any director or executive officer of the annual reports and registration also securities underlying derivative company; statements, including Form S-1. instruments convertible into or • any nominee for director, if the The disclosure must cover such exchangeable for securities. For information is being provided in a information as the name of the example, the holder of an option proxy statement; related person and the basis on convertible into securities within 60 • any beneficial owner of more than 5% which the person is a related person, days will be deemed, for the purposes of any class of the company’s voting the related person’s interest in the of Section 13(d) (and determining a securities; and transaction with the company, the person’s status as an insider under • any immediate family member of the approximate dollar value of the Section 16(a)), to indirectly beneficially people listed above (i.e., any child, transaction and any other information own the underlying securities, whether stepchild, parent, stepparent, spouse, regarding the transaction that is or not the option has been exercised. sibling, mother-in-law, father-in-law, material to investors in light of Thus, derivative securities owned by son-in-law, daughter-in-law, brother- the circumstances of the particular an insider that are, within 60 days, in-law or sister-in-law of such people) transaction. convertible into or exercisable for and any person. other than a tenant • Stock exchanges care—The listing rules more than 5% of a security will create or employee, sharing the household of of the various stock exchanges require a reporting obligation under Section such people. the company to think carefully about 13(d) with respect to the underlying related party transactions. For example, securities. If such derivative securities Reasons for concern: The company should under NASDAQ rules, an independent are, within 60 days, convertible into care about related party transactions for a body of the company’s board of or exercisable for more than 10% of number of reasons: directors must conduct ongoing review a security, such holder will also be • It makes good business sense—Related and oversight of all related party deemed an insider of the company of party transactions may involve terms transactions for potential conflict-of- such security subject to the reporting that are not as competitive as might interest situations. Similarly, the NYSE obligations under Section 16(a). otherwise be achieved, preventing the recommends a similar process and also
78 NYSE IPO Guide A public company and its shareholders
requires listed companies to adopt a Although there may be situations a related party master list to be code of business conduct and ethics for where a limited market makes it distributed, with any updates, to the directors, officers and employees that difficult to establish what the terms relevant members of management address conflicts of interest. and manner of settlement of a such as the CFO and business unit and • Auditors care—Auditors are obligated particular transaction would be with department leaders responsible for to have sufficient understanding of the a third party, the company should purchasing or selling. The company company’s business activities to assess nevertheless attempt to set forth may also develop a “watch list” of whether the company’s disclosures objective business criteria against potentially related persons, using the on related party transactions are which the related party transaction can sources of information described above adequate. Accounting requirements be reviewed. to check whether their status changes. dictate certain disclosures about • The persons (or groups of persons on related party transactions. Audit rules the board of directors or otherwise) Tasks: In preparing for the IPO, the set forth specific auditing procedures who are responsible for applying such company and its lawyers should do the on how to determine the existence policies and procedures—The company following: of related parties and transactions should consider the board committee • Review both existing related party with them, how to examine identified responsible for administering the arrangements and any plans for new related party transactions and policy. Usually the audit committee ones as soon as possible. Consider how to respond to management’s is charged with this task, but it may the impact of such arrangements on representations that a transaction was also make sense for the nominating disclosure and governance standards. consummated at arm’s length. These and corporate governance committee • Identify arrangements between officers, audit procedures are quite detailed and to be responsible for matters relating insiders and their close relatives on can involve a review of the company’s to directors. Also, the company should the one hand, and the company on board minutes, proxy information establish when the responsible persons the other; these arrangements will and other material filed with the will review related party transactions. generally have to be disclosed. SEC, stockholder listings and other Although subsequent review may be • Confirm that the compensation potential sources of information. acceptable, best practice mandates committee approves all elements prior review. of compensation paid to executive officers. Compensation exceeding How to deal with the issue: The company In order to enable board members $120,000 paid to executive officers should develop policies and procedures or delegates to make informed advance must be disclosed if not approved (or for the review, approval or ratification of decisions on related party transactions, recommended for approval) by the related party transactions. Clear policies company procedures need to ensure that compensation committee or a group of are essential to provide directors and the information presented to them is independent directors performing that officers with guidance on related party sufficient in scope and quality: function. transactions and how the company will • Sources of information—The first • Unwind loans to directors and officers deal with them. Although the securities source of information should be the before the initial IPO registration laws do not mandate the specific features related parties themselves. For example, statement is filed with the SEC. of the policy, they require disclosure of it an annual questionnaire distributed to • Develop written related party in certain filings and suggest that it may be directors and officers should capture transaction policies and procedures. appropriate to include the following: basic information about transactions If the company already has a code of • Types of transactions covered by the between directors and officers, their conduct or other policies addressing policies and procedures—The company family members and the company. this issue, it may be preferable to should consider what makes most Furthermore, directors and officers integrate related party transactions sense given its business requirements, should have an ongoing obligation to policies with such existing policies. corporate structure and operating inform the company in advance of any Although the securities laws do not style. Also, it pays to be aware of potential related party transaction require that policies and procedures “hot-button” issues when describing and to provide updates of parties be in writing, best practice mandates the types of transactions covered. related to them, their employment written policies. For example, the SEC is especially and relationships with charitable sensitive about transactions involving organizations. The company may also 7.6 Share ownership mechanics family members, so the company may consider instituting independent Morrow & Co., LLC consider developing a nepotism policy. information-gathering procedures, • Standards to be applied pursuant to which may include periodic review of (a) Types of share ownership the policies and procedures—Policies news articles or Internet searches. Shareholders can be divided into two should hold all related parties to • Application of information—The broad groups: “registered” holders and the same standards as third parties. company may consider developing “beneficial” holders. A registered holder
NYSE IPO Guide 79 A public company and its shareholders
is one who owns shares directly in his are the ease of transfer or sale (no Transfer agents are subject to own name and whose identity and share certificates need to be presented at the regulation, both by the SEC and by the ownership appears on the company register time) and a more secure environment. state of incorporation. These regulations (a registered holder may be an individual, The risk of losing a certificate is mitigated govern, among other things: a group or other entity). Evidence of with book entry ownership and it also • processing time for transfers; share ownership may be by physical stock eliminates the need for posting a bond • responsiveness to inquiries; certificate or by electronic entry on the to replace a lost certificate. The SEC is a • accuracy of recordkeeping, and company’s records. Typically, the register strong proponent of the reduction in the retention of records; of shareholders is maintained by the use of physical certificates. • secure handling of stock certificates; company’s transfer agent, which keeps All beneficial holders are book entry • safeguarding of funds and securities; track of ownership and transfer of shares. holders—their ownership is recorded on and A beneficial holder is one who chooses the records of their custodian and there is • searching for and tracking lost not to keep the stock in his own name; no physical certificate for the owner. shareholders. ownership is retained by a broker, bank or other custodian. A beneficial holder (b) Recordkeeping States have rules regarding lost does not appear on the company’s records The transfer agent, retained by the issuer, shareholders and the process for turning as a shareholder but retains beneficial maintains a record of the ownership of the over securities in inactive or abandoned ownership of the shares. Holding in this company’s shares, including the holder’s accounts (escheatment). In addition, the manner is often referred to as holding in name and address. Brokers and banks Internal Revenue Service requires transfer “street name.” maintain their own record of ownership of agents to report the payment of dividends Companies know who their registered shares held in their name for the benefit and shares sales by means of Form 1099. holders are and can communicate with of others. The IRS also may instruct a transfer agent them directly. Beneficial holders are The transfer agent, in addition to to either begin, or cease, tax withholding, not known directly by the company and maintaining the ownership record, is also which the transfer agent must comply may choose not to have their identity responsible for the transfer, issuance with. disclosed. Beneficial owners can either be and cancellation of shares. A list of all nonobjecting beneficial owners (NOBOs) registered holders can be produced upon (c) Transfer of shares and voting or objecting beneficial owners (OBOs). request of the issuer. The most common As described above, transfer of shares OBOs will not allow their identity to be request for a registered holder list comes for registered holders are handled by the disclosed to the company, and the only at the time of the record date for an transfer agent; mailing of material and vote way to communicate with them is through annual meeting (or special meeting) to tabulation is also usually handled by the their broker, bank or custodian. NOBO determine those holders eligible to vote. transfer agent as well. holders, however, have waived the right Most commonly, the transfer agent is the For “street name” shares, the to remain anonymous, and an issuer can custodian of the list of common stock procedure differs. A beneficial holder in request a NOBO listing of such holders, holders, but they can also serve as record street name does not appear directly on upon payment of a charge for the list. The keepers for other types of securities, such the share register; shares are held by the NOBO list will contain the name, address as preferred stock or bonds. broker or bank that acts as custodian for and shareholding amount of the holders Transfer agent’s duties also include: those shares. Most brokers and banks but will not indicate which custodian • payment of dividends; do not hold their shares directly on the holds the shares for the owner. Issuers • tax reporting; register; instead, the shares are held can then communicate directly with these • dividend reinvestment plan (DRIP) by The Depository Trust & Clearing holders, if they choose. A shareholder administration; Corporation, which through its DTC has the right, when opening a brokerage • escheatment and lost shareholder subsidiary appears on the share register as account, to decide whether they choose reporting; owner of the shares (showing, in the name to have their identity disclosed in this • stock option issuance; of its nominee, CEDE & Co.). manner (i.e., whether to be a NOBO or • restricted stock transfers; and DTC was established to alleviate OBO). • annual and special meeting services, the volume of transfers of physical including the mailing of proxy material stock certificates necessary for trading “Book entry” and printed share to all registered holders and the of securities. Rather than transferring certificates: Registered holders have their tabulation of returned votes. certificates, shares are transferred ownership evidenced either by a printed electronically, and DTC will then allocate share certificate (the traditional method) Transfer agents generally provide online the shares to their participants (brokers or by book entry. With book entry, the access to holders accounts. The transfer and banks) for whom they are holding the holder’s ownership is recorded on the agent also usually acts as registrar of the shares. Since the shares held in DTC’s transfer agent’s register of shareholders, shares of an issuer as well, ensuring that shares name are not owned by Depository Trust, but no physical certificate is issued. The issued do not exceed the number of shares it maintains a list of participants for whom main advantages of book entry ownership authorized in the company’s charter. it is holding shares and the number of
80 NYSE IPO Guide A public company and its shareholders
shares owned by each participant. The and the intermediary will return the votes Finally, records must also be participating brokers and banks also directly to the transfer agent. The most maintained after the property is turned maintain their own records, as well as keep commonly used intermediary is Broadridge over to the states, in the event that a the contact information for the beneficial Financial Solutions. The intermediary will shareholder whose property has been holders of the shares (clients of the broker receive information on each participants’ escheated attempts to retrieve the or bank). holders (including name, address and share property at a later date. The assets can be Dividends paid by an issuer are amount) and compile that into a master reclaimed by the shareholder by directly paid by the transfer agent directly to list to complete the mailing of the issuer’s contacting the individual state. ● registered holders. Similarly, one payment material. In addition to meeting materials, is made to CEDE & Co. (DTC’s nominee); it can also distribute other information DTC will then allocate the payment to to beneficial holders (such as newsletters) each of its participants. The participants without a proxy voting form. will, in turn, allocate the dividend payment to the account of the beneficial holder. (d) Lost shareholders When an issuer needs to mail Since all 50 states and the U.S. territories information to its shareholders, whether require financial institutions, issuers and for a shareholder meeting or for some their transfer agents to report property other reason, the process is generally that is unclaimed or abandoned, it is done in two parts. The transfer agent, imperative that complete and accurate since it has the identity of all registered records be kept on all activity in an holders, will generally mail the requisite account. Property may be considered information to all holders on the registered unclaimed or abandoned based on list. If the mailing is for a meeting at which uncashed dividend checks or on a certain voting will take place, the mailing will number of pieces of returned mail (a “lost” include a form of proxy that the holder can shareholder). Inactivity or abandonment use to give voting instructions and return leads to escheatment—the process of it to the transfer agent for tabulation. transferring abandoned property to the The transfer agent does not have state or territory. the identity of the beneficial holders in In each case, property can be street name and cannot mail directly to escheated only after a certain period those holders. DTC disclaims beneficial of inactivity passes on the account ownership of the shares and will not vote (referred to as the “dormancy period”). on behalf of its participants directly. Each state has its own regulations on However, it does provide, as of the the amount of time that constitutes the voting record date, an omnibus proxy dormancy period, as well as what types and participants’ listing for the security of shareholder action constitutes a valid subject to the meeting. The omnibus action to avoid dormancy. The SEC also proxy formally assigns the voting rights requires a company and its transfer for shares held in its name to each of agent to conduct due diligence, including their participants; the participants’ mailings and database searches before the listing provides the name and number of property is escheated (SEC Rule 17ad- shares held by each of the brokers and 17). After all due diligence is completed, banks held in the DTC account. It is up the company and its transfer agent must to each participant to mail material to file unclaimed property reports with the their beneficial holders, seeking voting states, and the property is turned over to instructions. They will provide a form of the state. proxy to their holders, to be returned to Accurate records must be kept to the broker or bank, and the participant make sure that all lost shareholder and will then execute the vote and return it escheatment regulations are adhered to. to the transfer agent for inclusion in the This serves to ensure that all required tabulation. escheatment of property is completed In practice, almost all brokers and on a timely basis, and also that assets banks outsource the mailing of proxy are not escheated improperly. States material to their beneficial owners in the may, and often do, perform audits on a interests of efficiency and cost savings. company and its transfer agent to ensure They will use an intermediary who will that the escheatment process is handled mail and tabulate votes on their behalf, appropriately.
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8 Managing risk
NYSE IPO Guide 83 Managing risk
8.1 Liability standards misconduct or at least acted recklessly areas (e.g., registration of offers and sales, Cleary Gottlieb Steen & Hamilton LLP and can be based on information class actions) but generally not with regard contained in a document filed with the to securities fraud or misrepresentation. Sources of liability: The main potential SEC (including a registration statement All U.S. states (other than New York) sources of liability for public companies or a periodic or other report), as well have statutes that allow investors to and their officers, directors and other as any information released to the sue to rescind transactions or recover employees are the federal securities laws, public by the company, including damages when securities are sold by state securities laws and state corporate press releases and annual reports to means of materially misleading offering law of fiduciary duty. shareholders. This catchall antifraud documents. In approximately 35 states, The principal areas under which provision has been widely used in including a number with a significant liability may arise under the federal securities litigation by private parties investor base, sellers must show they securities laws are as follows: and the SEC alike. The geographic exercised reasonable care to avoid liability. • Disclosure liability provisions— reach of liability under Rule 10b-5 has However, state securities laws are unlikely Several specific provisions of the been the subject of extensive litigation to provide a basis for the nationwide class federal securities laws impose liability and some legislative changes in recent actions or other large-scale proceedings for written or oral statements about years, as discussed in Section 9.8. that have marked securities litigation the company or its securities that • Failure to register—As described in under the federal securities laws. contain a material misstatement or Section 3.2, the U.S. securities laws Finally, the corporate laws of the make a material omission. Certain of establish a framework for public individual states impose basic “fiduciary” these provisions apply to registration offerings of securities. This framework duties on directors and officers of statements and prospectuses (including requires the registration of every companies organized under those laws, the IPO registration statement and offer and sale of a security with the with these duties being owed to the prospectus); others apply to the SEC unless a specific exemption from company itself and its shareholders. company’s periodic and other reports registration applies. As discussed in Directors have two fundamental fiduciary filed with the SEC. The precise Section 3.2, the terms offer and sale duties: the duty of care and the duty of liability standard and burdens of have been very broadly construed. loyalty. Directors must act in good faith, proof vary among statutes, as do Both private parties and the SEC may with the care of a prudent person, and in the available defenses based on the bring suit against the company or other the best interest of the company. They defendant’s exercise of reasonable care offering participants for violations of must refrain from self-dealing, usurping or the plaintiff’s nonreliance on the these rules. corporate opportunities and receiving disclosure. Depending on the specific • “Books and records” requirements— improper personal benefits. Decisions provision, the SEC may bring criminal Under the Exchange Act, the made on an informed basis, in good or civil penalties against the company, company is required to make and faith and in the honest belief that the its directors and officers; and in some keep books, records and accounts action was taken in the best interests of cases, private parties may also rely on that, in reasonable detail, accurately the company, will be protected by the these laws to assert claims for damages and fairly reflect the transactions “business judgment rule.” Generally, or rescission. and dispositions of its assets. The officers owe fiduciary duties similar to • Antifraud provisions—The company SEC regularly uses this as a basis for those of directors. Officers also may owe a and others may face liability enforcement proceedings, and the duty to keep the board informed. Officers under broadly worded statutes and company, its officers and directors with greater knowledge and involvement regulations addressing fraud in and other parties who control the may be subject to a higher standard of the securities markets. The most company may be subject to civil or scrutiny and liability. important of these are Section 10(b) criminal penalties, including fines and Directors and officers can be held of the Exchange Act and Rule 10b-5 imprisonment, if they are found to liable to the company for violations of thereunder, which apply in connection have violated this provision. these duties. The shareholder derivative with purchases and sales of securities. • Market manipulation—Transactions suit provides a means by which a private Rule 10b-5 broadly prohibits fraudulent in the company’s own securities could litigant can enforce duties on behalf of the and deceptive practices and untrue raise concerns about the possible company. statements or omissions, both manipulation of the market price. written and oral, of material fact in Manipulation would expose the Types of proceedings: Remedies and connection with the purchase and sale company to a variety of civil and sanctions for improper securities activities of any security. Under Rule 10b-5, the potentially criminal liabilities. can be sought in three basic ways: issuer and its employees or agents • Civil (including class actions and may be liable whether or not any of The individual states have securities derivative suits)—Private parties seek them actually purchased or sold any statutes that are analogous to the federal to recover losses allegedly suffered as securities. Liability requires proof securities law statutes. Federal law a result of the defendant’s conduct that the defendant engaged in willful preempts state law to a degree in certain or request relief to compel or to stop
84 NYSE IPO Guide Managing risk
certain actions. Government agencies, claimed to violate the prohibition against investors, which it has invoked to seek such as the SEC, may also bring civil insider trading, the company should disgorgement of all compensation actions to force the defendant to give observe the following guidelines: received after alleged occurrence of up illegally obtained profits or pay • Only trade during “window periods” fraud, not just bonuses and incentive monetary penalties or to compel or tied to the release of the company’s compensation; stop certain actions. interim and annual earnings reports • giving the SEC the authority to bar • Administrative—Government agencies and other material information and the persons from serving as directors or bring administrative proceedings before public filing of such information with officers of public companies in cease administrative judges, who follow the the SEC and the relevant securities and desist proceedings; and rules promulgated by the applicable exchange. • creating civil and criminal penalties agency. For certain violations of the • Develop and promote a written for false certifications by officers of federal securities laws, the SEC may policy and code of ethics with clear periodic reports. bring administrative proceedings to guidelines prohibiting insider trading impose civil penalties or an order and addressing general standards of Corporate compliance programs: A to bring immediate halt to allegedly conduct, protection of confidential corporate compliance program is a written improper conduct. information and whistleblowing. and operational commitment to company- • Criminal—Only the U.S. Department • Develop robust compliance programs. wide compliance with all applicable laws. A of Justice can institute federal criminal • Conduct periodic training on compliance program protects the company proceedings. Defendants who are contemporary regulations, and management in three major ways: convicted in criminal proceedings face requirements and developments for all • It reduces the chance that employees substantial fines and, in the case of employees, including directors, officers will engage in criminal misconduct. individuals, terms of imprisonment. and other management. • If employees do break the law, it can help mitigate the consequences for None of these mechanisms is exclusive and Meanwhile, directors, officers and the company. The U.S. Department a party may be forced to defend against employees should observe the following of Justice, the SEC and many other more than one type of proceeding. guidelines: agencies are more lenient on companies • Do not trade when aware that a with effective compliance programs Liability for corporate disclosures: The material event or trend is developing when making charging decisions and securities laws do not impose a general or will occur but is not yet ripe for assessing penalties. duty to disclose material information disclosure. • It establishes behavioral and about the company. Rather, such disclosure • Do not selectively disclose material professional expectations for is required only when there is a legal duty nonpublic information to others. employees, allowing the company to do so. This duty arises in connection • Trade only in “window periods” to set standards in advance and with the purchase and sale of securities, in compliance with any internal facilitating termination of employees whether in registered or private offerings procedures, after all important for misconduct when rules are not or in secondary market trading. The corporate developments have been followed. company and its directors and officers disclosed to the market. can be liable for material misstatements • Trade pursuant to a Rule 10b5-1 plan 8.2 Class action and derivative lawsuits and omissions in public disclosures. This (see Section 6.3). Marsh liability risk is mitigated by conducting appropriate due diligence prior to the IPO Sarbanes-Oxley provisions: The Imagine the shock if the newly public and establishing robust internal reporting Sarbanes-Oxley Act enhanced the SEC’s company were to be served with a federal and disclosure controls and procedures enforcement powers, expanded areas securities class action lawsuit within three in connection with ongoing reporting of personal exposure for directors and days following the IPO. This happened to a obligations. executive officers and created new criminal significant new issuer in 2012. In fact, most provisions. These provisions include: securities claims are filed within three Liability relating to insider trading: • giving the SEC the authority to freeze years of an IPO and there is a significantly Insider trading liability arises under Rule possible “extraordinary payments” higher probability that a securities class 10b-5 when a party trades the company’s to directors, officers, agents and action will arise if an IPO is involved. As securities (or “tips” others to do so) while employees during the course of an such, when managing risk in a newly public aware of material nonpublic information. investigation involving “possible” company, it is critical to understand the The number of insider trading enforcement violations of the federal securities laws; primary civil liability exposures faced by actions by the SEC has increased steadily • mandating forfeiture of certain CEO directors and officers. over the last five years, and it is expected and CFO bonuses and profits in that this aggressive enforcement trend will connection with restatements; Direct class actions: The primary exposure continue. To reduce the risk that trading • giving the SEC the authority to seek for directors and officers of U.S.-listed by those parties in its securities may be equitable relief for the benefit of companies continues to come from federal
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securities laws—in particular, sections to state a material fact. There is no to defraud investors, including making of the Securities Act, the Exchange requirement under Section 11 to show that any untrue statement of material fact or Act and SOX. Claims made against directors and officers intended to defraud omitting a material fact in the company’s directors and officers under these investors. filings. Actions may be brought against the statutes are frequently brought as class A series of related court decisions company and/or its officers or directors by action litigation, where damage awards have been the subject of controversy private parties, the SEC or the Department and settlement proceeds go directly to and discussion related to whether a of Justice. In general, Rule 10b-5 liability shareholders allegedly harmed. There are directors and officers (D&O) liability is broader than Section 11 liability as also statutes that may have industry- insurance policy covers certain losses as applied to the directors and officers of the specific application. a result of violations of Section 11 (Level 3 company. Moreover, plaintiffs’ lawyers The Securities Act is designed to Communications, Inc v Federal Insurance must demonstrate “scienter,” which is an prevent fraud in securities offerings Co, 272 F3d 908 (7th Cir 2001); Conseco, intention by a defendant director or officer and to assure that investors receive full Inc v National Union Fire Insurance to defraud. disclosure in connection with the offer Company, Case No 49D130202CP000348, and sale of securities by the company. As Marion Circuit Court, Marion County, Shareholder derivative suits: Another such, the Act imposes a high standard of Indiana (December 31 2002)). Taken frequent source of potential liability conduct on directors and officers of the together, the decisions have generally and expense is what is commonly called company. Section 11(a) of the Act states been interpreted by some practitioners a “derivative suit.” These are lawsuits that a person who purchased a security of D&O liability to distinguish between brought by shareholders on behalf of the covered by a registration statement (e.g., coverage for the company (or issuer) and company against individual directors and an IPO and secondary public offering coverage for individual directors and officers and typically allege violations of of equity or debt) may recover damages officers. D&O insurance coverage for state and common law fiduciary duties from, among others, the company and individual defendant officers and directors owed to the company or other wrongdoing. its directors and officers who sign the is generally viewed not to be endangered Most shareholder derivative suits are registration statement if the registration by these decisions; however, the effect resolved through payment of fees to statement: of the collective decisions may affect the plaintiff’s counsel and by the company’s • contained a misstatement of material nature and breadth of D&O insurance adoption of certain corporate governance fact; or coverage afforded to the company, and and management reforms negotiated • omitted to state a material fact that modifications to such coverage may be between the company and the plaintiffs, either was required to be stated or was appropriate to assure affirmative coverage the purposes of which are to strengthen necessary in order for the registration for potential violations of Sections 11 protections for investors and enhance statement not to be misleading (this and 12. shareholder value. includes anyone who has consented A related but separate issue is whether Until recently, derivative actions had to be a director of the company and is D&O insurance policies should also rarely resulted in substantial monetary named as a director in the registration include affirmative coverage for violations recoveries. But within the last four years statement, not just those who have of Section 15 of the Securities Act. Section there have been a number of derivative signed the registration statement) 15 provides that any person who is deemed actions with settlements exceeding $50 to control any person found liable under million. When monetary settlements While the company is strictly liable Section 11 or 12 will share liability for or damages are involved, such awards for violations of Section 11, directors the damages imposed on the controlled generally go to the benefit of the company and officers may avoid liability if they person. Companies undergoing an initial itself and not directly to shareholders. are successful in establishing their own public offering might seek such affirmative Shareholder derivative lawsuits, which defense. If the misstatement or omission coverage, particularly companies whose have been increasing in frequency, usually occurred in a part of the registration directors and officers might be deemed to settle in tandem with outstanding class statement not passed upon by an expert be control persons following the IPO. action litigation and are often called (e.g., an auditor’s report), the director Turning to the Exchange Act, “companion” or “tagalong” cases. These or officer must demonstrate that he or the objective of this legislation is to suits are now often brought in multiple she had, after reasonable investigation, increase the information available to jurisdictions and can sometimes involve sufficient grounds to believe that the public company investors through inconsistent outcomes (In Re Oracle Corp disclosure statements were true or that the implementation of disclosure Derivative Litigation, 2003 WL 21396449 material statements were not omitted. If requirements and to prevent unfair (Del Ch June 17 2003)). the misstatement or omission occurred practices in U.S. securities markets. As Two common bases of liability in in a part of the registration statement discussed earlier, Rule 10b-5 has broad shareholder derivative actions include passed upon by an expert, a director or application and includes statements or violations of the duty of care and the duty officer need only show that he or she had omissions in the company’s Exchange of loyalty, discussed in more detail below, no reasonable grounds to believe that that Act filings (e.g., Forms 10-K, 10-Q and but may also include excessive officer portion was materially untrue or omitted 8-K). The rule prohibits any practice compensation, proxy violations, option
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plan violations, related party transactions, decisions where an actual conflict total filings during this period. While the misappropriation of corporate exists and consider abstaining where number of filings has fluctuated, the number opportunities and corporate waste: the appearance of a conflict exists. of publicly listed companies in the United • Duty of care—Directors and officers States has continued to decrease. The result owe the company and its stockholders Frequency and severity of securities class is that the average listed company in the a duty of care. They must act on an action suits: The average public company United States was 68% more likely to be informed basis and in a manner that faces a 6.4% probability that it will face a the target of a securities class action lawsuit they reasonably believe to be in the securities class action lawsuit in a given in the last five years (2008 to 2012) than it company’s best interests, exercising five-year period. And if an IPO is involved, was from 1996 to 2000. the degree of care that an ordinarily class action lawsuits settlements are on The average cost of resolving these prudent person in a similar position average 35% higher. lawsuits has also increased. In 2012, would exercise. The duty of care It is important to recognize recent the average settlement value (excluding focuses on the decision-making trends in securities class action litigation. settlements over $1 billion) was $36 million, process. When directors or officers are An understanding of these trends can up from $35 million from 2007 to 2011. accused of breaching their duty of care, impact decisions concerning directors and Typically, plaintiffs’ attorneys’ fees and generally the “business judgment rule” officers liability (D&O) insurance, including expenses make up approximately one-third shields their decision by presuming limits purchased, coverage selection and of settlement values. that in making the decision, the premium trends. (Note: The information directors and officers were informed, that follows is taken from Recent Trends 8.3 Indemnification acted in good faith and honestly in Securities Class Action Litigation: 2012 Marsh believed that the decision was in the Full-Year Review, a publication by NERA best interests of the company and its Economic Consulting, a unit of Oliver Generally, indemnification of officers stockholders. To support application Wyman Group. Marsh and Oliver Wyman and directors is governed by the law of of the business judgment rule, are both wholly owned subsidiaries of the state of incorporation. All 50 states directors and officers generally should Marsh & McLennan Companies.) provide for corporate indemnification and be proactive and attentive, regularly In 2012, there were 207 federal address situations where the company attend board meetings, meaningfully securities class action filings, the lowest may indemnify its officers and directors evaluate alternatives and deliberate as level since 2007, with a notable slowdown and situations where the company must a board with adequate and complete in filings in the second half of 2012. Filings indemnify its officers and directors. To information. Where appropriate, the from 2010 to 2012 were driven in large understand when indemnification is board of directors should also consider measure by a spike in merger objection permitted by the company, look to the retaining financial advisors, counsel suits, which comprised, on average, 28% of company bylaws or charter. and other experts to provide input and guidance. • Duty of loyalty—Directors and Federal securities filings and number of companies listed in the United States officers owe the company and its (January 1996–June 2012) stockholders a duty of loyalty. Again, they must act in good faith and in the 550 8,884 Cases, excluding IPO laddering 9000 8,448 reasonable belief that their actions are 8,783 Listings 500 7,994 8000 in the best interests of the company. 8,200 450 7,289 Loyalty issues arise when a director 6,757 7000 or officer has a conflict of interest 400 6,154 6,029 5,936 6000 or lacks independence with regard 350 6,097 6,005 5,001 to a particular business decision or 5,401 300 5,262 5000 personally profits from an opportunity 275 274 5,118 4,964 252 245 250 240 234 237 at the expense of the company. In 232 225 4000 208 207 evaluating claims for breaches of the 201 198 196 200 187 duty of loyalty, courts generally will 3000
Number of federal lings 150 examine the decision-making process 132 132 2000 but may also evaluate the substance 100 of the business decision to determine 50 1000 fairness to the company and its Number of companies listed in the United States stockholders. To help avoid liability, 0 0
interested directors should disclose 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 potential conflicts and opportunities Filing year to other directors and abstain from Note: Number of companies listed in the United States is from Meridian Securities Markets; deliberations and voting on any 1996–2011 values are year-end; 2012 is as of June.
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Federal securities filings by type (January 2005–December 2012) Corporation Law, a corporation may (but need not) indemnify a director or officer 300 Merger objection cases only “if such person acted in good faith Cases related to credit crisis and in a manner reasonably believed to 250 Ponzi scheme cases be in or not opposed to the best interest Other cases of the corporation.” In the criminal context, a director or officer must also 200 have had no reason to believe his or her conduct was unlawful in order to be 150 indemnified. Outside of the mandatory indemnification discussed in the prior 100 paragraph, companies frequently provide broader indemnification protections in Number of federal lings recognition that only a small proportion 50 of situations may require a company to indemnify with a larger proportion 0 of situations permitting a company to 2005 2006 2007 2008 2009 2010 2011 2012 indemnify. Filing year Even if a director’s or officer’s conduct is of the type that can be indemnified, the company’s ability to indemnify him or In Delaware, for example, the statute officer’s claim for costs and expenses her may be limited or prohibited by state merely authorizes indemnification where for enforcing the company’s obligation statute. For example, the Delaware statute not considered mandatory by statute to indemnify; authorizes the company to indemnify (as further discussed below), meaning • a provision that forces a director or directors and officers only for expenses a director or officer is not necessarily officer to bear the burden of proof incurred by them in defending shareholder entitled to indemnification unless the to demonstrate entitlement to derivative suits brought by or on behalf company charter or bylaws contain indemnification. of the company. The Delaware statute necessary authorizing language to permit does not authorize indemnification of indemnification. Delaware corporations Several common questions that arise settlements or judgments in such actions. may structure their certificates of regarding indemnification follow. The rationale is that if the company incorporation to limit the liability of their When must the company indemnify indemnified the directors or officers for directors to situations involving: its directors and officers? Section 145(c) amounts they owed to the company, the • breaches of their duty of loyalty of the Delaware General Corporation Law result would be a return of funds back (including improper personal benefit) to requires a corporation to indemnify a from the company, rendering the debt the company and its stockholders; and director or officer when the person to be owed to the company meaningless. • acts or omissions not in good faith or indemnified has been successful on the To what extent is an individual’s that involve intentional misconduct or merits with respect to a claim against him liability limited as a matter of law? a knowing violation of the law. or her. In other words, if the director or The state in which the company is officer defends the claim on the merits incorporated will determine the extent to It is important for directors and officers and is vindicated of any wrongdoing, it is which a director’s or officer’s liability to of public and nonpublic companies to mandatory that the company indemnify the company is limited as a matter of law. seek counsel on and understand the that individual for the costs and expenses, Almost all states have adopted statutes indemnification provisions of company including attorneys’ fees, incurred in that limit the liability of directors—and, bylaws and/or indemnification agreements connection with the claim. As a practical in some instances, officers—under state to which they will be subject. Review of note, a recent Delaware Chancery court law. Like Delaware, many states allow the provisions and/or agreements should decision in early 2012 has cast some companies in their charters to limit or occur not simply prior to an initial public uncertainty around whether an officer eliminate the personal liability of directors offering, but on a periodic basis as well. or director has been “successful on the for damages in claims by the company Be mindful of features (or absence of merits” of a claim against him or her and its shareholders (Section 102(b)(7) of features) in the company bylaws, charter (see Hermelin v. K-V Pharmaceutical the Delaware General Corporation Law). or corporate indemnification agreements Company, C.A. No. 6936-VCG (Del.Ch. Notably, the Delaware statute does not that could impair one’s ability to seek Feb. 7, 2012). eliminate liability for conduct not taken indemnification. Two examples of such What is the nature of the conduct in good faith or for breach of a director’s provisions include: required for the company to indemnify duty of loyalty. • a provision that fails to obligate the its directors and officers? Under From whom does a director or officer company to reimburse a director’s or Section 145(a) of the Delaware General seek indemnification? In short, it depends.
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Indemnification is not self-executing. and quality of the defense presented by 8.4 D&O liability insurance The company bylaws, charter and any directors and officers. Marsh corporate indemnification agreement Rights to advancement are between a director or officer and the governed under a combination of state It is clear that companies and their company will determine: law, corporate bylaws and corporate boards of directors may well face lawsuits • who evaluates and approves requests indemnification agreements of the at some point. While most boards take for indemnification; and company and are separate and distinct their responsibilities seriously and try to • whether a director or officer may be from the obligation of indemnification. execute them properly, that intent does indemnified in a particular case and, For example, a right to advancement not confer immunity. Shareholders and if so, whether the director or officer of defense costs may be broader and other stakeholders—often prompted by an may receive an advancement from the less restrictive than an individual’s aggressive plaintiffs’ bar—can be expected company to pay for expenses incurred right to indemnification. Because the to sue when they see themselves as having in connection with the matter. determination as to whether an officer’s been wronged. Thus, in addition to doing or director’s conduct is indemnifiable everything possible to execute their In the absence of specific provisions generally cannot be made until the end responsibilities properly and effectively, related to who evaluates and approves of a claim or proceeding, Section 145(e) those charged with corporate governance requests for indemnification, the decision of the Delaware General Corporation should also protect themselves with D&O is generally made by a majority vote of Code permits (but does not require) a insurance. disinterested (nondefendant) directors, a corporation to advance defense costs, Most D&O insurance policies for committee of disinterested (nondefendant) including attorneys’ fees, to defend public companies provide financial directors or upon the recommendation against a claim for something that, if protection to more than just individual of independent legal counsel in a written true, would be an indemnifiable claim; directors and officers. They also afford a opinion. but only if the claimant submits to the significant degree of protection for certain If the company is either unwilling or company a written undertaking to repay financial obligations of the company. As unable to indemnify a director or officer the amounts advanced if it is ultimately a result of this dual protection, directors for expenses, damages or settlement determined that he or she is not entitled and officers must be aware that, at certain amounts, the director or officer may to indemnification. Specific attention also times, their interests and those of the be able to seek payment directly from should be paid to other conditions that company may diverge, particularly if insurers, depending on the nature and may have to be met in order to receive claims are made that may approach or breadth of insurance coverage under timely advancement. exceed the shared limits of liability for all insuring agreement A of the company’s A note of caution: in light of a 2008 the insureds taken as a whole. Directors directors and officers liability insurance Delaware court decision in Schoon and officers should understand the basic policy (commonly called “Side A”). v Troy Corp (948 A 2d 1157 (Del Ch coverage and limits of their particular Notably, the ability of a director or 2008)), directors and officers relying on policies. officer to seek timely reimbursement indemnification provisions in company D&O policies are generally written on a directly from insurers may differ bylaws should understand whether: “claims-made” basis. Under such policies, significantly, depending on the exact • the bylaws include language stating the making of a claim against the insured terms, conditions, exclusions and limits that the rights of directors and officers during the term of the policy—not the that are purchased by the company. to advancement of legal expenses vest occurrence of injury or damage—is the Today, most Side A polices are poised upon commencement of services; operative threshold event to which the to begin responding to a loss on behalf • these rights are contract rights; and policy responds. Some policies also require of a director or officer within 60 days if • the bylaws state that they cannot be that the insured report the claim to the the director or officer has not received amended retroactively to impair those insurer within the policy period (or within a response from his or her company rights. a brief window of time thereafter). regarding whether it will indemnify Most D&O insurance policies have the director or officer for the matter in Although Delaware has since amended one or more of the following three basic question. its corporations code to reverse the insuring agreements (see chart below): Does the company have to advance the effect of Schoon v Troy Corp, it serves • Side A: Personal asset protection costs and expenses incurred in defending to highlight the potential importance for officers and directors—Insuring against a claim made against a director for directors and officers to consider Agreement A, commonly referred or officer? The ability of the company to separate indemnification agreements to as “Side A,” covers a loss incurred advance defense costs in a timely manner with the company that specifically by individual directors and officers to its directors and officers can be critical address advancement of expenses, resulting from claims for which the in attracting independent directors including provisions that prohibit company has not indemnified them. because the cost of defending a lawsuit modifications to such an agreement A director or officer need not pay a can be immediate and substantial and without the written consent of the retention or deductible in the event may directly influence both the nature director or officer. Side A insurance proceeds are sought
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if the company is unable or unwilling What is the structure of the D&O policy post-IPO – typical “ABC” policy example to indemnify the individual director or officer directly. Covered claim Covered claim • Side B: Corporate reimbursement against directors against corporate insurance—Insuring Agreement B, also and ofcers entity called “Side B,” protects the company against a loss incurred by the company in indemnifying an officer or director for claims made against them. Side B Indemnication coverage is commonly referred to as Side C balance sheet protection. A deductible No Yes or retention applies for claims made under Side B. • Side C: Corporate coverage against Side A Side B securities claims—Insurance Agreement C, also called “Side C,” Insured corporate entity protects the company against a loss as a defendant resulting from securities claims made Insureds Insureds Directors and ofcers corporate balance sheet (for securities claims only) directly against it. A deductible or retention also applies for claims made under Side C. Personal assets Corporate assets Corporate assets A D&O insurance program can be customized to meet the particular demands of a public company and its D&O insurance D&O insurance officers and directors. Many companies, D&O insurance Insuring agreement B: Insuring agreement C: Insuring agreement A: however, commonly purchase a D&O corporate reimbursement corporate entity coverage individual insureds insurance policy in which a single limit of individual insureds (for securities claims only) of liability is shared equally among all three insuring agreements. The effect of Personal assets protection Corporate risk transfer Corporate risk transfer this is that a single policy limit protects both the personal assets of directors and officers and certain financial obligations of the company. Companies also frequently purchase additional, dedicated limits of Personal assets Corporate risk Side A coverage, with broad policy terms protection Both transfer and conditions, and a DIC or difference (Individual) (Company) in conditions feature (see discussion in (b) D&O Insurance and indemnification). Companies purchase these additional limits for a number of reasons, including the insurer seeking the drastic remedy of Severability of the application: Rescission considerations related to premium pricing, policy rescission or avoidance. Through raises the concept of severability. In this philosophical predispositions, balance rescission, an insurer voids coverage context, severability simply relates to sheet strength and the broader protection under the policy for all insureds and the question of whether the knowledge afforded individual officers and directors returns the premium paid by the company. of one or a limited number of covered in such Side A policies. Rescission of an insurance policy by an officers or directors will be imputed to insurer may result in severe consequences (and potentially result in a loss of coverage (a) D&O policy provisions for the company and its directors and for) all the insureds named in a policy Certain provisions in a D&O policy may officers. A successful rescission results (including the company itself). Severability affect the extent to which the policy in all or a portion of the D&O insurance imposes a limit on the extent to which responds favorably. Some of the key policy being null and void and, ultimately, the knowledge of one individual insured concepts are discussed below. can result in a loss of coverage for all is imputed to the company and other named insureds on the policy, including insured individuals. As a result, nearly all Rescission: Material misrepresentations innocent directors and officers. Certain D&O insurance policies contain provisions or nondisclosure of material information D&O policies today can be negotiated to which state that no insured person’s in the course of the application process make some or all insuring agreements knowledge will be imputed to any other for a D&O insurance policy may result in nonrescindable. insured and which limit the identified
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individuals—usually the CEO and This can be troublesome because of another insured corporate entity. This CFO—whose knowledge will be imputed the ambiguity involved in interpreting exclusion has historically been broader to the company (as an insured itself). As what “in fact” actually means. Insureds than it is today, so many of the concerns another—and perhaps better—alternative, should consider seeking a more clearly about the overreaching nature of this the company may seek a policy that is not defined parameter for determining when exclusion have been eliminated. However, rescindable for any reason. Obtaining a a conduct exclusion may apply. Policies there remain certain exceptions to this fully nonrescindable policy may involve stating that the exclusions apply only if exclusion that should be considered, most trade-offs in other coverage or additional the excluded conduct was established in of which relate to situations in which premium. connection with a “final adjudication” a company finds itself in insolvency or Frequently, the company’s periodic of the underlying claim generally better bankruptcy. securities filings and financial statements protect directors and officers. However, under the Exchange Act and registration although “pure” final adjudication language (b) D&O insurance and indemnification statements under the Securities Act are provides broad protection for individual Directors and officers no doubt find it expressly made part of the application directors and officers, it could result in the especially troubling when the company is for D&O insurance. Claims of inaccurate depletion of limits, leaving less in available financially able to indemnify or advance or incomplete disclosure in such filings limits to protect nondefendant directors defense costs to them but chooses not to incorporated into the application for and officers. or simply ignores their requests. Many insurance may be the basis for claims directors and officers assume that in made by insurers that the application was Priority of payment provisions: Unlike such a circumstance, the company’s D&O materially false or misleading. As a result, many other types of commercial insurance, insurance policy would respond. But that accounting restatements—depending on traditional D&O policies protect two might not be the case. In a traditional their nature, scope and magnitude—may distinct sets of beneficiaries: the D&O policy, if the company is permitted provide insurers with an additional basis company’s individual directors and officers to indemnify an officer or director but to rescind a D&O insurance policy. and the company. Because there is a limit chooses not to, the insurer often will first of liability for D&O insurance programs, seek the application of a “self-insured Conduct exclusion: Almost all D&O situations may arise in which insurance retention” (in other words, a deductible) policies contain exclusions barring proceeds may have to be prioritized among that under ordinary circumstances coverage for certain “bad conduct” by the insured parties. Typically, a priority would not apply. This is sometimes directors or officers. Generally, they of payments provision requires that the called a “presumptive indemnification” include: claims against the individual directors and requirement. Under this circumstance, • intentionally dishonest acts or officers be satisfied first, before claims the self-insured retention would have omissions; against the company are satisfied. to be paid by an officer or director prior • fraudulent acts or omissions; However, sometimes this provision to accessing any proceeds of a D&O • criminal acts; may have unintended consequences. For policy. In some cases, the self-insured • willful violations of any statute, rule example, a situation may arise in which retention may be substantial. Directors or law; a number of concurrent claims are made and officers should seek clarification from • an insured’s obtaining an illegal profit; against the company and its individual their insurance brokers and counsel on and directors and officers. This could include the extent to which their D&O insurance • an insured’s obtaining an illegal shareholder derivative suits (settlements policies allow directors and officers to remuneration. of which may not be indemnifiable by access the policy proceeds in the event the the company) and securities class actions company is able but unwilling to indemnify From an insured’s perspective, each of (settlements of which are indemnifiable). If or advance defense costs to them. In fact, these exclusions should be limited as much the securities class action suits are settled most traditional primary D&O policies, as possible. For example, as noted above, before the settlement of the shareholder similar to Side A D&O policies, are now it is important to consider enhancements derivative actions, insurers may delay responding to a loss on behalf of a director to a policy so that the conduct of any payment of any proceeds under the policy or officer within 60 days if the director or one insured director or officer will not be for a securities claim until settlement officer has not received a response from his imputed to any other insured. This should of the shareholder derivative action. A or her company regarding whether it will limit the exclusion of coverage to the delay in such a settlement payment may indemnify the director or officer for the individual directors or officers who actually adversely affect timing or funding of a matter in question. This has significantly committed the excluded conduct, while proposed settlement of such a claim. reduced the punitive aspect of presumptive maintaining coverage for other insureds. indemnification. It is also important to clarify the “Entity v Insured” exclusion: Many A properly constructed D&O policy point at which coverage exclusions D&O policies contain a so-called entity v generally is meant to provide a level apply or are triggered. Certain policies insured exclusion, which bars coverage for of protection for individual directors state that the exclusions apply if the a claim brought by an insured company and officers in the event the company’s excluded conduct “in fact” occurred. against an insured director or officer or indemnification or advancement obligation
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inadequately protects them. Outlined conduct of such individual also complies either unwarranted or improper. Moreover, below are some specific circumstances with the limitations and exclusions of the assuming that such indemnification of where an individual officer or director may insurance policy. an officer or director was warranted and expect such protection. proper, the proceeds of the policy might be Refusal by board to indemnify: If the deemed an asset of the “estate” and subject Derivative suit judgments or settlements: board or other authorized designee to an automatic stay. The obligation to The ability of the company to indemnify either declines in writing to indemnify indemnify may be deemed an unsecured its officers and directors for judgments or an individual or fails to make or initiate obligation, placing the affected officer’s or settlements resulting from a shareholder a determination to indemnify an director’s interest behind the interests of derivative action may be significantly individual, insurance may respond to secured creditors and on par with other limited or prohibited by statute in a protect individual directors and officers, unsecured creditors awaiting payment or company’s state of incorporation. For but it may be subject to a retention or settlement. example, Delaware generally does not deductible depending on the structure of If there is some risk that the company allow indemnification of settlements the program. may avail itself of the protection of U.S. or judgments in an action brought by To avoid a circumstance where an bankruptcy laws, it may be useful to or on behalf of the company unless individual insured might be personally seek an explanation from the company’s the court permits such action. In such responsible to pay a retention, many insurance advisor and counsel as to how circumstances, Side A coverage may public companies today purchase a the company’s D&O insurance policy may apply as long as the conduct of individual variation of Side A insurance often respond to a number of potential issues. directors and officers also complies with referred to as Side A DIC (the “DIC” Key issues to understand would include the limitations and exclusions of the refers to the “difference in conditions” identifying any issues related to: insurance policy. provisions that are contained in this • how limits in the policy are either type of insurance policy). Side A DIC allocated or prioritized to coverage Public policy prohibition against insurance provides broader coverage and other than coverage of claims made indemnification: Indemnification is often purchased in addition to and in against a director’s or officer’s personal for claims related to registration of excess of the traditional D&O (Sides A, assets; securities and antifraud provisions of B and C) insurance described above. In a • whether the design of the company’s the federal securities laws (and other circumstance where the board or other D&O insurance program is such that federal statutes, such as the Racketeer authorized designee declines to indemnify directors or officers will not be subject Influenced and Corrupt Organizations Act an individual as described above, Side A to a retention or deductible if the and antitrust laws) may be precluded by DIC insurance could be called upon to company is permitted to but fails to public policy. The SEC’s view is that such provide directors and officers coverage indemnify such an individual; and indemnification is against public policy at the primary level of the program (no • what—if any—language exists in the because it undermines the securities retention). policy to waive an automatic stay as laws’ deterrent effect. However, the SEC regards the company’s policy. does not regard the maintenance of D&O Near insolvency: Should the company insurance as against public policy, even approach insolvency, it will approach Choosing a D&O policy structure, limits, where the company pays the premium. As the “zone of insolvency,” where officers retention and insurers: The company a result, it may be possible for insurance and directors may be deemed to owe should consider several questions before to respond to protect individual directors certain fiduciary duties to creditors of the selecting the limits and structure of its and officers in such circumstances where company. Although not yet insolvent, the D&O policy, including the following: indemnification from the company is company might choose not to indemnify a • How susceptible is the company to prohibited as a matter of public policy. particular director or officer for fear that a class action lawsuit or government such act may be a breach of fiduciary duty enforcement action? Conduct not in “good faith” and owed to creditors of the company or may • If the company suffers a class action “reasonable belief”: The company may be the subject of an order by a bankruptcy lawsuit, what might it cost to defend indemnify a director or officer only if such trustee to return those proceeds. Insurance and settle? person acted in good faith and in a manner may respond if limits of the policy are not • What limits, structures and retentions that he or she reasonably believed to be otherwise eroded. do the company’s peers purchase? in, or not opposed to, the best interests of • How can the balance between coverage, the company. As a result, acts that do not Actual insolvency or bankruptcy: The limit, retention and price be optimized? satisfy the “good faith” and “reasonable company either may be insolvent or, in • What is the overall financial stability of belief” standard may not be indemnified the context of U.S. bankruptcy laws, may each insurer on the program? by the company. In such circumstances, be unable or unwilling to indemnify an • How can the program most cost- claims made against an individual director officer or director if the bankruptcy trustee effectively address exposure for foreign or officer may be insurable so long as the determines that such indemnification is directors and officers?
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Constructing a D&O liability program (c) Timing the D&O liability insurance Meetings with underwriters: It is generally leading into an IPO is a dynamic process. purchase for an IPO expected that senior representatives of the The goal is to understand the choices A D&O policy for a newly public company company will meet with the underwriters, and trade-offs and to achieve an optimal generally becomes effective on the date the either in person or by teleconference, balance that properly reflects the values of company’s registration statement covering before a premium quotation will be given the company and its directors and officers. the traded securities becomes effective. for a D&O policy. It is an opportunity For example, many companies purchase The process and timeline leading up to for the insurers to better understand policies that protect both the company and the commencement of the policy period the company’s financial and operating the individual directors and officers for differ depending on the situation and can condition and its prospects and to speak nonindemnifiable claims. This structure be tailored to meet the specific needs of directly with management about corporate involves a shared limit of liability that the company. The following is a suggested governance issues and concerns. These protects the company and its directors timeline for meeting key milestones in the meetings typically take place during the and officers. If a very large claim is made process of obtaining D&O coverage. roadshow detailed in Chapter 3. against the company, it may exhaust the limits made available to individual directors D&O strategy meeting: In the month Analysis: Once quotes have been submitted and officers. One potential solution is to leading into filing of Form S-1, it is to the insurers, insurance advisors— purchase additional limits of coverage recommended that the company meet with sometimes working in concert with dedicated solely to protect individual its insurance brokers and outside counsel, outside counsel—provide the company’s directors and officers. Alternatively, if needed, to strategize on D&O program management and/or board with detailed dedicated coverage may also be purchased design options, selection of carriers, comparative analysis to allow the company solely for independent directors of the coverage issues, limit analysis, timeline and to ultimately make a number of decisions board, excluding nonindependent board cost. Being beneficiaries of D&O insurance, on the nature of its D&O program, members and officers. the entire board of directors or certain key including the appropriate structure, limits, Selecting an appropriate level of members may need to be engaged. retentions, coverage and insurers. limits is now more science than art. Peer benchmarking data is only one element Filing of Form S-1: Once the company’s Binding of insurance: Once decisions have to consider in choosing the right amount registration statement is filed, a been made by the company, insurance of insurance and retention. Analysis of submission can be made to the advisors will execute those decisions a particular company’s susceptibility to underwriters, which would include the to build the D&O program and bind the securities class actions and projections of draft Form S-1. Given the passage of the insurers in time for the effectiveness of the realistic settlement amounts can provide JOBS Act in 2012, a draft registration registration statement. greater confidence in limit decisions. statement might be filed confidentially Turbulence affecting the financial with the SEC. In such event, additional 8.5 Personal risk management condition of insurers several years ago time and consideration should be given to Marsh has raised concerns regarding insurer obtaining nondisclosure agreements with stability, making the decisions on which insurers from which a company wishes to An IPO will certainly have an impact insurers to partner with more challenging. solicit a quote. The submission, combined on your professional life, but it will An in-depth comparative analysis of an with calls and/or face-to-face meetings also have a considerable effect on your insurer’s creditworthiness and financial with the underwriters, will allow the personal lifestyle. The complexity of strength is a precursor to an assessment insurers to assess the company’s D&O risk a high net worth lifestyle requires a of the company’s counterparty risk. Just profile. new way of thinking about risk and as important is the ongoing monitoring of the financial condition of the company’s Timeline partner insurers. One of the more complex and -45 to 0 days 0 days 30–40 days 35–50 days 45–60 days 60–75 days evolving areas of D&O coverage involves Initial Comments Amended Roadshow IPO subsidiaries located outside the United S-1 led from SEC S-1 led States. It is important to understand the tax, regulatory and coverage issues associated with D&O exposures outside the United States to ascertain whether D&O strategy Initial feedback Underwriter Bind public exposure exists. There are a number meeting Information to from client Narrow eld calls and company underwriters of underwriters meetings D&O policy of solutions to address such exposure, depending on location and magnitude, Decide on program, limits, some of which may impact the company’s and structure choice of primary insurer.
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customized solutions to help address • Valuables—Most standard insurance potential to supply an income-tax-free it. Many ultrawealthy individuals and polices have low dollar limitations benefit to the trust free of estate tax. families find they benefit by working with for loss of high-value items such as Careful planning in this manner with your a personal risk manager that can provide jewelry, art and other collectibles. tax and/or legal advisors can allow wealth comprehensive resources to properly align and assets you’ve created to pass to your protection for their property, liability, Specialized coverage can help properly family intact. family and lifestyle. And because you protect these assets and investments. and your company will now be more Key person: You may be the “brains behind prominent, it is imperative to have total Benefits of a broker: When wealthy the business,” but you also may have coordination between your business estate individuals accumulate new property and irreplaceable employees. If something plans. nonliquid assets, protection for each is unexpected happened to a key employee, often purchased as needed with a local would your business suffer? Key person (a) Protecting yourself and your assets agent. However, working with various insurance helps you cover additional costs Personal liability: Entertaining guests agents or brokers in different states can lead when such a situation arises. You even at your home, letting your teenage child to gaps or overlaps in coverage. Additionally, may be able to combine protection for drive your car and serving on a board of the distinctive aspects of high-value items your business with an agreement designed directors are among everyday activities can require specialized solutions that often to reward a vital employee for continued that can expose you to legal liability. Your are not available through local agents. By employment. increased public prominence may lead working with a broker that specializes in These are just some of the concerns some to believe you have “deep pockets,” addressing the risks associated with the that may arise as a result of your new making you a target for expensive high net worth lifestyle, you will benefit wealth. Again, you may benefit greatly by lawsuits. from expertise, comprehensive coverage, working with a personal risk manager to A personal excess liability insurance innovative solutions and access to broad, design the right protection for your family policy is designed to protect against customized coverage. and your business. multimillion-dollar settlements resulting from personal injury, bodily injury or Protecting yourself and your business: 8.6 Managing compliance risk property damage lawsuits. Consider a There’s no doubt that you are now NYSE Governance Services recent example, in which the teenage looking to the future with the son of a wealthy business owner was anticipation that your business and Compliance and ethics programs are involved in an automobile accident with a family will long benefit from all of your designed to prevent and address corporate bicyclist. Although there was no indication hard work. Now is the time, however, risk—such as SEC enforcement actions that the driver acted irresponsibly, the to consider the effects that events and other government prosecutions court awarded a $20 million judgment beyond your control—such as death and against directors, officers and other to the bicyclist. The insured carried only disability—may have on your business. employees of public companies in $5 million in excess liability insurance, It is critical to evaluate the risks inherent connection with regulatory violations. meaning his family’s financial situation in your business and in your estate plan. In order to minimize the risk of these may be severely harmed for years to Coordination of the two will help protect lawsuits and enforcement actions, it is in come. Consulting with a personal risk the business and ensure continuity of the the interest of the company, its board and management expert can help you set legacy you have created. its management to design and maintain appropriate liability limits for your robust controls and procedures designed lifestyle. Wealth transfer: It is important to evaluate to prevent misconduct and ensure the IPO’s impact on your estate plan, regulatory compliance. A corporate ethics Personal property: As you acquire wealth, including the risks in transferring wealth and compliance program is a written and it’s likely you will acquire high-end to succeeding generations. Those potential operational commitment to company- property and assets. Key areas of risk to risks can include: wide compliance with all applicable laws consider include the following: • significant taxes at your death; and/or and, therefore, provides protection to the • Homeowners—High-value homes are • unwise dissipation by heirs, their company and management in three major often built with unique materials and divorcing spouses and creditors. ways: features. Not all insurance policies • It reduces the chance that employees provide for appropriate replacement Properly drafted and executed wills and will engage in criminal misconduct. costs in their loss settlement trusts can protect your assets from taxes • If employees do break the law, it can provisions. and creditors. Many wealthy individuals help mitigate the consequences for • Automobiles—Luxury, exotic or choose to fund trusts with assets as well the company. The DOJ, the SEC, and collector vehicles may require as with life insurance. Owned by a trust many other agencies are more lenient specialized insurance. outside the estate, life insurance has the on companies with effective ethics and
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compliance programs when making positions of substantial authority address from a financial or internal charging decisions and assessing in recognizing and preventing a political perspective. penalties. compliance breakdown. • Quantify each risk area—The ethics • It establishes behavioral and • Address current and potential risks— and compliance risk assessment professional expectations for An effective ethics and compliance process should allow for quantification employees, allowing the company to set risk assessment should take into of each risk area. An assessment that standards in advance and facilitating consideration risks that presently exist, goes beyond “likelihood” and “impact” termination of employees for as well as those activities that are can be more useful in prioritizing misconduct when rules are not followed. currently legal but could reasonably be compliance budget spending and called into question in the future. activities, as well as in justifying Assuming a corporate ethics • Review internal and external any incremental controls, policies, and compliance program exists, information—Ethics and compliance processes or spending that must an organization must still perform risk assessments should include an be implemented. Furthermore, if incremental compliance activities, as risks examination of internal corporate executed correctly, such quantification can and do change over time. Engaging in documents, as well as industry can be used to measure program an ethics and compliance risk assessment information and historical incidence effectiveness, a U.S. Federal is one way a company is able to analyze reports. To be adequately predictive, Sentencing Guidelines criterion of the effect that ever-changing risks have on the ethics and compliance risk an effective ethics and compliance the organization, prioritize these risks and assessment should include not only program. develop options and actions to reduce the compliance breakdowns and failures • Conduct ethics and compliance threat they pose. but also near-misses. risk assessments periodically—The Organizations often confuse an • Include participants from all levels of frequency with which an organization ethics and compliance risk assessment the organization—When collecting and chooses to conduct ethics and with a general corporate-wide risk assessing potential risk areas, ethics compliance risk assessments and assessment and are uncertain as to the and compliance risk assessments schedule follow-up risk reviews scope, frequency and structure of such should involve personnel across may depend on the nature of the an assessment. As an increasing number various disciplines and seniority levels. organization’s industry. However, of organizations have begun to institute This can be accomplished through if the methodology and process is ethics and compliance risk assessments, workshops, focus groups, surveys and adequately defined, it can reasonably leading practices have started to emerge. interviews. be conducted on an annual basis, They are as follows: • Consider impact and likelihood of and year-over-year results can • Examine all major areas of occurrence—Ethics and compliance be appropriately compared. Since misconduct—A common mistake risk assessments should weigh risk operating environments, regulations organizations make when conducting areas to account for impact and and government enforcement priorities an ethics and compliance risk likelihood of occurrence. By assigning routinely change, it is inadvisable to assessment is to limit the potential quantifiable weights or ratings to each conduct ethics and compliance risk risk universe to a preconceived list relevant risk area, organizations will be assessments on a less frequent basis of likely high-impact risks. Rather, able to rank them appropriately. than every two years. a proper ethics and compliance • Document the outcome—The outcome • Measure employee knowledge—The risk assessment encompasses all of the ethics and compliance risk ethics and compliance risk assessment potential risks, including both those assessment should be documented should include a measurement of that are systemic to the average in a defensible action plan. This plan employee knowledge, as well as organization and those that are unique should include not only a description awareness of the compliance program to the industry in which the specific of the process that was followed but and supporting controls. Doing so organization operates. also the actions that were taken to can help pinpoint where training and • Examine risk contextually—To be design, implement or modify the communications programs need to be effective, the ethics and compliance compliance program. improved. risk assessment must take into account • Be defensively objective—The ethics • Benchmark—When possible, the ethics the ability of the organization to plan and compliance risk assessment and compliance risk assessment should for, prevent or mitigate each risk area. process should fairly assess the full benchmark against peer organizations. This focus entails examining the universe of the organization’s potential In addition to industry peers, consider controls, processes and procedures risks, including existing acceptable those organizations that are peers in designed to prevent compliance industry practices. Resist the terms of size and geographic scope. failures, as well as assessing the temptation to ignore or deemphasize This is particularly important as it effectiveness of the individuals in risks because they could be costly to ensures that the organization meets
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“accepted or applicable industry practice,” as outlined in the FSG. • Coordinate with internal analysts—It is helpful to coordinate ethics and compliance risk assessments with internal audits. Completing an ethics and compliance risk assessment aligns company focus and resources to address areas of greatest significance to the organization and allows the auditor to design a program that tests the most important internal controls.
At the end of the risk assessment process, an organization should be armed with extensive documentation of identified and prioritized risk areas. Failing to act upon this information could subject an organization to exposure in the event the information is disclosed during litigation or in connection with a government investigation. Therefore, with this information in mind, the organization should revise its compliance program, review its code of conduct, modify its training plan, shape its compliance communication program and appropriately staff its ethics and compliance department. ●
96 NYSE IPO Guide 9 Foreign private issuers
NYSE IPO Guide 97 Foreign private issuers
9.1 American depositary receipts foreign issuers can be at a significant Capital raised using ADRs, by J.P. Morgan (Depositary Receipts Group) disadvantage when competing for talent sector—2002 to 2012 in the U.S. labor market. ADRs also allow The tranche of shares that foreign issuers for the creation of direct purchase and sell to U.S. investors when going public dividend reinvestment plans, which can typically takes the form of American enhance the investment appeal of a foreign depositary shares, commonly known as issuer. ADRs. These instruments subsequently trade just like ordinary shares on the Enhanced corporate visibility in the NYSE, another U.S. stock exchange or in United States: Finally, by going public the over-the-counter market. in the United States, a foreign issuer can increase its visibility not just in the (a) Advantages for issuers U.S. investment community, but in the For foreign issuers, going public in the commercial and consumer markets that United States has numerous advantages make up the world’s largest economy. beyond an initial capital raising. Many U.S. citizens own equities and 13% – Communications tend to follow publicly traded companies. 28% – Technology Ready access to world’s largest equity Consequently, a U.S. listing can raise a 22% – Financial market: A U.S. listing affords ready access foreign issuer’s corporate profile as well as 13% – Industrial to the world’s largest equity market, capital. 6% – Energy facilitating future capital raising through The effectiveness of ADRs is why 162 follow-on, secondary and rights offerings. foreign issuers have used this instrument 8% – Consumer, noncyclical to raise over $44 billion in capital (IPOs 7% – Consumer, cyclical Diversification of shareholder base and only) in the United States during the past 3% – Basic materials valuation support: By going public in decade alone.1 As of December 31, 2012, the United States and maintaining a 262 foreign issuers had ADRs listed on Source: J.P. Morgan, Bloomberg, other depositary listing there, U.S. investors can more the NYSE.1 banks, stock exchanges, January 2013 easily invest in a foreign issuer. For some foreign issuers, a U.S. listing results in higher corporate governance (b) Advantages for investors standards, further increasing its Capital raised using ADRs, by The effectiveness of ADRs for raising appeal. Attracting U.S. investors helps region—2002 to 2012 ($MM) capital in the United States is due to their broaden and diversify a foreign issuer’s appeal to investors—these instruments shareholder base, reducing the issuer’s are a convenient way to directly invest in dependence on investors in its home international companies while avoiding market for its capital needs. Moreover, many of the risks typically associated with the incremental demand that U.S. securities held in other countries. For U.S. investors can bring to bear on a $11,552 investors, ADRs: foreign issuer’s shares helps drive • are easier to purchase and hold than its market valuation—and hence a foreign issuer’s underlying ordinary lowers its cost of capital—over the $3,874 $29,082 shares; long term. • trade easily and conveniently in U.S. dollars and settle through established U.S. acquisition currency: Because the clearinghouses; ADRs used to raise capital in the United • pay dividends in U.S. dollars; States are dollar denominated, they can 65% – APAC • eliminate local custody arrangements; eventually be used to make stock-based 9% – EMEA and acquisitions of U.S. companies. Generally, • provide notifications of corporate 26% – LATAM U.S. shareholders are more likely to accept actions in English. ADRs than foreign shares. Source: J.P. Morgan, Bloomberg, other depositary banks, stock exchanges, January 2013 (c) Establishing an ADR program Stock-based compensation for U.S. ADR structures: A Level III ADR program employees: Being dollar denominated, listed on the NYSE (or on another U.S. ADRs allow foreign issuers to establish stock exchange) allows a foreign issuer to stock purchase and option plans for 1Source: J.P. Morgan, Bloomberg, other realize all of the aforementioned benefits U.S.-based employees. Absent these plans, depositary banks, stock exchanges, January 2013. of ADRs, including raising capital from
98 NYSE IPO Guide Foreign private issuers
individual investors. Alternatively, U.S. investment in foreign equities capital can be raised from qualified 6.0 25% institutional investors only via a private Value ($ trillions) placement, known as a Rule 144A % Equity portfolio offering. 5.2 5.0 A Level II ADR program allows a foreign 4.7 4.6 20% 4.6 4.5 issuer to list on a U.S. stock exchange, but 4.3 4.2 4.2 not raise capital. Under a Level I program, 4.0 4.0 the ADRs are not listed, trading instead in 15% the over-the-counter market. 3.3 3.0 2.7 How ADRs are created: ADRs are 2.6 normally created when the shares of a 10% foreign issuer—either those currently 2.0 trading in its local market or newly issued shares in connection with an 5% offering of securities—are deposited 1.0 with a depositary bank’s custodian in the issuer’s home market. The depository then issues to investors 0 0%
ADRs representing those shares. At 2004 2005 2006 2007 2008 2009 2010 2011 any time thereafter, an investor can sell Q1 2012 Q2 2012 Q3 2012 Q4 2012 these ADRs in the secondary market (e.g., the NYSE) or have the sponsoring Source: Federal Reserve, March 2013 depositary bank cancel the ADRs and receive the underlying ordinary shares that can be sold in the foreign issuer’s local market. Parties that work with the foreign issuer: The deposit agreement includes Establishing an ADR program requires close provisions relating to the following: Setting up an ADR program: Once coordination between the foreign issuer, • deposit of the issuer’s shares; a foreign issuer has chosen an ADR its chosen depositary bank and each firm’s • execution and delivery of the ADRs; structure, it will work closely with a legal counsel. When raising capital in the • issuance of additional shares by the depositary bank to establish and maintain United States, the issuer also relies on other issuer in compliance with applicable the ADR program. Time frames and advisors, such as accountants, investment securities laws; requirements for launching a program will bankers and investor relations firms. The • transfer and surrender of the ADRs; vary. However, certain characteristics are chart on page 100 summarizes the roles • setting of record dates by the depositary; common to any ADR structure. and responsibilities of each party involved. • voting of the foreign issuer’s On page 101 is a sample timetable for the underlying shares (i.e., the shares Setting the ADR-to-share ratio: Each establishment of a Level III ADR program. evidenced by the ADRs); ADR issued will represent a certain • obligations and rights of the depositary number of underlying ordinary shares The deposit agreement: As a first step bank and the holders of the ADRs; held in custody in the foreign issuer’s toward establishing an ADR program, the • distribution by the depositary of cash home market. There is no official rule foreign issuer and its chosen depositary dividends, stock dividends, rights to for setting the ratio for ADRs. However, bank negotiate a deposit agreement. This acquire additional shares of the issuer and the share prices of sector peers should contract details the legal relationship other distributions made by the issuer; be taken into consideration in order to and obligations of the depositary bank • circumstances in which reports and establish a ratio that will result in an and the issuer, describes the services the proxies are to be made available to ADR initial price per ADR that investors will depositary and issuer will provide and sets holders; perceive to be “attractive.” forth the rights of ADR holders and the • tax obligations of depositary receipt The ratio initially selected may affect fees they must pay the depositary bank. holders; the transaction costs that a foreign issuer’s Some terms are standard, but deposit • fees and expenses to be incurred by investors will pay. For instance, since fees agreement provisions may vary from the issuer, the depositary and ADR for issuance (and cancellation) are assessed program to program depending on the legal holders; in cents per ADR, an ADR that is priced requirements of the foreign issuer’s home • prerelease of ADRs; and “too low” can add incremental transaction market, the objectives of the depositary • protections for the depositary and the costs for investors. bank and individual issuer specifications. issuer (i.e., limitations on liabilities)
NYSE IPO Guide 99 Foreign private issuers
SEC registration: As a U.S.-listed company, Establishing an ADR program: roles and responsibilities of foreign issuer, a foreign issuer must comply with the depositary bank and other parties registration provisions and continued reporting requirements of the Securities Custodian Depositary Exchange Act, as amended, as well as • Receive local • Provide advice/perspective on type of program, exchange or certain registration provisions of this shares in market on which to list or quote. act. For more information about the SEC issuer’s home • Advise on ratio of depositary shares to ordinary shares. registration and reporting requirements, country. • Appoint custodian. please refer to Chapter 5. • Confirm • File Form F-6 if Level one, 2 or 3 program. deposit of • Review draft registration statement or offering memorandum, underlying depending on type of program to be established. shares. • Coordinate with all partners to complete program implementation • Hold shares steps on schedule. in custody for • Coordinate with legal counsel on Deposit Agreement and the account securities law matters. of depositary • Prepare and issue certificates and/or direct registration statements. in the home • Announce DR program to market (brokers, traders, media, retail/ market. institutional investors via news releases and internet.
Issuer Legal counsel (depositary’s • Provide depositary and custodian with and issuer’s) notices of dividends, rights offerings and • Prepare draft deposit agreement other corporate actions, including notices of (depositary bank’s counsel) and file annual and special shareholder meetings. required registration statements with • Ongoing compliance with stock exchange the SEC. and SEC regulations, including disclosure • Manage compliance with U.S. and reporting (coordinating with legal securities laws, rules and regulations counsel/accountants). and perfect any securities law • Executes U.S. focused investor relations exemptions (if Rule 144A/Reg S plan. program) (issuer counsel).
Accountants (Level II/III ADRs only) • Prepare issuer’s financial statements in accordance with, or reconcile to, U.S. GAAP or accepted IFRS standard. • Review registration statement or offering circular and provide requisite opinions.
Investor relations advisor/firm • Develop long-term plan to raise awareness of issuer’s program in the United States. • Develop communications plan and information materials for launch activities (roadshow and presentations to investors, launch day promotion, meetings with financial media). • Coordinate with issuer’s advertising and public relations teams on specific program plans to support and develop company image in the United States.
Investment banks/Underwriters (Level II/III/Rule 144A/Regulation S ADRs only) • Advise on type of program to launch and exchange or market on which to list or quote. • Advise on ratio of depositary shares to ordinary shares. • Cover issuer through research reports/promote DRs to investors. • Advise on roadshows, investor meetings, investors to target. • Advise on capital market issues. • Where applicable, advise on potential merger/acquisition candidates, and other matters such as rights offerings, stock distributions, spin-offs, proxy contests, etc. If concurrent public offering: • Advise on size, pricing and marketing of offering. • Act as placement agent or underwriter in offering. • Conduct roadshows with management/introduce issuer to institutional and other investors. • Line up selected dealers and co-underwriters for offering.
100 NYSE IPO Guide Foreign private issuers
Level III ADR program—Sample timetable Parties involved Weeks Action I D L A IB IR 1 2 3 4 5 6 7 8 9 I0 11 12 13 14 Ongoing Establish and organize transaction team. • • • • • • Begin U.S. roadshow and ongoing investor • • • • relations program: create communications materials, target institutional investors, organize direct purchase programs for retail investors and establish employee ownership plans. Select ratio.
Underwriter conducts preliminary due • diligence. Prepare and submit to SEC offering • • • • • circular/prospectus and Form F-1. Commit to file Form 20-F within 12 months (if not already being filed in conjunction with an existing Level II ADR). Resolve any and all matters involving registration and disclosure. Negotiate Deposit Agreement. • • • Submit exchange listing or NASDAQ • • • quotation application and agreement. Receive approval. Prepare Form F-6 and submit to SEC • • • with Deposit Agreement. Receive SEC comments on Form F-1 • • • and other forms. Amend if necessary.
Complete requirements for trading and • • • • settlement: obtain DTC eligibility, CUSIP number and ticker symbol; and prepare ADR certificates.
Receive SEC declarations of • • • effectiveness on Forms F-1 and F-6. Execute DA. Conduct roadshow meetings with U.S. • • • investors (group and one-on-one).
Print final prospectus, price offering • • and sell ADRs. ADRs are listed and begin trading. Closing. Underwriter delivers cash • • • proceeds to issuer, depositary’s custodian receives underlying shares and depositary delivers ADRs to syndicate for forward delivery to investors. Distribute press release and broker • • • • • announcements to media and investment community. Place tombstone advertisement. • • • • •
Time frames provided are indicative. Regulator’s involvement and issuers’ program specifics may vary and can materially affect timing. The SEC generally provides comments on Form F-1 registration statements within 30 days of the date filed. Key to parties involved: I = Issuer; D = Depositary Bank; L = Legal Counsel (for depositary and/or issuer); A = Accountant; IB = Investment Bank; IR = Investor Relations firm
NYSE IPO Guide 101 Foreign private issuers
9.2 Direct equity share listing (a) Phase one—preparation submission of successive amended Cleary Gottlieb Steen & Hamilton LLP During the first phase, the principal task registration statements. For a domestic is to prepare a draft registration statement U.S. issuer other than an emerging growth As discussed in Section 9.1, most foreign on Form F-1. This includes the preliminary company, the successive versions of the issuers that list equity in the United States prospectus, which will be the principal registration statement are publicly filed. do so using ADRs. ADRs were developed to document used to market the offering to Most foreign issuers, however, go through facilitate custody and settlement for U.S. investors. If the issuer is already listed the SEC review process on a confidential investors and the U.S. clearing system. in its home jurisdiction, the prospectus basis, without making the registration A foreign private issuer may also list can draw on material the issuer already statement public at that time or disclosing its shares directly on the NYSE without prepares for home-country reporting that it has been submitted. (Confidential employing ADRs. This is common for purposes, but the U.S. prospectus often will review is discussed in Section 9.5(a), Canadian companies, and major Dutch, be quite different from what the issuer has below.) For a foreign private issuer that German and Israeli issuers have also done previously published. If the issuer is going pursues a confidential review, the initial so. An issuer that lists shares directly needs public in two jurisdictions at the same public filing usually occurs after the to establish a share registry system that time, the coordination of the preparation resolution of most or all SEC comments. effectively permits its shares to be quoted, process to address requirements in both During the SEC review period, the traded and settled in the United States jurisdictions, and sometimes in two issuer and the underwriters also prepare in U.S. dollars. To allow U.S. clearing and languages, can be challenging. for the roadshow, developing a roadshow settlement without the intermediation Unlike authorities in many other presentation and itinerary. If the issuer of a depositary, the usual approach is to jurisdictions, the SEC requires an issuer to qualifies as an emerging growth company appoint a U.S. registrar that coordinates file its material contracts and certain other under the JOBS Act (see Chapter 4), with the home country registrar using a documents as exhibits to the registration limited premarketing (often called “testing continuously updated two-way electronic statement, and these exhibits are publicly the waters”) is permitted before the link between clearing systems. The available. One priority for the first phase registration statement is filed, although mechanics can be complex, and the cost is to identify required exhibits and this has not yet become common practice. and time required to work them out can be determine whether making them public Otherwise, marketing does not begin a deterrent, especially for the first issuer presents any difficulties. until after the initial public filing of the to make these arrangements from a given The issuer should also use the registration statement. jurisdiction. preparation period to familiarize itself with the ongoing requirements applicable (c) Phase three—marketing 9.3 Description of IPO process timeline to companies registered with the SEC and The marketing period begins after the Cleary Gottlieb Steen & Hamilton LLP to confirm the readiness of its reporting registration statement has been publicly and compliance systems. filed, which is ordinarily after SEC Every IPO is different, but most follow The underwriters will typically use comments have been resolved. If the a broad pattern that breaks down into this period to conduct much of their due issuer’s shares are not already trading four phases. An aggressive but reasonable diligence, which includes management (in its home market, for example), a timeline might take 20 weeks: eight weeks presentations, review of documentation price range for the offering must also be to prepare materials for submission to the and often other steps as well. established before full marketing begins. SEC, eight weeks to complete SEC review Other items of documentation can be The marketing phase often takes two and then make a public filing, three weeks addressed during the preparation phase or three weeks. It involves distributing the for marketing and a week to price and close or later. These include working with the preliminary prospectus and conducting a the IPO. NYSE on listing qualifications, selecting a roadshow with prospective investors based Several factors typically affect the depositary and negotiating arrangements on an elaborate roadshow presentation. length of the timeline. If the issuer will be with it, preparing the separate registration As marketing proceeds, the underwriters dual-listed, the most important of these statement on Form F-6 for the ADRs and gather nonbinding indications of interest factors is the coordination of non-U.S. negotiating the underwriting agreement. from investors—a process known as requirements with U.S. requirements, “bookbuilding.” After the conclusion of the although with most non-U.S. regulators (b) Phase two—SEC review roadshow, the issuer and the underwriters and exchanges there is ample precedent Following the preparatory phase, the ask the SEC to declare the registration for managing this coordination. Another issuer submits its substantially complete statement effective, which is required important factor is how much time the registration statement to the SEC before the shares can be sold to investors. issuer and its auditors take to develop for review and then responds to SEC the information required by U.S. rules, comments, with the assistance of its (d) Phase four—pricing and closing especially financial statements that meet U.S. counsel and its auditors. The SEC The bookbuilding process culminates in SEC requirements and an audit report that comment process can involve extensive the pricing of the IPO, when the issuer meets PCAOB standards. This can extend back-and-forth discussion between (and any selling shareholder) agrees with the first phase substantially. the issuer and the SEC staff and the the underwriters on the offering price and
102 NYSE IPO Guide Foreign private issuers
the underwriters agree to purchase the press conferences or issue press releases U.S. issuers. The registration statement securities. The underwriters promptly offshore, and that publicity will not be an is composed of two parts: Part I consists begin confirming sales to investors, and in illegal offer, provided that: of the prospectus (described below) and a successful offering the securities are all • there is a bona fide intent to conduct Part II contains information that must sold within hours. Typically, ADRs begin at least part of the offering outside the be publicly filed with the SEC, but need trading on the NYSE the morning after United States; not be provided to prospective investors. pricing. Closing usually occurs three to five • access to the offshore press activities (See Section 3.2 for a more complete business days after pricing of the IPO. is provided to both U.S. and foreign description of the different parts of the This process—pricing, selling to journalists; and registration statement.) investors, commencement of trading and • any written offering-related materials However, there are several important closing—is more complex in a dual-listed provided to the press must contain a distinctions between registration offering, which requires coordination of prescribed cautionary legend and may statements for foreign private issuers one or more regulatory regimes, markets, not contain any form of purchase order and for U.S. issuers. A foreign private currencies and exchanges. See Section 3.1 or coupon that may be returned to issuer will register its IPO using Form for more detail on the IPO process for U.S. express interest in the offering. F-1 (or, in the case of Canadian issuers, issuers, which is similar in many respects Form F-10), rather than Form S-1 used to the process for foreign private issuers. Issuers should be cautious when by a domestic issuer. A foreign private they rely on this safe harbor, since a issuer that chooses to establish an ADR 9.4 Publicity statement in reliance on the safe harbor program must file an additional short-form Cleary Gottlieb Steen & Hamilton LLP may still give rise to U.S. liability if it is registration statement on Form F-6, which false or misleading. Moreover, the SEC requires certain information concerning Publicity in connection with an IPO is may require that the content of offshore the depositary arrangement and consists subject to strict regulation under U.S. communications, particularly forward- principally of the deposit agreement and a law, as discussed in Section 3.2. The looking statements, be included in the sample ADR certificate. statutory framework under Section 5 of the registration statement and prospectus if the One important difference concerns Securities Act regulates offers of securities, SEC views those statements as material. the availability of confidential SEC review and it particularly regulates written offers. If a foreign private issuer qualifies of a draft registration statement. A Because of the broad definitions given as an emerging growth company under registration statement is available to the to the terms offer and written, offering the JOBS Act, it may elect to benefit public as soon as it is formally filed with participants must be careful to distinguish from eased restrictions on publicity the SEC, and the SEC staff generally will between permissible communications and and offers in its IPO. Specifically, in not review a registration statement before illegal offers and to avoid any conduct or connection with an IPO of an emerging it is filed. Consequently, a domestic issuer communications that could be construed growth company, the JOBS Act permits conducting an IPO files successive publicly as impermissibly conditioning the market oral or written communications with available versions of its registration for the securities to be offered. certain sophisticated investors (qualified statement. To avoid this, the JOBS Act The specific limitations on publicity institutional buyers as defined under established a confidential review process turn on whether the registration statement Rule 144A under the Securities Act for an IPO registration statement of an has been filed and then on whether it or accredited investors as defined in emerging growth company. (See Chapter 4.) has been declared effective. Before the Regulation D under the Securities Act) Confidential review under the JOBS registration statement is filed there before the filing of a registration statement Act is available for a foreign issuer, but the is a “quiet period,” when no offers are to determine whether the investors have SEC also has a separate policy under which permitted. Between public filing and an interest in the IPO. These “testing- it will review a draft registration statement effectiveness of the registration statement, the-waters” communications are not for a first-time foreign registrant on a there is a “waiting period,” when offers may subject to the restrictions on all forms of confidential basis where (1) the issuer is be made, but written offers are subject to communication during the “quiet” period already listed or is concurrently listing its content regulation and filing requirements. or the requirements imposed on written securities on a non-U.S. securities exchange, After the registration statement is effective, communications during the “waiting” (2) the issuer is being privatized by a foreign offers and sales are permitted, but there are period of the IPO process. See Chapter 4 government or (3) the issuer demonstrates still restrictions on written offers. for a more complete discussion of the JOBS that the public filing of its registration The SEC has established a number of Act, including eased publicity restrictions. statement would conflict with the law of safe harbors that allow communications a relevant foreign jurisdiction. If an issuer that might otherwise be prohibited 9.5 Registration proceeds under this policy, the SEC may still offers or impermissible written offers. Cleary Gottlieb Steen & Hamilton LLP require it to publicly file its draft registration One of them is specifically designed for statements in certain circumstances, such foreign private issuers. In addition to the (a) Registration statement as where there is publicity about a proposed safe harbors available to U.S. issuers, a The registration statement requirements offering or listing. Otherwise, a foreign foreign private issuer may hold offshore are similar for foreign private issuers and private issuer often waits until shortly
NYSE IPO Guide 103 Foreign private issuers
before the roadshow to make its first public use Form 40-F.) Form 20-F must be filed exchange on which its securities are listed filing—in contrast, an emerging growth with the SEC within four months of the end and made public by such exchange or (3) is company proceeding under the JOBS Act of each fiscal year. The contents of Form distributed to the foreign private issuer’s confidential review process must make a 20-F are similar to the IPO prospectus, security holders. Form 6-K specifies that public filing at least 21 days in advance of including with respect to the required the information required to be furnished is the roadshow. The issuer must resubmit audited financial statements. There are, information that is material with respect to all previously submitted draft registration however, some differences, including the issuer and its subsidiaries concerning: statements, SEC staff comment letters and disclosures about controls and officer • changes in business; issuer response letters at the time of the certifications, as well as information about • changes in management or control; public filing of its registration statement, stock repurchases and the use of IPO • acquisitions or dispositions of assets; and these will be posted publicly on the proceeds. • bankruptcy or receivership; SEC’s EDGAR system. The SEC does not automatically • changes in certifying accountants; For a discussion of SEC fees associated review the annual report on Form 20-F, • financial condition and the results of with the filing of a registration statement, but it is required to review each issuer’s operations; see Section 3.2(f). annual report on Form 20-F at least • changes in securities or in the security once every three years and may provide for registered securities; (b) Prospectus comments to improve disclosure or remedy • defaults upon senior securities; The prospectus will be distributed to noncompliance at any time. Unlike Form • material increases or decreases in the prospective investors in preliminary form 10-K, which requires detailed information amount outstanding of securities or during the “waiting” period in order to on an issuer’s compensation of its directors indebtedness; market the IPO. The disclosures included and executive officers, a foreign private • the results of submission of matters to in the prospectus are described in more issuer may provide an aggregate amount a vote of security holders; detail in Section 3.3(a), but they generally for director and officer compensation, • transactions with directors, officers, or include a description of the issuer’s and individual employment contracts and principal security holders; business, its operating and financial compensatory plans need not be filed as • the granting of options or payment history and a description of the securities exhibits to the Form 20-F so long as the of other consideration to directors or being offered. issuer has not made such data, contracts or officers; and Foreign private issuers should plans public elsewhere. A foreign private • any other information which the pay particularly close attention to the issuer is required to disclose in the Form issuer deems of material importance to requirements concerning the financial 20-F fees to investors associated with security holders. statements that must be included in its ADR facility and any payments to the the prospectus. If the issuer’s financial issuer by the ADR depositary. Form 6-K is very simple, consisting of statements are not presented under U.S. A foreign private issuer is not subject a cover and signature pages to which the GAAP or IFRS as approved by the IASB, to the U.S. proxy rules and so need not relevant information is attached. The form they must include a reconciliation of prepare a U.S.-style proxy statement, must be signed by an authorized officer, certain items to U.S. GAAP. For further although many choose to prepare a but no certification by the CEO or CFO information concerning the particular “glossy” annual report in addition to the is required. The information submitted rules that apply to foreign private annual report on Form 20-F. A foreign need not be in English, but a full English issuers. private issuer whose shares or ADRs are translation is required for press releases, listed on the NYSE is, however, required annual or interim financial information 9.6 Reporting requirements to solicit proxies from U.S. shareholders and information sent directly to security Cleary Gottlieb Steen & Hamilton LLP for shareholder meetings. holders. For other information, an English summary will suffice. (a) Ongoing reporting-related Current reports: Unlike U.S. issuers, The SEC reportedly has considered requirements foreign private issuers are not required revising Form 6-K because of the number After the initial public offering, an issuer to file quarterly financial information of foreign private issuers using the must file regular periodic and other reports on Form 10-Q or to disclose the items United States as their sole listing with the SEC in accordance with the specified on Form 8-K within four business jurisdiction. The SEC staff is concerned requirements of the Exchange Act. The days. Instead, a foreign private issuer is that these issuers may make limited reports required for a foreign private issuer required to furnish material information disclosures as a result of not having differ from those required for a U.S. issuer “promptly” to the SEC on Form 6-K if the obligations to make information public described in Section 6.1(a). information is otherwise disclosed because under home country laws. it (1) must be made public in the foreign Foreign private issuers are generally Annual reports: The primary report for a private issuer’s country of domicile or required to comply with stock exchange foreign private issuer is the annual report incorporation pursuant to the law of that rules requiring prompt disclosure of material on Form 20-F. (A Canadian company may country, (2) is filed with any foreign stock events as discussed in Section 6.1(a).
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Other specialized disclosure requirements: avoid potential liability. A foreign private concerning non-GAAP financial A foreign private issuer must comply with issuer seeking to comply voluntarily with measures, see Section 5.5. the SEC’s specialized disclosure rules Regulation FD may make the general adopted under the Dodd-Frank Act. There public disclosure by filing a Form 6-K, Stock exchange notifications and are two principal types of disclosure, each distributing a press release, conducting affirmations: A NYSE listed foreign of which will be made on a new Form SD a public webcast (announced in advance) private issuer must comply with beginning in 2014. First, an issuer must file or other means designed to provide requirements to notify the exchange on Form SD if certain “conflict minerals” or broad, nonexclusionary access to the an ongoing basis with regard to, among certain of their derivatives are necessary information. See Section 5.5 for a more other things, record dates, dividends, to the functionality or production of its detailed discussion of Regulation FD. shareholder meetings, changes in listed products. Second, an issuer involved in the securities and certain corporate actions. commercial development or extraction of oil, Use of non-GAAP financial measures: As Beyond the notice requirements, NYSE natural gas or minerals must file Form SD to noted in Section 5.5, special disclosure requires that a listed foreign private disclose payments it makes to governments rules apply when an issuer presents issuer submit an annual affirmation in connection with those activities. certain financial information in a way that concerning compliance with NYSE’s A foreign private issuer is also is different from its financial statement audit committee and corporate required to disclose in its annual reports presentation based on GAAP. A financial governance-related requirements within on Form 20-F certain activities relating measure that triggers these SEC rules 30 days after the filing of a Form 20-F to Iran, materials likely to be used for is referred to as a “non-GAAP financial (or 40-F). NYSE also requires that, on human rights abuses and transactions with measure” (even if the issuer uses IFRS or an interim basis, a foreign private issuer persons designated for their support of another body of accounting principles submit an affirmation in the event of terrorist activity or the proliferation of rather than U.S. GAAP). Use of non-GAAP certain changes to its audit committee or weapons of mass destruction. financial measures in a public statement the loss of foreign private issuer status. A foreign private issuer that operates (whether written or oral) is subject to mines in the United States may be subject Regulation G, which requires that the (b) Disclosure controls, internal controls, to disclosure requirements concerning non-GAAP measure be accompanied and certifications health and safety violations at those mines. by a presentation of the most directly Internal control over financial reporting: comparable GAAP financial measure As of the end of each fiscal year, a foreign Duty to correct and update: If an issuer and a quantitative reconciliation of the private issuer, like a U.S. issuer, is discovers that a public statement was two measures. A foreign private issuer, required to evaluate its internal control materially inaccurate or misleading when however, is exempt from the requirements over financial reporting. ICFR is a set of made, it should promptly correct the of Regulation G if (1) its securities are processes designed to provide reasonable statement to reduce its risk of liability. listed or quoted on a securities exchange or assurance of the reliability of financial Even if it was accurate when made, a inter-dealer quotation system outside the reporting and preparation of financial forward-looking statement may need to be United States, (2) the non-GAAP financial statements in accordance with GAAP. Even updated if changed circumstances make it measure is not derived from or based on a though the evaluation of IFCR is based on inaccurate or misleading. U.S. courts have U.S. GAAP measure and (3) the disclosure the issuer’s primary financial statements, reached conflicting conclusions on whether is made outside the United States or it should take into account controls this kind of duty to update exists. included in a written communication related to U.S. GAAP reconciliation (if released outside the United States. reconciliation is required). Selective disclosure and Regulation When a foreign private issuer An internal control report must be FD: Under Regulation FD, if an issuer includes non-GAAP financial measures included in the foreign private issuer’s discloses material nonpublic information in a report filed with the SEC, it must annual report on Form 20-F. The report to market professionals (e.g., research comply with more stringent disclosure must contain: analysts) or to investors under requirements and consider whether the • a statement of management’s circumstances in which it is reasonably measure comes within a category of non- responsibility for establishing and foreseeable that the recipient will GAAP financial measures not permitted maintaining adequate ICFR for the trade on the basis of the information, in filed materials. Generally speaking, issuer; it must make general public disclosure materials submitted to the SEC on Form • a statement identifying the framework of that information at the same time. 6-K are not considered “filed” with the used by management to evaluate the Selective disclosure can also lead SEC, so those materials are not subject effectiveness of ICFR; to insider trading liability in some to these more stringent rules—except • an assessment by management of the circumstances. Regulation FD does not that if the Form 6-K is incorporated by effectiveness of ICFR as of the end of apply to foreign private issuers, but reference into a securities registration the most recent fiscal year, including many comply voluntarily or look to it statement, it is treated as filed. For a statement as to whether ICFR is for guidance as a “best practice” and to further information on the rules effective; and
NYSE IPO Guide 105 Foreign private issuers
• a statement that the auditors of the the amount and percentage of securities private issuer with shares or ADRs financial statements included in the held by the acquirer and related details listed on the NYSE is required to solicit report have issued an audit report on about the acquirer’s involvement with the proxies from U.S. holders for shareholder the effectiveness of ICFR. securities. A shareholder who holds more meetings. than 5% of an issuer’s securities at the The auditors’ report on the effectiveness time of an issuer’s IPO is entitled to file (b) Audit committee of ICFR must also be included in the Form a report on less demanding Schedule 13G, Any issuer listed on a U.S. exchange 20-F. A first-time registrant is exempt from but changes in the shareholder’s holdings must have an audit committee to oversee these rules until its second annual report may require the holder to switch over to accounting, financial reporting and audit is filed with the SEC. For a more in-depth filing reports on Schedule 13D. services. There are no size requirements discussion of the ICFR requirements, see Section 7.3 contains additional for the audit committee of a listed foreign Section 6.1(b). information on the required disclosures private issuer, so the committee may under Regulation 13D-G and timing of consist of a single member. Disclosure controls and procedures: A disclosures. The members of the audit committee foreign private issuer is also required The directors, officers and large must be independent within the meaning to maintain “disclosure controls and shareholders of a U.S. company are subject of SEC Rule 10A-3. The SEC defines the procedures” designed to ensure that to certain reporting and short-swing term independent in this context to mean financial and nonfinancial information profits requirements under Section 16 of that a member of the audit committee required to be disclosed under the the Exchange Act, as described in Section (1) may not be an “affiliated person” Exchange Act is recorded, processed, 7.4. Foreign private issuers are not subject of the issuer or any of its subsidiaries summarized and reported in a timely to these rules. and (2) may not accept any consulting, and accurate matter. They must include advisory or other “compensatory fee” procedures to accumulate and communicate 9.7 Corporate governance directly or indirectly from the issuer or information to top management to allow Cleary Gottlieb Steen & Hamilton LLP any of its subsidiaries, other than in his for timely decisions regarding required or her capacity as a member of the board disclosure, including reports on Form 6-K. (a) Stock exchange corporate governance of directors or any board committee requirements (including the audit committee). CEO and CFO certifications: The CEO and For a foreign private issuer, most—but There are two general exemptions from CFO of a foreign private issuer provide two not all—corporate governance matters the independence requirements. First, separate certifications in annual reports will be determined by home country although all audit committee members on Form 20-F (or Form 40-F, though not laws and practices. Issuers listed on must be fully independent within a year in any Form 6-K). The substance of these the NYSE are subject to governance of listing in the United States, only one certification requirements is discussed in requirements set forth in the NYSE member of the audit committee must be Section 6.1(b). Listed Company Manual. The Manual fully independent at the time of the initial provides that a foreign private issuer listing and only a majority of the members (c) Beneficial ownership reporting by may follow home country practice rather must be fully independent within 90 days of investors than the Manual’s corporate governance listing. Second, an audit committee member After the IPO, the issuer’s major provisions, but with some important may sit on the board of directors of both shareholders will be required to comply exceptions. A listed foreign private a listed issuer and an affiliate of the listed with certain reporting requirements under issuer must maintain an audit committee issuer if the member otherwise meets the the Exchange Act. Specifically, any person compliant with the independence independence requirements for each entity. who is directly or indirectly the beneficial requirement of SEC Rule 10A-3 and is For a foreign private issuer, three owner of more than 5% of any listed class also subject to the requirement that the additional exemptions from the of voting equity securities of the issuer CEO promptly notify the NYSE if he or independence requirements are available will be required to file reports under she becomes aware of noncompliance to permit the following persons to sit on Sections 13(d) and 13(g) of the Exchange with the applicable provisions and the the audit committee: Act. Regulation 13D-G under that act requirement to submit annual (and under • any employee who is not an executive generally requires each such person (or some circumstances, interim) written officer, if that employee is elected group of persons acting together), within compliance affirmations. The NYSE also or named to the board of directors 10 days after the 5% threshold is crossed, requires that a listed foreign private or audit committee pursuant to the to file a report on Schedule 13D with the issuer disclose in its annual report on issuer’s governing law or constitutive SEC and send copies to the issuer and Form 20-F any significant ways in which documents, an employee collective relevant stock exchanges. Schedule 13D its corporate governance practices differ bargaining or similar agreement or requires substantial disclosure regarding from those followed by U.S. issuers under other home country legal or listing the identity of the acquirer, the source NYSE standards, including with respect requirements; and amount of funds used to acquire the to audit and compensation committee • a person who is an affiliate or a securities, the purpose of the acquisition, requirements. As noted earlier, a foreign representative of an affiliate (including
106 NYSE IPO Guide Foreign private issuers
a controlling shareholder) as a timely and understandable disclosure in described in Section 9.6(b). The other set, nonvoting observer, if that person is documents filed with the SEC and in other the antibribery provisions, prohibits the not the chair of the audit committee public communications; (3) compliance bribery of non-U.S. government officials. or an executive officer of the issuer with applicable laws, rules and regulations; An issuer will violate the antibribery and does not receive any compensation (4) the prompt internal reporting of provisions if it uses the mails or any means prohibited by the independence violations of the code to an appropriate or instrumentality of interstate commerce requirements; and person or persons; and (5) accountability for (including communication between the • a representative of a foreign adherence to the code. The code of ethics (if United States and any foreign country) government that is an affiliate of the one exists) must be filed with the SEC and to, for example, make payments to foreign issuer, if that representative is not posted on the issuer’s website or otherwise officials for the purpose of corruptly an executive officer of the issuer and made available to any person requesting a influencing actions or decisions by them does not receive any compensation copy without charge. The issuer must also in order to assist the issuer in obtaining prohibited by the independence disclose, on an annual basis, any waiver business. The SEC and the U.S. Department requirements. (including any implicit waiver) granted of Justice have aggressively expanded FCPA to its CEO or any of the senior financial enforcement in recent years. A foreign private issuer is exempt from officers subject to the code and any the audit committee requirements if it has amendments that may be made to the code. 9.8 Managing risk an alternative mechanism for overseeing Cleary Gottlieb Steen & Hamilton LLP the independent auditor, such as a board (e) Prohibitions on arranging credit of auditors or statutory auditors, that A foreign private issuer planning a U.S. IPO Once a foreign private issuer is listed on is separate from the issuer’s board of should review any arrangements that may be a U.S. stock exchange, it and its directors, directors. considered direct or indirect loans or other officers and certain other employees are There are also accommodations for extensions of credit by it or its subsidiaries subject to the federal and state securities foreign private issuers operating under a to any of its executive officers or directors, laws with respect to their registration dual holding company structure and for as these generally must be terminated prior statements, reports filed with the SEC, foreign private issuers with two-tier board to the effectiveness of the IPO registration other public statements and trading structures. If an issuer relies on any of statement to comply with SOX. activities, as discussed in Section 8.1. For the exemptions for foreign private issuers example, Rule 10b-5 broadly prohibits under the audit committee rules, it must (f) Clawback requirements fraudulent and deceptive practices and disclose that in its annual report on The Dodd-Frank Act requires the SEC to untrue statements or omissions, both Form 20-F. establish final rules under which the stock written and oral, of material fact in exchanges will amend their listing standards connection with the purchase and sale of (c) Compensation committee to require listed companies to adopt and any security. Under Rule 10b-5, the issuer A foreign private issuer is exempt from the disclose compensation clawback policies as and its employees or agents may be liable requirements concerning compensation set forth in the statute and implementing for making false or misleading statements committees that apply to U.S. issuers, but regulations. The SEC has yet to issue final about the issuer, whether or not any if it relies on the exemption with respect rules, however, and it remains to be seen of them actually purchased or sold any to member independence, it must in its whether it will establish an exemption for securities. Liability requires proof that the annual report on Form 20-F, if listed on foreign private issuers from the clawback defendant engaged in willful misconduct or the NYSE, include a description of any policy requirement as it has for other at least acted recklessly and can be based significant differences of home country corporate governance requirements. For on information contained in a document rule from the NYSE rules regarding the further information concerning clawback filed with the SEC (including a registration composition of compensation committees. requirements, see Section 2.4. statement, the Form 20-F or a Form 6-K), as well as other information released to (d) Ethics code (g) Foreign Corrupt Practices Act the public by the issuer, including press A foreign private issuer must disclose in its As described in more detail in Section releases. annual report on Form 20-F whether it has 6.1(c), a foreign private issuer that conducts The geographic reach of liability adopted a code of ethics that applies to its an IPO in the United States will be subject under Rule 10b-5 has been the subject of CEO, CFO, principal accounting officer or to the FCPA. Two sets of provisions under extensive litigation and some legislative controller and persons performing similar the FCPA are applicable to SEC-reporting changes in recent years. A private plaintiff functions. If the issuer has not adopted companies. One set, the accounting can only sue under Rule 10b-5 with respect a code of ethics governing its CEO and provisions, requires issuers to keep accurate to securities transactions that occur in the senior financial officers, it must disclose books and records and to maintain a system United States or transactions in securities that fact. A “code of ethics” means written of internal accounting controls. These that are listed on a securities exchange in standards that are reasonably designed to accounting provisions are in addition the United States. The SEC and other U.S. deter wrongdoing and to promote (1) honest to the internal control requirements government agencies, however, can enforce and ethical conduct; (2) full, fair, accurate, and disclosure controls and procedures Rule 10b-5 against wrongful conduct even
NYSE IPO Guide 107 Foreign private issuers
if it occurred outside the United States if financial information covering the adequately that it is not required to it had a substantial effect in the United issuer’s predecessor entities (if comply with this requirement in any States or on its citizens. any) may need to be provided; other jurisdiction outside the United • if a jurisdiction outside the United States, and that complying with the 9.9 Executive and employee States does not require a balance requirement is impracticable or involves compensation programs sheet for the earliest year of the undue hardship. Regardless, the latest Cleary Gottlieb Steen & Hamilton LLP three-year period, that balance audited annual financial statements sheet may be omitted; and included in the filing cannot be more Having a class of listed equity securities • audited financial statements than 15 months old as of the date the generally facilitates using equity-linked are required only for the most registration statement becomes effective. compensation programs for U.S. executives recent two years if the financial • If a registration statement becomes and employees. For further information statements presented are prepared effective more than nine months concerning considerations relevant to in accordance with US GAAP. after the end of the last audited fiscal compensation programs, see Section 2.4. • Foreign private issuers may use year, the company must provide The U.S. “say on pay” rules that require GAAP other than US GAAP, but may unaudited interim financial statements U.S. domestic issuers to seek periodic need to reconcile to US GAAP. This in accordance with, or reconciled to, nonbinding shareholder votes to approve reconciliation is not required if the US GAAP (this reconciliation is not executive compensation (see Section 2.4) company uses IFRS as issued by the required if the company uses IFRS as do not apply to foreign private issuers. IASB. issued by the IASB) covering at least Early in the U.S. IPO planning process, • Regardless of the basis of presentation, the first six months of the year. a foreign private issuer should review its the audited financial statements must • Foreign private issuers may report in executive and employee compensation be accompanied by an audit report any currency. programs with its advisers to ensure that issued by independent accountants • Financial statements of an acquired the U.S. disclosure and other requirements that are registered with the PCAOB foreign business need not be reconciled relevant to them will not pose issues for and audited in accordance with PCAOB from local GAAP to US GAAP when the the company. standards. Financial statements audited acquired business is below 30% for any under the International Auditing of the Rule S-X 1-02(w) significance 9.10 Financial information Standards or other local country GAAS tests. This reconciliation is not KPMG LLP would not be considered “audited” required if the acquired business uses financial statements for SEC purposes. IFRS as issued by the IASB. The financial statement requirements The accountants must meet SEC and • Financial statements of a significant for an initial registration statement of a PCAOB standards for independence. equity method investment meeting the foreign private issuer is found in Items 3, The SEC Staff will not object if the significance threshold of Rule 3-09 of 8, 17 and 18 of Form 20-F and in Regulation audit report states that the audit was Regulation S-X need not be reconciled to S-X. The financial statement requirements also conducted in accordance with US GAAP (or, if applicable, IFRS as issued differ in a number of significant ways from home-country generally accepted by the IASB), unless either of the two those of domestic US issuers. Some of the accounting standards. tests is greater than 30% as calculated key differences in the requirements are as • The latest audited annual financial on a US GAAP (or, if applicable, IFRS as follows: statements included in the registration issued by the IASB) basis. A description • Audited financial statements generally statement must be as of a date not of the differences in accounting methods must cover each of the latest three older than 12 months prior to the date is required, however, regardless of the fiscal years, with certain exceptions: the registration statement is filed. The significance levels. ● • if the issuer has been in existence SEC will waive this requirement in less than the required three years, cases where the company can represent
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Appendix I: NYSE original listing standards, U.S. operating companies, REITs, and funds
U.S. domestic companies must qualify for listing under the domestic listing standards. Foreign private issuers may list under either the domestic listing standards or the listing standards for non-U.S. companies set forth in Appendix II.
Domestic listing requirements call for minimum distribution of the company’s shares within the United States, as well as minimum financial criteria. This chart is to be used for an initial evaluation only. For a more complete discussion of the minimum numerical standards applicable to U.S. companies, see Section 102.00 of the Listed Company Manual, which can be accessed at http://nysemanual.nyse.com/LCM/Sections/.
Distribution and size criteria Alternative #3—Affiliated company Must meet all three of the following: For new entities with a parent or affiliated company listed on the NYSE Round-lot holders(a) 400 Global market capitalization(c) $500 million Publicly held shares(b) 1,100,000 Operating history 12 months Market value of publicly held shares:(b) Parent or affiliate is a listed company in good standing IPOs, spinoffs, carveouts, affiliates $40 million Company’s parent or affiliated company retains control of the entity or is under common control with the entity All other listings $100 million Alternative #4—Assets and equity Stock price criteria All issuers must have a $4 stock price at the time of listing Global market capitalization(c) $150 million
Financial criteria Total assets $75 million Must meet one of the following standards: Stockholders’ equity $50 million Alternative #1—Earnings(d) Real estate investment trusts (REITs)(e) Aggregate pre-tax income for the last three years(d) $10 million Stockholders’ equity $60 million
Minimum in each of the two most Closed-end funds and business recent years $2 million development companies (BDCs) Positive amounts in all years Market value of publicly held shares(b) $60 million (also Or require a total market cap of $75 Aggregate pre-tax income for the last million for BDCs) three years(d) $12 million (Continued opposite) Minimum in the most recent year $5 million (a) The number of beneficial holders of stock held in “street name” will be considered in addition to the holders of record. Minimum in the next most recent year $2 million (b) Shares held by directors, officers or their immediate families and other concentrated holding of 10% or more are excluded in calculating the number of Alternative #2a—Valuation/revenue with cash flow(d) publicly held shares and market value of publicly held shares. (c) Global market capitalization for existing public companies is the average of Global market capitalization(c) $500 million the most recent three months of trading history in the case of the pure valuation/ revenue test. For all other standards, the measurement is at a “point in time” for an existing public company though trends are considered. For IPOs, spinoffs and Revenues (most recent 12-month period) $100 million carveouts, it is represented by the valuation of the company as represented by, in the case of a spinoff, the distribution ratio as priced, or, in the case of an IPO/ Adjusted cash flow: carveout, the as-priced offering in relation to the total company’s capitalization. Aggregate for the last three years $25 million (d) The NYSE may consider two full fiscal years and the current nine months in All three years must be positive certain limited circumstances. For emerging growth companies presenting two fiscal years and qualifying under Alternative #1, pre-tax income must total at least Alternative #2b—Pure valuation/revenue $10 million in the aggregate for the last two fiscal years together with a minimum of $2 million in both years. For emerging growth companies presenting two fiscal years and qualifying under Alternative #2a, aggregate cash flow must total $25 (c) Global market capitalization $750 million million for the last two fiscal years, with positive amounts in both years. (e) REITs with more than 3 years of operating history must qualify under one of Revenues (most recent fiscal year) $75 million Alternatives 1-4.
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Appendix I continued
Additional considerations that are suitable for auction market trading and that are eligible for In addition to meeting the minimum numerical standards listed trading on the NYSE. Thus, the NYSE may deny listing or apply above, other factors must necessarily be considered. The additional or more stringent criteria based on any event, condition, company must be a going concern or be the successor to a or circumstance that makes the listing of the company inadvisable going concern. or unwarranted in the opinion of the NYSE. Such determination can The NYSE has broad discretion regarding the listing of a be made even if the company meets the quantitative standards set company. The NYSE is committed to listing only those companies forth above.
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Appendix II: NYSE original listing standards, non-U.S. operating companies
The NYSE offers two sets of standards—worldwide and domestic—under which non-U.S. companies may qualify for listing. Both standards include distribution and financial criteria. A company must qualify for both the distribution and financial criteria within that particular standard. The domestic standards are summarized at Appendix I. This chart is to be used for an initial evaluation only. The NYSE will work with each company to determine which standards are best suited to that entity. For a more complete discussion of the minimum numerical standards applicable to non-U.S. companies, see Section 103.01 of the Listed Company Manual, which can be accessed at http://nysemanual.nyse.com/lcm.
Criteria Requirements Worldwide Distribution Round-lot holders Total stockholders(a)
5,000
Publicly held shares(b) 2.5 million
Market value of publicly held shares(b) $100 million
IPOs, carveouts and spinoffs n/a
All other listings n/a
Financial Criteria Must meet one of the following standards: Alternative 1 Aggregate pre-tax income for $100 million Earnings(d) last three fiscal years
Minimum pre-tax income in each $25 million of two most recent fiscal years
Alternative 2a Global market capitalization(c) $500 million Valuation/revenue with cash flow(d)
Revenues (most recent 12-month period) $100 million
Aggregate cash flow for last three fiscal $100 million years
Minimum cash flow in each of two most $25 million recent fiscal years
(Continued opposite)
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Appendix II continued
Criteria Requirements Worldwide
Alternative 2b Global market capitalization(c) $750 million Pure valuation/ revenue
Revenues (most recent fiscal year) $75 million
Alternative 3 Global market capitalization(c) $500 million Affiliated company For new entities with a parent or affiliated company listed on the NYSE
At least 12 months of operating history Yes Affiliated listed company is in good standing Yes Affiliated listed company retains control of Yes the entity
(a) The number of beneficial holders of stock held in “street name” will be considered in addition to the holders of record. (b) Shares held by directors, officers or their immediate families and other concentrated holding of 10% or more are excluded in calculating the number of publicly held shares and market value of publicly held shares. (c) Global market capitalization for existing public companies is the average of the most recent six months of trading history in the case of the pure valuation/revenue test. For all other standards, the measurement is at a “point in time” for an existing public company though trends are considered. For IPOs, spinoffs and carveouts, it is represented by the valuation of the company as represented by, in the case of a spinoff, the distribution ratio as priced, or, in the case of an IPO/carveout, the as-priced offering in relation to the total company’s capitalization. (d) The NYSE may consider two full fiscal years and the current six months and qualifying under Alternative 1 in certain limited circumstances. For emerging growth companies presenting two fiscal years pre-tax income and qualifying under Alternative 1, pre-tax income must total at least $100 million in the aggregate for the last two fiscal years with a minimum of $25 million in each year. For emerging growth companies presenting two fiscal years and qualifying under Alternative 2a, aggregate cash flow must total at least $100 million for the last two fiscal years with a minimum of $25 million in each year.
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Appendix III: NYSE MKT original listing standards
NYSE MKT has established certain quantitative and qualitative standards for initial listing of U.S. and foreign companies, as follows. To learn more about NYSE MKT quantitative, distribution and governance requirements, please refer to the complete requirements outlined in the NYSE MKT Company Guide, which can be referenced at http://wallstreet.cch.com/MKT/CompanyGuide/.
Criteria Original listing standards
Standard 1 Standard 2 Standard 3 Standard 4
Pre-tax income(a) $750,000 n/a n/a n/a
Market capitalization n/a n/a $50 million $75 million OR At least $75 million in total assets and $75 million in revenues
Market value of publicly $3 million $15 million $15 million $20 million held shares
Minimum stock price $3 $3 $2 $3
Operating history n/a 2 years n/a n/a
Stockholders’ equity $4 million $4 million $4 million n/a
Distribution(b) 800 public shareholders and 500,000 shares publicly held; OR
400 public shareholders and 1 million shares publicly held; OR
400 public shareholders, 500,000 shares publicly held and average daily trading volume of 2,000 shares for previous six months.
(a) Required in the latest fiscal year or two of the three most recent fiscal years. (b) The shares of foreign companies may be considered for listing under Section 101. Companies which do not meet the share distribution requirements under Section 102 may be considered for listing under the alternate requirements set forth below:
Share distribution
Round-lot public shareholders 800 worldwide
Publicly held shares 1,000,000 worldwide
Aggregate market value of publicly held shares $3,000,000 worldwide
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Appendix IV: NYSE financial continued listing standards, U.S. companies
The NYSE has both quantitative and qualitative continued listing criteria. When a company falls below any criterion, the NYSE will review the appropriateness of continued listing. The following is a summary of the NYSE’s quantitative continued listing standards. For a more complete discussion of the NYSE’s continued listing standards, as well as the procedures followed when a company falls below any of the continued listing criteria, see Section 802.00 of the Listed Company Manual, which can be accessed at http://nysemanual.nyse.com/lcm.
Price criteria For companies that listed under the “pure valuation/revenue” standard Average closing price of a security is less than $1.00 over a consecutive 30 trading-day period Average global market capitalization over a consecutive 30 trading-day period Numerical criteria for capital and common stock is less than $375 million
For companies that listed under the “Earnings” standard and or “Assets and equity” standard Total revenues for the most recent fiscal Average global market capitalization over year are less than $15 million a consecutive 30 trading-day period is less than $50 million or
and Average global market capitalization over a consecutive 30 trading-day period Total stockholders’ equity is less than $50 million is less than $100 million
or For companies that listed under the “Affiliated company” standard Average global market capitalization over a consecutive 30 trading-day period The listed company’s parent/affiliated company ceases to control is less than $15 million the listed company or such parent/affiliated company itself falls below the numerical criteria; and average global market For companies that listed under the “Valuation/revenue capitalization over a 30-day trading period is less than $75 with cash flow” standard million.
Average global market capitalization The NYSE has separate criteria for closed-end funds, real over a consecutive 30 trading-day period estate investment trusts, special-purpose acquisition companies, is less than $250 million bonds and preferred stocks. See Section 802.01B of the Listed Company Manual. and
Total revenues for the most recent 12 months $20 million
or
Average global market capitalization over a consecutive 30 trading-day period is less than $75 million
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Appendix V: NYSE MKT continued listing standards(a)
NYSE MKT has both quantitative and qualitative continued listing criteria. When a company falls below any criterion, NYSE MKT will review the appropriateness of continued listing. The following is a summary of NYSE MKT’s quantitative continued listing standards. For a more complete discussion of NYSE MKT’s continued listing standards, as well as the procedures followed when a company falls below any of the continued listing criteria, see Section 1003 and Section 1009 of the Company Guide, which can be accessed at http://wallstreet.cch.com/ MKT/CompanyGuide/.
A company falls below compliance if its stockholders’ equity is less than: • $2 million and the company has two out of three years of losses from continuing operations and/or net losses. • $4 million and the company has three out of four years of losses from continuing operations and/or net losses. • $6 million and the company has five consecutive years of losses from continuing operations and/or net losses.
A company is not subject to stockholders’ equity continued listing requirements if it has: • Market capitalization of $50 million; OR • Total assets AND total revenue of $50 million each (in last fiscal year or two of the last three); AND (in each case) • Distribution: 1.1 million shares publicly held, $15 million market value of public float, and 400 round-lot shareholders.
Distribution A company falls below compliance if: • The number of publicly held shares is less than 200,000; OR • It has fewer than 300 Shareholders; OR • The market value of publicly held shares is less than $1 million (if below for 90 consecutive days).
(a) In addition to the financial and distribution standards shown above, NYSE MKT has requirements relating to: 1. disposal of assets/reduction of operations; 2. failure to comply with the Listing Agreement and/or SEC requirements; 3. low selling price; 4. failure to pay listing fees; 5. maintenance of sufficient liquidity; and 6. public interest concerns.
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Appendix VI: Summary of filing and other requirements based on issuer category KPMG LLP
The following table summarizes some of the most common financial statement filing requirements, Regulation S-K disclosure requirements, and other rules for nonaccelerated filers, smaller reporting companies, emerging growth companies and foreign private issuers.
Requirement Nonaccelerated Categories with modified reporting requirements reporting company Smaller reporting Emerging growth Foreign private issuer company company
Audited financial statements in initial registration statement
Balance sheet Most recent two fiscal Most recent two fiscal Most recent two fiscal Most recent two fiscal year-ends year-ends year-ends year-ends if financial statements are presented in accordance with U.S. GAAP. Most recent three fiscal year-ends if presented in accordance with IFRS as issued by the IASB(a)
Income statement, Most recent three fiscal Most recent two fiscal Most recent two fiscal Most recent three fiscal comprehensive income, years years years years(b) cash flows, changes in shareholders’ equity
Financial statements of Up to three years Limited to up to two Limited to up to two Up to three years a significant acquired may be required, years, depending upon years, depending upon may be required, business depending upon level of significance(c) significance depending upon level of significance significance(d)
Initial Sarbanes-Oxley Act compliance after an IPO
Quarterly section First periodic filing First periodic filing First periodic filing First Form 20-F filed 302/906 certifications (10-Q/10-K) after the (10-Q/10-K) after the (10-Q/10-K) after the after the IPO IPO IPO IPO(e)
Section 404(a) Second 10-K filed after Second 10-K filed after Second 10-K filed after Second 20-F filed after management report the IPO the IPO the IPO the IPO
Section 404(b) auditor Second 10-K filed after Not required Transition Second 20-F filed after attestation(f) the IPO if an accelerated period of up the IPO(g) filer to five years
Select Regulation S-K disclosure requirements
Selected financial Last five fiscal years Not required Last two fiscal years Last five fiscal information and interim periods and interim periods years and interim presented presented(h) periods presented
(Continued opposite)
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Appendix VI: continued
Requirement Nonaccelerated Categories with modified reporting requirements reporting company Smaller reporting Emerging growth Foreign private issuer company company
Select Regulation S-K disclosure requirements
MD&A 3 years 2 years 2 years 3 years
Initial compliance with First 10-Q filed after the First 10-Q filed after the First 10-Q filed after the First 20-F filed after the XBRL IPO IPO IPO IPO
(a) IFRS requires a first-time adopter to present an opening IFRS statement of financial position at the date of transition to IFRS, which results in the presentation of three statements of financial position. An FPI that is not a first-time adopter of IFRS is also required to provide three statements of financial position if it makes retrospective revisions to its financial statements, which is required upon adoption of a new accounting policy, a restatement or a reclassification in the financial statements. Even if an FPI is an EGC, it would still be required to provide three statements of financial position in these instances to assert that its financial statements are prepared in compliance with IFRS as issued by the IASB. (b) In an initial registration statement, if the financial statements are presented in accordance with U.S. GAAP (rather than reconciled to U.S. GAAP), the earliest of the three years of financial statements may be omitted if that information has not previously been included in a filing made under the Securities Act or the Exchange Act. This accommodation does not apply to financial statements presented in accordance with IFRS as issued by the IASB, unless the issuer is applying IFRS as issued by the IASB for the first time. Instruction G to Form 20-F provides for an accommodation that permits a foreign private issuer in its first year of reporting under IFRS as issued by the IASB to file two years rather than three years of statements of income, changes in shareholders’ equity and cash flows prepared in accordance IFRS as issued by the IASB. (c) A third year is required if the acquisition is greater than 50% significant and the acquired business had revenues of at least $50 million in its most recent fiscal year. (d) An FPI is required to comply with the reporting requirements of Rule 3-05 for material acquisitions when registering securities. An FPI is not subject to the ongoing reporting filing requirements of Rule 3-05 for a material acquisition (FPIs are not subject to the reporting filing requirements of Form 8-K). (e) If an FPI qualifies as an EGC, this is required with the first Form 20-F filed after the IPO. (f) Under existing SEC rules and regulations, newly public entities, other than nonaccelerated filers, begin complying with Section 404(b) auditor attestation of the Sarbanes-Oxley Act with their second annual report filed with the SEC. An EGC will be exempt from this requirement as long as it qualifies as an EGC; however, management’s reporting on internal control is still required. (g) On April 8, 2011, the SEC staff advised that foreign private issuers, who prepare their financial statements in accordance with IFRS as issued by the IASB, are not required to submit to the SEC and post on their corporate website XBRL reporting until the SEC specifies a taxonomy for use in preparing their XBRL exhibit. (h) After going public, an EGC will file annual, quarterly and periodic reports under existing SEC rules and regulations. An EGC filing that includes selected financial data in a filing is not required to provide this information for periods earlier than those presented in the EGC’s initial registration statement.
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NYSE IPO Guide 119 Contributor profiles
NYSE Cleary Gottlieb Steen & Hamilton LLP 11 Wall Street One Liberty Plaza New York, NY 10005 New York, NY 10006 United States United States Tel +1 212 656 3000 Tel + 1 212 225 2000 www.nyx.com www.clearygottlieb.com
Scott R. Cutler Nicolas Grabar Executive Vice President, Head of Global on technology at SG Cowen & Co. and Partner Listings Thomas Weisel Partners. He was also [email protected] a corporate securities lawyer at Cooley Scott Cutler is executive vice president and Godward, focused on M&A, IPOs, venture Nicolas Grabar’s practice focuses on head of global listings at NYSE, where he fund formation and venture capital international capital markets and securities is responsible for managing the Exchange’s representation. regulation, as well as the representation relationship with over 2,100 companies of large reporting companies, leading listed at the NYSE from Canada, Latin Mexican and Brazilian companies, Fortune America, United States and Asia, as well 100 companies and global investment as over 2,000 companies listed at the banks. He has extensive experience in European domestic markets. In addition, international financings in public and Mr. Cutler is responsible for the Exchange’s private markets, including U.S. securities relationship with the investment banking, law applicable to foreign issuers, and in private equity, venture capital, and legal the regulation of financial reporting. He communities to attract new listings and also specializes in the telecommunications and oversees the capital markets business, natural resource sectors and has advised including, initial public offerings for on acquisitions, joint ventures, privatizations operating companies, structured products, and debt restructurings. Mr. Grabar was closed-end funds, and REITs listing on the honored in 2011 as a “Dealmaker of the NYSE or NYSE MKT. He also oversees Year” and in 2010 as a “Dealmaker in strategic development and M&A for the the Spotlight,” each by The American global listings business. Lawyer. IFLR, Chambers, The Legal 500, Mr. Cutler has been involved in over Latin Lawyer, The International Who’s $130 billion in initial public offering Who of Lawyers and The Best Lawyers transactions since 2008, leading the NYSE in America repeatedly recognize him as to its #1 ranking globally among exchanges one of the world’s best capital markets over the past four years, and 75% of the lawyers. From 2002 to 2010, Mr. Grabar domestic U.S. market. He has managed chaired the annual PLI program on foreign some of the largest capital markets issuers and U.S. securities regulation. He transactions in history, such as General is a co-author of U.S. Regulation of the Motors, Visa, Petrobras, HCA and Banco International Securities and Derivatives Santander Brazil, and led the NYSE’s Markets (published by Wolters Kluwer, 10th transition in technology IPOs, with deals edition, 2012) and is currently a member of including AOL, AVG, Freescale, Fusion i-o, the TriBar Committee on Legal Opinions. LinkedIn, Netsuite, Pandora, VMWare Based in the New York office, Mr. Grabar and Yelp! became a partner in 1991. Mr. Grabar is He is a regular commentator on CNBC a member of the Bar in New York and has and Bloomberg TV and is frequently been admitted to practice in France. quoted in financial publications such as The Wall Street Journal, Financial Times, Sandra L. Flow Reuters, Bloomberg, New York Times, Partner Exame (Brazil) and Caijing Magazine [email protected] (China) on topics including capital markets, regulation and corporate Sandra Flow’s practice focuses on capital governance. markets transactions and corporate Mr. Cutler has an extensive background governance, including the representation in investment banking and corporate of both U.S. and international issuers, securities law. Before joining NYSE, he as well as underwriters, in a variety of was an investment banker focused Securities and Exchange Commission
120 NYSE IPO Guide Contributor profiles
Fenwick & West LLP Silicon Valley Center 801 California Street Mountain View, CA 94041 United States Tel + 1 650 988 8500 www.fenwick.com
(SEC) registered and private securities Mary E. Alcock, a counsel in the Cleary Jeffrey R. Vetter offerings and domestic and cross-border Gottlieb New York office, provided Partner listings. Her corporate governance practice executive compensation and employee [email protected] includes advising companies on their benefits expertise for this guide. In addition, disclosure obligations and governance Cleary Gottlieb associates Alex Speyer, Jeffrey Vetter’s practice concentrates on matters, including compliance with SEC Craig Fischer and Fred Martin, all of whom public and private offerings of securities, requirements, the Sarbanes-Oxley Act focus on corporate and financial matters, mergers and acquisitions, counseling public and listing standards of the NYSE and provided invaluable assistance, as did and late-stage private companies and other NASDAQ. She has also advised a number Cleary Gottlieb associates Liliane Diaba, securities law matters. of companies on issues relating to financial who focuses on executive compensation Mr. Vetter’s recent public offerings statement restatements. Ms. Flow has and employee benefits, Brynn Lyerly, who include Tableau Software, Workday, been recognized as a “leading lawyer” focuses on litigation, and Julie Yip-Williams, Facebook, Proofpoint, Fusion-io, Jive for capital markets by the IFLR 1000 who focuses on M&A and corporate Software, Responsys, SuccessFactors Guide to the World’s Leading Law Firms governance. Cleary Gottlieb senior attorney and ShoreTel. He has worked on more and distinguished for her capital markets Elizabeth Chang provided expertise in the than 45 IPOs during his career. Mr. Vetter practice by The U.S. Legal 500. Ms. Flow area of Blue Sky law. We also thank Cleary also represents underwriters of numerous is currently Chair of the Committee on Gottlieb associates Catherine Skulan and initial public offerings, including the initial Securities Regulation of the New York City Nicole Puppieni, and former associates public offerings of Marin Software, Model Bar Association. Based in the New York Femi Austin, Colleen Harp and Carsten N, Jive Software, Fusion-io, Salesforce. office, Ms. Flow became a partner in 2004. Fiege, for their assistance on the first com and Omniture, and has experience She is a member of the Bar in New York. edition of this guide. with other public and private offerings of debt and equity securities and stock John Palenberg exchange listings, including the listing of Partner SuccessFactors on the NYSE and Frankfurt [email protected] Stock Exchange, corporate governance matters and joint ventures. John Palenberg’s practice focuses on Mr. Vetter has also advised companies international capital markets transactions, with respect to corporate governance and particularly matters related to Japan and SEC matters, activist stockholders and joint German-speaking Europe, and corporate ventures. He also advises a variety of late- governance issues. He has extensive stage private companies. experience with international debt and equity Mr. Vetter was named a 2012 Attorney financings, restructurings, recapitalizations of the Year by The Recorder and is listed and refinancings involving obligors in the in Chambers USA for capital markets: United States, Europe, Africa and the debt & equity, U.S. News–Best Lawyers® Commonwealth of Independent States. for securities and capital markets law Chambers Global, Chambers Europe, The and is repeatedly selected as a Northern Legal 500 UK and The Legal 500 U.S. California Super Lawyer by Super Lawyers, recognize him as one of the world’s best a Thomson Reuters publication. capital markets lawyers. Mr. Palenberg was resident in the Frankfurt office from 1996 to William L. Hughes 2000 and in the London office from 2000 to Partner 2010, and from 2004 to 2010, he divided [email protected] his time between the London and Cologne offices. Prior to his return to the United William Hughes’s practice focuses States, JUVE ranked him as among the on securities offerings, counseling leading seven attorneys in Germany for debt public companies and securities law offerings. Currently based in the New York compliance. His experience encompasses office, Mr. Palenberg became a partner in initial public offerings, follow-on equity 1991. He is a member of the Bar in New York. offerings, investment-grade debt offerings,
NYSE IPO Guide 121 Contributor profiles
FTI Consulting 88 Pine Street, 32nd Floor New York, NY, 10005 United States Tel + 212 742 8964 www.fticonsulting.com convertible debt offerings and going-private Elizabeth Saunders Ms. Saunders holds a law degree from transactions. Mr. Hughes’s recent initial Chairman, Americas—Strategic DePaul University with a concentration in public offerings include Infoblox, Green Dot Communications securities law, and a BBA in finance from the and ShoreTel. He has also represented [email protected] University of Notre Dame. She is a member Cisco Systems and Symantec on numerous of National Investor Relations Institute (NIRI) public and private offerings of debt Elizabeth Saunders is Americas Chairman Senior Roundtable, and is a former NIRI board securities. Mr. Hughes regularly advises of the Strategic Communications segment member and Emerging Issues subcommittee companies on disclosure and reporting at FTI Consulting, and is based in Chicago chair. Ms. Saunders is also actively involved obligations under U.S. federal securities and New York. with Catholic Charities and The Cradle. laws, corporate governance issues and The Strategic Communications segment stock exchange listing obligations. He at FTI Consulting is a global, financial Leigh Parrish also advises a variety of late-stage private and corporate communications firm with Senior Managing Director—Strategic companies. in-depth expertise in investor relations Communications (IR), capital markets communications, and [email protected] transaction and crisis communications. It is consistently ranked by Mergermarket as Leigh Parrish is a Senior Managing Director one of the top M&A firms globally, and was and the Retail & Consumer Sector Leader named the 2012 “Corporate Agency of the in the Strategic Communications practice Year” by The Holmes Report. of FTI Consulting. She is based in the Ms. Saunders also leads the Americas Company’s New York office. Financial Communications practice, As a senior communications consultant and specializes in building best-practice with more than 15 years of experience, she financial communications programs across has a proven track record in directing critical a wide spectrum of clients. She serves as communications campaigns and devising senior counsel for business transformation multi-stakeholder strategic communications assignments, and has actively worked on programs. post-merger communications, CEO transitions Ms. Parrish’s client engagements have and restructurings for Fortune 500 companies, ranged from innovative capital markets including the Coca-Cola acquisition of its and business media relations programs largest North American bottler, CCE; the Dow to advising clients on communications Chemical acquisition of Rohm & Haas; the issues including corporate positioning, merger of Knight Capital Group and GETCO; key message development, management and various activism contests, defending transitions and terminations, financial companies from Carl Icahn, Janna Partners results and related disclosures, and and Relational Advisors. employee communications. She has Renowned for her expertise in the area extensive experience in event-driven, crisis of corporate governance, Ms. Saunders and financial situations that includes initial has published numerous articles; lectured public offerings, mergers and acquisitions, throughout the U.S. on shareholder activism bankruptcy or restructuring, regulatory strategies; and been quoted in Board & probes, litigation, product recalls and other Directors Magazine, The New York Times reputational issues. and The Wall Street Journal. She was also Ms. Parrish’s client experience is varied named to the Crain’s Chicago Business having worked across industries spanning “40 Under 40” list, and has spoken to the retail, consumer, education, real estate, National Association of Corporate Directors media, and financial services. Her recent (NACD) and WomenCorporateDirectors IPOs include Taylor Morrison, Restoration (WCD). Hardware and Dollar General while crisis Prior to this, Ms. Saunders was a co- and issues management work has included founder of Ashton Partners, one of the clients such as Orchard Supply Hardware, top-15 independent IR firms in the U.S. FTI American Suzuki Corporation, Fairfield Consulting acquired Ashton partners in 2001. Residential, Phillips Foods, Circuit City,
122 NYSE IPO Guide Contributor profiles
Ipreo J.P. Morgan & Co. 1359 Broadway, Global Equity Capital Markets 2nd Floor 383 Madison Avenue, Floor 28 New York, NY 10018 New York, NY 10179 United States Tel + 1 212 622 5628 Tel + 1 212 849 5000 www.jpmorgan.com www.ipreo.com
The Children’s Place and Kid Brands. She Chris Taylor Elizabeth Myers has led ongoing programs for a variety of EVP & Managing Director, Global Investor Managing Director, Head of Global Equity retailers such as OfficeMax, Aeropostale, Relations, New York Capital Markets, New York Guitar Center, Talbots, Dollar General, [email protected] Lumber Liquidators and consumer companies Elizabeth Myers is a Managing Director such as International Flavors & Fragrances, Chris Taylor heads up the Global Investor and Head of the Global Equity Capital Hanesbrands, Movado Group, and Jarden. Relations division for Ipreo, a leading Markets (ECM) group at J.P. Morgan. Ms. Parrish began her career at provider of market intelligence and IR Ms. Myers joined J.P. Morgan 21 years Robertson, Stephens and managed investor technology to publicly traded companies ago. Over the past 16 years in ECM she relations at Ivanhoe Mines Inc. prior to around the world. Ipreo’s extensive suite has executed numerous IPOs, follow-ons joining Morgen-Walke Associates, which of IR services includes cross-asset class and convertible transactions for clients later merged with Financial Dynamics./FTI. surveillance, investor targeting, perception across the globe, spanning a range of Ms. Parrish graduated with a BA in studies and custom analytics, as well as industries including financials, technology, History from San Diego State University. the BD Corporate platform, which offers the real estate, industrials, health care, natural most comprehensive database covering resources and consumer products. Prior to Sharrifah T. Al-Salem, CFA global institutional contacts, investor profiles joining ECM, she worked for several years Director—Strategic Communications and ownership data. in J.P. Morgan’s Mergers & Acquisitions [email protected] Mr. Taylor came to Ipreo through the group and focused on transactions across a acquisition of CapitalBridge in February range of industries. Ms. Myers has an MBA Sharrifah Al-Salem is a director in the FTI 2008, where he served as managing from Harvard Business School and a BA in Consulting Strategic Communications director, responsible for the global Economics from Princeton University. practice and is based in San Francisco. operations of the firm. During his 15-year Ms. Al-Salem joined the firm as an tenure there, he was a key orchestrator of Bill Contente analyst in November 2006. She has the firm’s growth and transformation into Managing Director, Vice Chairman of experience with financial communications one of the preeminent brands in market Equity Capital Markets, New York across various sectors, including Energy, intelligence. Mr. Taylor has been an active Technology and Retail; current and past speaker on relevant investor relations topics Bill Contente is a Managing Director and clients include Transocean, Cloud Peak at the National Investor Relations Institute Vice Chairman of Equity Capital Markets Energy, PetroLogistics, Polycom, Juniper (NIRI) Annual Conference, local NIRI at J.P. Morgan’s Investment Bank, based Networks and Restoration Hardware. chapters and other industry events. in New York. Prior to that Mr. Contente Ms. Al-Salem maintains a dynamic was Co-Head of Equity Capital Markets for relationship with sell-side analysts and the Americas. Mr. Contente has worked buy-side institutions and specializes in on numerous high profile IPOs and major advising on strategic messaging, driven capital raisings since joining J.P. Morgan in by market awareness and perceptions 1991. Amongst notable deals, Mr. Contente work. Additionally, she has done extensive lead the $23.1bn IPO for General Motors, shareholder base analyses, including the largest equity capital raise ever, and benchmarking movements among top the $19.7bn IPO for Visa. Mr. Contente buyers/sellers as well as assessing risk has extensive experience working with and capacity of top holders. More recently, clients in Diversified Industrials, Technology she played a significant role in building out Services, Transportation, Aerospace and communications platforms for Restoration Defense industries, and with Financial Hardware, PetroLogistics and Gogo around Sponsors clients. Previously, Mr. Contente their initial public offerings. worked extensively in Europe and Latin Prior to joining FTI Consulting, Ms. Al-Salem America, particularly in Brazil. Mr. Contente was with Equilar, Inc., an executive and board holds a B.A. in Economics from Yale compensation research firm. She received a University. BS in management science at University of California, San Diego. Ms. Al-Salem is a CFA charterholder.
NYSE IPO Guide 123 Contributor profiles
J.P. Morgan & Co. J.P. Morgan Depositary Receipts Global Equity Capital Markets Group 560 Mission Street, Floor 20 1 Chase Manhattan Plaza, Floor 58 San Francisco, CA 94105 New York, NY 10005 Tel + 1 415 315 5000 Tel + 1 212 552 3739 www.jpmorgan.com www.jpmorgan.com
Michael Millman with J.P. Morgan for six years and has Ivan M. Peill 16 years of experience in investment Vice President, Global Head of IR Managing Director, Global Head of banking and legal practice. Prior to his Advisory, New York Technology, Media and Telecom Equity current role, he worked in J.P. Morgan’s [email protected] Capital Markets, San Francisco EMEA ECM Execution Group based in London, with responsibility for the execution Ivan Peill is a Vice President in the IR Michael Millman is a Managing Director and of numerous initial public offerings and Advisory Services team of J.P. Morgan’s Global Head of J.P. Morgan’s Technology, follow-on offerings across a broad range Depositary Receipts Group. He has 15 Media and Telecom (TMT) Equity Capital of sectors and geographies. He began years of investor relations experience. Markets Group. In his role, Michael his career in 1997 as a corporate and Before joining J.P. Morgan, he was an spearheads the firm’s strategic advisory securities lawyer and practiced in London advisor at Georgeson & Co., Thomson and equity capital raising services for and Paris advising clients on a wide range Financial and Capital MS&L, where he TMT clients around the world. He is also of financing transactions, including in counseled small- to large-cap clients in responsible for coverage of U.S. western particular public and private equity capital Asia, Europe, the United States and Latin region equity mandates. Mr. Millman began raisings. Mr. Roberts holds a BA Hons (First America. In addition to his extensive IR his career at J.P. Morgan in 1997 and Class) from University College London, as experience, Mr. Peill has expertise in currently oversees a wide variety of equity well as postgraduate law qualifications from financial media relations. mandates ranging from structuring and UEA Law School and The College of Law, Mr. Peill advises J.P. Morgan DR clients executing initial public offerings, follow-on London. on various aspects of investor relations: offerings and specialized capital raising formulating an IR strategy; building alternatives such as convertible security an effective IR infrastructure; training offerings and equity private placements. executives new to investor relations; His client coverage includes a range of creating effective investor communications emerging and established companies in materials, such as roadshow presentations; the TMT sector and he has managed many developing disclosure policies; analyzing of J.P. Morgan’s most important and high changes in institutional ownership; and profile equity financing mandates. Michael’s using the financial media to raise visibility in work has led him to interact with a variety the capital markets. of clients across the globe, and develop Mr. Peill is the editor of J.P. Morgan’s DR strategic relationships with key buy-side Advisor Quarterly, a publication focused institutions, financial sponsors and venture on investor relations and other issues firms. Mr. Millman holds a BA in Economics/ important to DR issuers. He also writes Statistics from Rutgers University and an papers on SEC regulatory developments MBA from Columbia University. and serves as an expert speaker at IR conferences around the world. He holds an Christopher Roberts MBA with honors from Fordham University Managing Director, Head of Equity and is a member of the National Investor Execution, Technology, Media and Relations Institute. Telecom Equity Capital Markets, San Francisco
Christopher Roberts is a Managing Director and Head of Equity Execution for J.P. Morgan’s Technology, Media and Telecom (TMT) Equity Capital Markets Group. In this role, he oversees the structuring and execution of TMT equity offerings bookrun by J.P. Morgan with the aim of ensuring efficiency of process and consistency of execution standards. Mr Roberts has been
124 NYSE IPO Guide Contributor profiles
KPMG 345 Park Avenue New York, NY 10154-0102 United States Tel + 1 212 758 9700 www.kpmg.com
Aamir Husain United States, Canada and Hong Kong that Mike Meara Partner, New York have also included strategic sales efforts Director, New York [email protected] and carveouts. [email protected]
Aamir Husain is a partner at KPMG in the Shari Mager Mike Meara is a member of KPMG’s firm’s New York office where he is the Managing Director, Silicon Valley Accounting Advisory Services group and national leader of the IPO Advisory practice. [email protected] a director in the firm’s New York office. He He has more than 19 years of experience has worked on a variety of equity offerings, providing capital markets advisory services Shari Mager is a managing director at including IPOs and other SEC-registered to global private equity funds, investment KPMG in the firm’s Accounting Advisory offerings. Mr. Meara regularly advises banks and other strategic investors. Mr. practice. She is based in the Silicon Valley public companies on financial reporting Husain advises clients with technical and office, providing capital markets advisory and regulatory issues, including SEC project management advice on complex services to private equity and venture- filings, restatements, IFRS conversions accounting and finance reporting issues backed companies. Ms. Mager provides and postmerger integration. Prior to joining associated with the SEC registration clients with accounting, financial reporting Accounting Advisory Services, he held process, IPOs, 144a debt offerings, carve- and project management advice for both financial management positions in Fortune outs and conversions to and from IFRS and public and private equity and debt offerings, 1000 companies, where he was responsible U.S. GAAP. He has extensive experience as well as mergers, acquisitions and for SEC reporting and corporate financial in cross-border transactions and has divestitures. This includes assisting clients reporting areas. Mr. Meara received his assisted major international institutions in with SEC filings and reporting matters, sell- MBA and BBA degrees from Thunderbird the United States, Europe and Asia to list side assistance including carveouts, U.S. and the University of Texas at Austin, on the New York Stock Exchange as well GAAP technical accounting issues and respectively. as on exchanges in London, Hong Kong postmerger financial integrations, including and Toronto. During his career, Mr. Husain accounting conversion and business has worked on over 30 IPOs. He received combination issues. his BA degree from Boston University and is a member of the American Institute of G. Anthony Lopez Certified Public Accountants (AICPA) and Director, Denver the Institute of Chartered Accountants in [email protected] England and Wales (ICAEW). Tony Lopez is a member of KPMG’s Kevin Bogle Accounting Advisory Services group Managing Director, New York and a director in the firm’s Denver office. [email protected] Mr. Lopez specializes in transaction or special-event-based advisory services, Kevin Bogle is a member of KPMG’s including IPOs, business combinations, Accounting Advisory Services group and spin-offs, financial restatement assistance, a managing director in the firm’s New IFRS conversions and technical on-call York office. Mr. Bogle provides clients accounting. Mr. Lopez advises companies with accounting, financial reporting and on a variety of SEC reporting matters. He project management support for equity formerly was a FASB staff member, SEC and debt offerings (including initial public Associate Chief Accountant and Deputy offerings), mergers and acquisitions, Chief Auditor with the PCAOB. Mr. Lopez accounting conversions and divestitures. also spent five years in the national office This includes assisting clients with SEC and of another Big 4 firm consulting on complex foreign filings, U.S. GAAP and International accounting matters. Financial Reporting Standards (IFRS) technical accounting issues and financial integrations. During his career, Mr. Bogle has assisted clients with their IPOs in the
NYSE IPO Guide 125 Contributor profiles
Marsh 99 High St 345 California Street, 1166 Avenue of the Americas Boston, MA 02116 Suite 1300 New York, NY 10036-2774 United States San Francisco, United States Tel + 1 617 385 0200 CA 94104-2679 Tel + 1 212 345 6000 United States www.marsh.com Tel +1 415 743 8000
Dennis Kearns David Hong Susan Ott Managing Director, Financial & Managing Director, Financial & Vice President, Private Client Services Professional Liability Practice Professional Liability Practice San Francisco [email protected] New York, NY [email protected] [email protected] Dennis Kearns is a managing director and Susan Ott directs asset protection manager of the Claims Advocacy Group for David Hong is the U.S. Placement leader consulting and insurance services offered Marsh’s Financial and Professional Liability and a senior advisor in Marsh’s Financial to affluent individuals and families. Her Practice, specializing in complex coverage and Professional Liability Practice. In 25 years of extensive risk management and claims issues concerning directors his role as an advisor, he assists clients experience provides her with unique insight and officers liability, employment practices on the evaluation and design of risk- into delivering tailored client solutions that liability, fiduciary liability, and professional transfer solutions that address financial help protect wealth as well as physical liability insurance. Dennis leads a team of and professional exposures, including assets. Prior to rejoining Marsh in 2011, 11 lawyers serving as claims advocates directors and officers, errors and omissions, Susan worked as the managing director for Marsh clients and works extensively employment practices and fiduciary- and of Personal Insurance for another Bay with advisory brokers and clients on policy crime-related products. Mr. Hong is Area brokerage. She has been a featured language, manuscript endorsements, recognized for his technical expertise in speaker at several industry conferences and other legal issues regarding the risk-profile evaluation, coverage analysis and wealth management events, including structure and placement of management and related securities compliance and the Risk & Insurance Management Society liability insurance. Prior to joining Marsh corporate governance issues. He advises (RIMS), the Family Firm Institute (FFI) in 2011, Dennis spent 11 years at Chubb, a variety of publicly traded U.S. and and the Family Office Exchange (FOX). serving as an executive underwriter, multinational companies that have D&O Ms. Ott is a graduate of the University underwriting counsel, and coverage insurance programs supported in the U.S., of San Francisco with a BS in business counsel. He also served as a senior European and Bermuda marketplace. administration and a master’s in human attorney in Chubb’s claims department, Prior to joining Marsh in 2004, he was a resources and organization development. providing insurance coverage advice securities attorney for nine years in New She also holds the designation of Associate on personal and commercial insurance York and San Francisco, focusing on in Risk Management (ARM) from the policies and monitoring coverage litigation. mergers and acquisitions, public and private Insurance Institute of America. Dennis previously served as underwriting debt and equity placements, corporate counsel and held several positions in the governance and securities compliance. In claims department at AIG, where he was his nine years as a securities lawyer, responsible for adjusting high-end exposure Mr. Hong has been the general counsel for claims under multimedia, corporate, a software and communications company miscellaneous, and Internet professional and was an attorney with Morrison & liability polices. Admitted to practice law Foerster LLP. He has represented a broad in 1993, Dennis has also held positions base of clients in industries including in private and public legal practice and technology, aerospace and defense, has served as an adjunct professor. He mining, consumer products, transportation has served as a speaker and panelist at and power and energy. He holds a JD several seminars on directors and officers degree from Georgetown University Law liability insurance topics, including events Center and a BA from Columbia University. sponsored by RIMS and the American Conference Institute.
126 NYSE IPO Guide Contributor profiles
Morrow & Co., LLC RR Donnelley 470 West Avenue 111 South Wacker Drive Stamford, CT 06902 Chicago, IL 60606-4301 United States United States Tel + 1 203 658 9400 Tel + 1 312 326 8000 www.morrowco.com www.rrdonnelley.com
Frederick J. Marquardt Mr. Thomas F. Juhase Senior Managing Director President, Financial Services Group [email protected] Tom Juhase was named president of Fred Marquardt is a senior managing RR Donnelley’s Financial Services Group director of Morrow & Co., LLC, a prominent in 2004. The Financial Services Group proxy solicitation and corporate governance consists of Global Document Solutions, consulting firm. Mr. Marquardt has over Business Communication Solutions, 35 years of experience in the industry and Global Investment Markets, Global Capital regularly works with both domestic U.S. Markets, Global Real Estate Services, and foreign corporations on annual and Global Translations and Multilingual special shareholder meetings, consent Communications Services, Global solicitation, tender and exchange offers Outsourcing Services and Legacy and governance consulting work. He EDGR Data and Analytics Business, now works closely with a team of experienced RRD Data and Analytics. individuals in providing clients with the Mr. Juhase joined RR Donnelley & Sons timely information on strategic engagement in 1991 as managing director of European with investors and corporate governance Capital Markets based in London. In advice. 1996, he became managing director of Before joining Morrow in 1991, International Sales and Operations for the Mr. Marquardt was senior vice president business unit until 1999, when he became at The Carter Organization, Inc., managing director and vice president having served as the head of the Proxy of sales for RR Donnelley Financial in Solicitation Group. the United States. He later served as Mr. Marquardt is a frequent speaker on RR Donnelley Financial Services Group proxy solicitation and governance topics to senior vice president of sales and service industry groups, law firms and professional delivery until 2004. He is based in organizations, both in the United States New York City. and abroad. He earned a BA from Queens Prior to joining RR Donnelley, Mr. Juhase College of the City University of New York spent several years in a variety of sales and and an MBA in finance from St. John’s general management positions within the University. financial printing and document services industry. He earned a BS degree from Seton Hall University and a MBA from the University of Miami.
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Publisher Timothy Dempsey
Consulting publisher Brian Curran, NYSE
Editorial and Production Services PreMediaGlobal
Consulting editors Nicolas Grabar, Sandra L. Flow and John Palenberg Cleary Gottlieb Steen & Hamilton LLP
NYSE IPO Guide, Second Edition, is published by Caxton Business & Legal, Inc 27 N Wacker Drive, Suite 601 Chicago, IL 60606 United States Tel +1 312 361 0821 Fax +1 312 278 0821 www.caxtoninc.com
Printed by RR Donnelley
ISBN 978-0-615-84229-5
NYSE IPO Guide, Second Edition, © 2013 Caxton Business & Legal, Inc
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DISCLAIMER This guide is written as a general guide only. It should not be relied upon as a substitute for specific legal or financial advice. Professional advice should always be sought POTENTIAL UNLOCKED... before taking any action based on the information provided. Every effort has been made to ensure that the information in this ON THE BIGGEST STAGE guide is correct at the time of publication. The views expressed in this guide are those of the authors. The publishers and IN BUSINESS authors stress that this publication does not purport to provide investment advice; nor do they accept responsibility for any errors or omissions contained herein. Tableau Software (NYSE: DATA) The NYSE IPO Guide, Second Edition, contains summary information about legal and regulatory aspects of the IPO process When a company goes public on the NYSE, it is joining the premier global exchange and beginning a and is current as of the date of its initial publication (August 16, 2013). Although partnership that will continue far beyond the opening trade. the NYSE IPO Guide may be revised and updated at some time in the future, the Opportunities only offered by a NYSE listing: NYSE does not have a duty to update the information contained in the NYSE IPO Unique market model — light-speed technologies enhanced by human judgment. Guide, and the NYSE will not be liable for The deepest pools of liquidity. any failure to update such information. The NYSE makes no representation as Unmatched brand exposure providing global visibility, and to the completeness or accuracy of any An unparalleled network of the world’s leading companies. information contained in the NYSE IPO Guide. It is your responsibility to verify any information contained in the NYSE IPO Unlocking the World’s Potential. NYSEBigStage.com Guide before relying upon it.
83458_ifc_ibc_ptg01_hires.indd 1 19/08/13 7:46 PM NEW YORK STOCK EXCHANGE IPO Guide, Second Edition
NYSE IPO Guide
For an electronic version of the NYSE IPO Guide, please go to: www.nyx.com/ipo-guide
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