From PLI’s Treatise Initial Public Offerings: A Practical Guide to Going Public #19784 16 PREPACKAGED BANKRUPTCY AND PREARRANGED BANKRUPTCY PROCESS Deryck Palmer Jessica Fink Cadwalader, Wickersham & Taft LLP Disclaimers and Suggested References: The outline that follows provides a general overview of retiree medical benefit VEBAs, with specific focus on the VEBAs recently proposed by the Big Three U.S. automakers. The author is by no means an expert on medical benefit plans or VEBAs. Nor can the author claim special insight into any aspect of the Big Three VEBAs. The information in this outline is gleaned entirely from public sources. For two very practical references on retiree medical and VEBAs see: (1) the ABA-JCEB teleconference “Shifting Retiree Health Benefits from Employers to VEBAs” (December 6, 2007—available in archived teleconf format or CD), in which Nell Hennessey, Douglas Greenfield, Karen Handorf and Vicki Hood do a terrific job describing the background on union retiree medical and the Big Three VEBAs and (2) Jones Day Commentary—Who Killed Yard-Man (Apr. 2007), a Jones Day client newsletter available on-line which provides an excellent summary Chapter 9 Assembling the IPO Team § 9:1 Introduction § 9:2 Management and Employees § 9:2.1 CEO and CFO § 9:2.2 New Positions [A] Controller [B] Additional Finance and Accounting Staff [C] General Counsel [D] Investor Relations Personnel [E] Stock Plan Administrator [F] Internal Auditor [G] Webmaster § 9:3 Board of Directors § 9:3.1 Board Composition § 9:3.2 Compensation for Outside Directors § 9:4 Company Counsel § 9:4.1 Selection Criteria § 9:4.2 Sample Questions/Requests for Company Counsel Candidates § 9:5 Independent Accountants § 9:5.1 Big 4 or Not? § 9:5.2 Switching Auditors Prior to an IPO § 9:5.3 Sample Questions/Requests for Independent Accountant Candidates § 9:6 Managing Underwriters § 9:6.1 Identifying Possible Candidates § 9:6.2 Bases for Evaluating Potential Managing Underwriters [A] Track Record [B] Team Members [C] Commitment to the Company [D] Distribution Reach and Mix [E] Aftermarket Support 9–1 § 9:1 INITIAL PUBLIC OFFERINGS [F] Prestige and Reputation [G] Client Satisfaction [H] Economic Factors [I] Financial Strength and Stability [J] Other Capabilities § 9:6.3 The Selection Process [A] Narrowing the Field [B] Designating Lead Managing Underwriters [C] Selecting Co-Managers [D] Being Evaluated by the Underwriters [E] Confidentiality Agreements § 9:6.4 Sample Questions/Requests for Managing Underwriter Candidates § 9:7 Underwriters’ Counsel § 9:8 Consultants and Advisors § 9:8.1 Compensation Consultant § 9:8.2 Investor Relations Firm § 9:8.3 Accounting Consultant § 9:8.4 IPO Consultant § 9:9 Outside Vendors § 9:9.1 Financial Printer § 9:9.2 Transfer Agent § 9:9.3 Virtual Data Room Provider § 9:9.4 Electronic Road Show Host § 9:9.5 Banknote Company § 9:9.6 Option Administrator § 9:10 Changes in the IPO Team § 9:1 Introduction As part of its IPO preparations, the company must assemble the group of employees, board members, outside professionals, and advisors who are needed for the IPO journey and subsequent life as a public company. In addition to company management and new hires with specific skill sets, the IPO team will include company counsel, independent accountants, managing underwriters, underwriters’ counsel, other advisors, and various vendors. This chapter describes the principal members of the IPO team, in the approximate order in which they should be in place, and suggests selection criteria for each. In assembling its IPO team, the company should always remember that there is no substitute for experience when the stakes are high and time is short—hallmarks of every IPO.1 1. The roles of the key IPO participants are discussed in chapter 10. 9–2 Assembling the IPO Team § 9:2.2 § 9:2 Management and Employees § 9:2.1 CEO and CFO The CEO and CFO are essential to the success of the company’s IPO. If the incumbents do not possess the combination of experience, knowledge, communications skills, vision, and integrity needed to lead the company through the IPO process, woo investors on the road show, and tend to public company obligations after the closing—all while managing the company’s operations—the board will need to consider deferring the IPO or changing the company’s leadership. The skills needed to manage a company from formation through private funding and expansion are very different from those required for the IPO process and public company life; many entrepreneur-CEOs do not fit both roles equally well. Similarly, it is not uncommon for a company going public to seek a more seasoned CFO, even when the existing CFO has been more than adequate for the company’s needs while privately held. § 9:2.2 New Positions On top of normal hiring to meet its growing business needs, most IPO companies need to add other capabilities. [A] Controller The company should have a controller on board before completing the IPO, and preferably six to twelve months before the organizational meeting—particularly if the CFO has more of a finance than an accounting background. The controller should be well grounded in accounting and public company reporting. Many controllers have prior work experience in public accounting firms, although the company must be mindful of the restrictions on hiring out of their own independent accounting firm. Familiarity with industry-specific accounting issues is very helpful. [B] Additional Finance and Accounting Staff Additional finance and accounting employees will be needed to assist with various public company responsibilities, including prepara- tion for section 404 of the Sarbanes-Oxley Act and public reporting matters. The size and timing of these staffing needs vary among companies, but generally some new employees are hired during the IPO process and others are added as the company’s needs develop over time. Prior experience with their anticipated responsibilities is very important for these hires, since few IPO companies can afford the luxury of on-the-job training for new employees. 9–3 § 9:2.2 INITIAL PUBLIC OFFERINGS [C] General Counsel A general counsel can make significant contributions to the IPO process, particularly if hired at least six to twelve months before the organizational meeting—in time to become familiar with the com- pany’s business, contracts, and corporate affairs, and to participate with outside company counsel in public company preparations. Even if the company does not intend to rely on its general counsel for securities related work—which has become increasingly challenging with the growing complexity of and rapid change in securities law—it is always desirable, and sometimes necessary, for the general counsel to have at least some public company experience. Industry familiarity is helpful, and prior experience as a general counsel or senior in-house lawyer is also useful. If the general counsel does not have public company or securities experience, the company may need to add a securities lawyer to its legal staff; many companies also hire a paralegal at this point. [D] Investor Relations Personnel Although some private companies employ public relations person- nel, most private companies rely on the CEO or CFO to handle any stockholder relations matters that come up. Following an IPO, additional resources must be devoted to investor relations. Some companies combine internal staff with professional advisors, while other companies rely entirely on outside firms. (For better or worse, the CEO and CFO usually must master many investor relations skills to survive in a public company.) By the time the IPO is closed, the company should have plans in place to fill this function. Key attributes here include professional experience, knowledge of the company, and familiarity with its industry. [E] Stock Plan Administrator In most private companies, there is no formal stock plan function. Stock and option records are usually maintained by the CFO or counsel, and agreements are generated by counsel, or by the CFO using forms supplied by counsel. An IPO company must hire a qualified transfer agent to handle stock transfers and record keeping. Although some stock plan functions also can be outsourced, most public companies have a need for an internal stock plan administrator—who usually resides within the human resources or finance groups—because of the complexity of public company stock plans and the need for timely and accurate stock option documentation. Many of the option backdating problems that have come to light in public companies were caused by sloppy or incom- plete record keeping. 9–4 Assembling the IPO Team § 9:2.2 [F] Internal Auditor The basic role of an internal auditor is to provide an objective evaluation of the company’s internal controls, identify actual and potential problems, and recommend corrective action. The internal auditor may also monitor compliance with policies, procedures, and regulations, assess the efficiency of business processes, and perform other audit functions. Although the internal auditor is not an adjunct to the company’s independent accounting firm, the external auditor is permitted within professional guidelines to take the internal auditor’s findings into account when auditing the company’s financial state- ments or its ICFR. The internal auditor usually has a dual reporting relationship to the company’s management and audit committee. In some companies, the internal auditor is an employee, while other companies outsource this function to an accounting firm other than the company’s independent auditor. Although not required by SEC rules, the internal audit function can be an important component of a company’s overall system of financial and accounting controls. Few private companies have an internal auditor, but many companies establish this capability after going public.2 As with other finance and accounting personnel, an internal auditor—whether a company employee or an accounting firm to whom the function has been outsourced—should have public company experience and be familiar with the company and its industry.