IPO Database Sample: Antitakeover Defenses Memorandum (“Shark Repellants”) Memorandum Confidential Attorney-Client Privilege TO: Board of Directors FROM: Bingham McCutchen LLP RE: “Shark Repellents” -- Possible Defenses Against Certain Abuses Introduction This memorandum considers a variety of measures that, as part of preparation for a possible public offering, [Company] (the “Company”) might implement to enhance the ability of the Board of Directors of the Company (the “Board”) to resist possibly abusive takeover attempts, possibly forestalling a takeover at a time when the Board believes that it is not in the best interest of the stockholders, and in any event enhancing the ability of the Board to assure that stockholders receive a fair price for their shares in the event of a takeover. One of the obvious disadvantages of going public is that it enables a potentially unfriendly third party to accumulate a substantial equity position. We recognize that the Company is not likely to be confronted with a takeover threat in the period immediately following an initial public offering, because the majority or a controlling portion of the Company’s stock would still presumably be in “friendly hands.” It is nevertheless possible that at some point in the future a controlling stake in the Company could be acquired on the public market. Furthermore, because many of the measures described in this memorandum require stockholder approval, or, if only requiring Board approval, may subject the Board to close stockholder scrutiny, it would be much easier for the Company to consider and implement, if desirable, these defensive measures now while it is still private rather than after an initial public offering and in the context of reacting to some future event. Accordingly, in many cases, companies about to go public choose at that time to consider and adopt a program of defensive measures comprising some (though generally not all) of the measures described below prior to the IPO. On the other hand, the purpose of this memorandum is not to recommend the adoption of any specific defensive measures. Rather, it summarizes types of defensive measures that are employed by various public corporations. The defensive measures described below include certain antitakeover statutory provisions and certain charter and by-law provisions and other corporate actions (so-called “shark __________________________ © 2009 Bingham McCutchen LLP One Federal Street, Boston, MA 02110 Attorney Advertising This communication is being circulated to Bingham McCutchen LLP’s clients and friends. This document does not constitute legal advice and it is not intended to provide legal advice addressed to a particular situation. The information has not been updated since last use and may be required to be updated and customized for particular facts and circumstances. Prior results do not guarantee a similar outcome. A/73218225.1 Board of Directors Page 2 repellents”) which may make a hostile takeover more difficult. These measures are generally intended to give the Board more leverage in the event a takeover proposal is made so as to better enable the Board to protect the interests of the Company and its stockholders. The case law (at least in Delaware where the Company is incorporated) has generally developed in support of the use by management of all reasonable means to thwart an offer which the directors, in the proper exercise of their business judgment, believe is not in the best interest of stockholders. The Company’s IPO underwriters may have views as to the expected impact of certain defensive measures on the offering. Nonetheless, the decision whether to adopt any of the measures summarized below is ultimately one for the Company and the Board to make. We should note, however, the “corporate governance ratings,” assigned by a number of organizations such as Institutional Shareholder Services (ISS), which carry some weight with at least some institutional investors. Adoption of virtually any of these “shark-repellant” measures will lower the Company’s rating and could, in any case, cause some institutional shareholders to vote against management proposals, including even director nominations. Brief Background The measures described below fall into different categories -- some defenses would be conferred automatically upon the Company by law (unless the Company affirmatively “opted out” of the particular provision before the closing of its IPO); most would require amendments to the Company’s charter and by-laws approved by the present stockholders; while others (particularly adoption of a so-called “poison pill” rights plan or issuance of “blank check” preferred stock) could be implemented even after an IPO by the Board, without stockholder approval (although the taking of such an action by the Board once an unsolicited offer has emerged or appears imminent might be successfully challenged in the courts). At your request, we can provide you with actual examples of the documentation for any of these measures, as well as summaries from prospectuses of other companies. It would be customary (and we recommend) the adoption of a new Amended and Restated Certificate of Incorporation (a “New Amended and Restated Certificate of Incorporation”), which could be filed and/or take effect just prior to the closing of the IPO, to implement any changes the Company decides to make as well as clean up the record of any prior amendments. __________________________ © 2009 Bingham McCutchen LLP One Federal Street, Boston, MA 02110 Attorney Advertising This communication is being circulated to Bingham McCutchen LLP’s clients and friends. This document does not constitute legal advice and it is not intended to provide legal advice addressed to a particular situation. The information has not been updated since last use and may be required to be updated and customized for particular facts and circumstances. Prior results do not guarantee a similar outcome. A/73218225.1 Board of Directors Page 3 1. Classified Board of Directors. Description. The Board would be divided into three classes of approximately equal size with one class being elected each year. Directors can be removed by the stockholders only for “cause” and only the directors can change the size of the Board or fill resulting vacancies. This would require a stockholder-approved New Amended and Restated Certificate of Incorporation, and that amendment itself would be protected by a supermajority requirement against repeal or further amendment. Advantages. Board classification limits the ability of stockholders to effect an immediate change in control of the corporation. Such control would be important in the event of a proxy contest by an insurgent group, especially to maintain any other structural defenses (such as a rights plan) that the Company has in place. As an example, Lotus Development Corp. lacked a staggered board, which meant that the holders of a bare majority of the Lotus common shares could have removed the entire Lotus board without cause in about 60 days (because Lotus had not adopted provisions to limit Delaware’s “consent vote” alternative to stockholder meetings, see below). This structure contributed to Lotus’ quick capitulation to an unsolicited bid from IBM. Limitations. From an antitakeover point of view, the classified Board may provide less protection than it appears to. If an offeror can obtain the votes of a majority of the target company’s stock actually voting at a meeting, and is thus in a position to elect one-third of a classified Board at the next annual meeting, the offeror theoretically will not be in control because the carryover Directors will remain in two-thirds of the Board positions. However, it is not uncommon for the carryover Directors to resign their positions once it is clear that the battle for control of the majority of the voting stock has been lost. Resignations result both from concerns as to potential liability in continuing to serve on a Board divided against itself and the fact that there may be little of substance to be gained in continuing the fight. To the extent that this fact is perceived by potential offerors, the deterrent effect of the classified Board is weakened. In addition, the delay in achieving control caused by even a stubborn classified Board will not usually be fatal to a well-financed offeror, although in at least one well-known instance it did prove fatal to such an offeror. __________________________ © 2009 Bingham McCutchen LLP One Federal Street, Boston, MA 02110 Attorney Advertising This communication is being circulated to Bingham McCutchen LLP’s clients and friends. This document does not constitute legal advice and it is not intended to provide legal advice addressed to a particular situation. The information has not been updated since last use and may be required to be updated and customized for particular facts and circumstances. Prior results do not guarantee a similar outcome. A/73218225.1 Board of Directors Page 4 Nevertheless, classified Boards are often established by companies comparable to the Company preceding an IPO.1 2. Limitation on Nominations and Call of Stockholder Meetings; Unanimous Written Consents. Description. Only the Board of Directors, the Chairman of the Board, Chief Executive Officer, specified other officers and/or a very large percentage of stockholders are authorized to call a special meeting of stockholders. The foregoing provisions can be implemented through stockholder-approved amendments to the by- laws. Another