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Preparing to go public
• Stockholder action provisions—The
company can improve its defensive
posture by regulating the methods
by which a hostile bidder can call
for and obtain a stockholder vote on
director elections or other proposals
that may facilitate a takeover. Charter
and bylaw provisions can be used to
limit the ability of the hostile bidder
to call special meetings or bypass the
meeting requirement altogether by
the use of a written consent of the
stockholders. The company may also
wish to consider provisions requiring
stockholders to give adequate advance
notice and supply information
before their proposals are added to
the agenda of a regular or special
meeting.
• Supermajority voting—“Supermajority”
voting requirements may be imposed
for mergers and other specified
transactions between the company and
an “interested stockholder,” which may
be defined, for example, as a holder
of more than 10% of the outstanding
shares. Thus, an 80% vote might be
required to approve an acquisition of
the company by a major stockholder,
instead of the more typical 50% or
66%. A fair price condition may be
incorporated into the supermajority
provision, requiring a supermajority
vote, for example, when an interested
stockholder proposes a merger at any
price less than the highest price paid
for any share of company stock by the
interested stockholder.
• Business combinations with
interested stockholders—For example,
under Delaware law, an “interested
stockholder” (generally a holder of
15% or more of the voting stock) is
generally prohibited from engaging
in a business combination with
the company for three years after
the holder became an interested
stockholder. Although a Delaware
corporation can expressly elect in
its charter not to be subject to this
“freeze-out” statute, it can be an
effective antitakeover defense.
• Issuance of shares—The company
should ensure that it has a sufficient
amount of common and “blank check”
preferred stock authorized under its
charter. In many jurisdictions, the
company may include in its authorized
and unissued stock a certain amount
of undesignated preferred shares.
The board will be authorized to
issue preferred shares in one or more
series and to determine and fix the
designation, voting power, preference
and rights of each series. The existence
of blank check preferred stock allows
the board to issue preferred stock with
supervoting, special approval, dividend
or other rights or preferences without
a stockholder vote. However, NYSE
rules generally require stockholder
approval by a majority of votes cast
before a company issues shares
representing 20% or more of the
outstanding voting power outside
a public offering. Also, if there is a
poison pill, the company should make
sure it has sufficient authorized shares
for the shares to be issued if the pill is
triggered.
• Change of control provisions—A
common feature of loan agreements
and other significant contracts is
a provision restricting a change of
control of the company, resulting
in an event of default if breached.
These provisions protect the lender
or other contracting party, but
reduce the company’s flexibility,
particularly in restructuring efforts
or friendly takeover transactions,
as well as making the company less
attractive to a potential acquirer.
In 2009, the Delaware Chancery
Court raised questions regarding
the interpretation and validity of
certain of these provisions, as a
contractual term that could affect
the stockholder franchise. The
company should carefully consider
these provisions in its existing and
proposed agreements, and if they
cannot be eliminated, they should be
approved at the board level.
Corporate housekeeping: In anticipation of
going public, the company should review
and clean up documents with provisions
that are intended for a private company
(e.g., charter documents and stockholder
agreements). Similarly, it is important for
the company to review corporate minutes
and other records to confirm that corporate
formalities have been observed and
properly documented, including for the
issuance of stock of the company and its
subsidiaries.
2.4 Providing for employees
Cleary Gottlieb Steen & Hamilton LLP
In preparing for an IPO, the company
should review all of its employee
compensation and benefits arrangements
in light of the opportunities and
responsibilities resulting from the IPO.
The major opportunity is the ability to
compensate employees with publicly
traded stock. The new responsibilities
include becoming subject to tax and
securities laws that did not previously
apply, including Section 162(m) of the
Internal Revenue Code of 1986 (the
Code), rules for compensation disclosure
in annual reports and proxy statements
and Section 16 of the Exchange Act. This
chapter describes these topics for a U.S.
domestic company that does not qualify as
an emerging growth company. For certain
differences applicable to emerging growth
companies, see Chapter 4, and to foreign
private issuers, see Chapter 9.
The company’s compensation
committee might consider hiring a
compensation consultant to help structure
new arrangements in light of the IPO.
As required by the Dodd-Frank Act,
stock exchange listing rules require the
compensation committee of a post-
IPO company to have the authority and
adequate funding to retain or obtain
advice from compensation advisers,
including compensation consultants
and independent legal counsel, and
to be directly and solely responsible
for overseeing them. In addition, the
compensation committee is required
to consider specific factors regarding
the independence of its advisers but
may nevertheless receive advice from
an adviser who is not considered to be
independent based on those factors.
Whether or not it retains advisers, the
compensation committee is required to
exercise its own judgment in fulfillment of
its fiduciary duties.
(a) Equity compensation
Incentive plans: Having publicly
traded stock opens up new avenues for
compensating employees of the company.
26 NYSE IPO Guide