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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
Preparing to go public In connection with its IPO, the company should carefully consider putting in place a new equity incentive compensation plan or reviewing and revising any existing plans in light of its status as a public company. Any post-IPO plan should allow the company sufficient flexibility in terms of types of awards and their terms and conditions. The plan should state the aggregate number of shares available to be issued under it. The company needs to consider carefully shareholder dilution concerns and estimated burn rates when determining this number. The company may also wish to hire a firm specializing in stock plan administration to handle the logistics of its equity compensation program. Any adoption of new plans or changes to existing ones should occur prior to completion of the IPO and, if possible, should be approved by the shareholders of the private company. A plan that has been adopted prior to the IPO may take advantage of grandfather provisions under stock exchange listing rules, enabling it to grant all of the stock reserved under the plan without seeking public shareholder approval of the plan until it either runs out of shares or is materially modified. In addition, if a plan that grants employees tax-favorable “incentive stock options” pursuant to Section 422 of the Code is adopted and approved by the shareholders of the company prior to the IPO, it will not require further approval by shareholders after the IPO until the earlier of 10 years from the adoption date or any amendment of the plan to add additional shares or change eligibility for participation. Pre-IPO plan adoption also provides an advantage under Section 162(m) of the Code, as discussed below. If the company has previously granted compensation to its employees in the form of equity awards pursuant to exemptions from registration under the Securities Act and Exchange Act, it should review the prior grants to ensure that no action is required (or that any action that may be required is taken) by the company to adjust the terms of the awards as may be necessary or appropriate. For example, if the pre-IPO company is a limited liability company, the awards should be amended to refer to common stock, with any further adjustments necessary to maintain economic equivalency. If pre-IPO awards were subject to conditions common to private company equity (e.g., a repurchase right upon termination of employment), the company should consider deleting those provisions if they do not cease automatically in accordance with their terms, keeping in mind potential tax and accounting issues. The company should also carefully review its equity valuation methods with respect to pre-IPO grants, both to confirm proper accounting treatment and, with respect to stock options or stock appreciation rights, to confirm that they were granted with exercise prices equal to (or greater than) fair market value in light of Section 409A and Section 422 of the Code. The company may wish to make equity grants in connection with the IPO to its executives and other employees. These grants would permit the employees to participate in the increase in value of the company following the IPO. The company will need to determine the amount and the type of equity award and may be required to disclose the aggregate amounts and also specific amounts with respect to its “named executive officers”—its principal executive officer, principal financial officer and the three other most highly compensated executive officers (and up to two former executive officers) whose total compensation for the last fiscal year exceeded $100,000— in the registration statement, as well as a description of the plan. Other plans: The company could consider adopting a stock purchase plan permitting employees to purchase stock from the company through payroll deductions either at the market price or at a discount, although this is not as common in connection with an IPO as equity incentive plans. Stock purchase plans may be designed to allow for employee-favorable tax treatment under Section 423 of the Code. Adopting a stock purchase plan prior to an IPO provides grandfather benefits under stock exchange listing rules and Section 423 of the Code similar to those for equity incentive plans. In addition, if the company has a defined contribution plan for its employees (e.g., a 401(k) plan), following the IPO, the company could consider making company contributions in stock or adding a company stock fund as an investment option; but either action must be very carefully reviewed prior to implementation. Form S-8: The company may register the sale of stock to employees, directors and certain independent contractors under a compensatory plan on a short-form registration statement—Form S-8. Form S-8 incorporates by reference company information from Exchange Act filings. The prospectus delivered to participants need not be filed with the SEC and primarily addresses the terms of the plan. (b) Section 162(m) of the Internal Revenue Code Following the IPO, the company will be subject to Section 162(m) of the Code. Under Section 162(m), the company may not take a deduction in its U.S. taxes for compensation paid to a “covered employee” to the extent it exceeds $1 million for the taxable year (subject to certain exceptions). Covered employees include the CEO and the three most highly compensated executive officers of the company (other than the CEO and the CFO) on the last day of the taxable year, as determined in accordance with the Exchange Act’s executive compensation disclosure rules. Transition relief: Section 162(m) provides transition relief for a company that becomes subject to Section 162(m) through an IPO (so long as such company was not previously part of an affiliated group that included a company with common stock registered under the Exchange Act). If compensation (cash or stock) is paid by the company pursuant to a plan or agreement that existed prior to the company becoming publicly held and was disclosed in the IPO prospectus “in compliance with all applicable securities law,” the compensation is not subject to the deduction limit until the earliest of the following: • expiration of the plan or agreement; • material modification of the plan or agreement; • issuance of all employer stock and other compensation allocated under the plan or agreement; or • the first shareholders’ meeting at which directors are to be elected after the end of the third calendar year following the year of the IPO. NYSE IPO Guide 27
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8 Managing risk NYSE IPO Guide 83
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9 Foreign private issuers NYSE IPO
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Foreign private issuers individual
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Foreign private issuers Level III A
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Appendices NYSE IPO Guide 109
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Appendices Appendix VI: Summary of
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Contributor profiles NYSE IPO Guide
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Contributor profiles (SEC) register
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Contributor profiles The Children
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Contributor profiles KPMG 345 Park
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Contributor profiles Morrow & Co.,
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