Takeover Defenses in <strong>IPO</strong> Companies13of the outstanding shares—commonly10% to 40%—to call special meetings.Companies that allow stockholders tocall special meetings, however, oftenauthorize the board to set the preciselocation and date of such meetingsand sometimes preclude stockholdersfrom calling for a special meetingclose in time to an annual meeting.Advance Notice RequirementsShould stockholders be required tonotify the company in advance ofdirector nominations or other mattersthat the stockholders would like to actupon at a stockholders’ meeting?Advance notice requirements providethat stockholders at a meeting mayonly consider and act upon directornominations or other proposals thathave been properly brought before themeeting. In order to be properly brought,a nomination or proposal must bespecified in the notice of meeting andmust be brought before the meetingby or at the direction of the board, orby a stockholder who has deliveredtimely written notice to the company.These provisions could have the effectof delaying until the next stockholdermeeting actions that are favored by theholders of a majority of the company’sstock. Investors generally do not object toadvance notice requirements, so long asthe advance notice period is not undulylong. Advance notice periods of 90 to 120days prior to the anniversary of the prioryear’s annual meeting date are common.State Anti-Takeover LawsShould the company opt out of anystate anti-takeover laws to which itis subject, such as Section 203 of theDelaware corporation statute?Section 203 prevents a publicly heldDelaware corporation from engagingin a “business combination” with any“interested stockholder” for three yearsfollowing the time that the person becamean interested stockholder, unless, amongother exceptions, the interested stockholderattained such status with the approval ofthe board. A business combination includesa merger or consolidation involvingthe interested stockholder and the saleThe following table sets forth the percentages of all <strong>IPO</strong> companies in 2007 and 2008 that adopted specifiedtypes of takeover defenses prior to or in conjunction with going public:Takeover Defenseof more than 10% of the company’s assets.In general, an interested stockholder isany entity or person beneficially owning15% or more of the company’s stock andany entity or person affiliated with orcontrolling, or controlled by, such entityor person. A public company incorporatedin Delaware is automatically subjectto Section 203 unless it opts out in itsoriginal corporate charter or pursuantto a subsequent charter or bylawamendment approved by stockholders.Blank Check Preferred StockShould the board be authorizedto designate the terms of series ofpreferred stock without obtainingstockholder approval?When “blank check” preferred stockis authorized, the board has the rightto issue shares of preferred stock in oneor more series without stockholderapproval under state corporate law, andhas the discretion to determine the rightsand preferences of each such series ofpreferred stock. Authorizing the boardto issue preferred stock and determineits rights and preferences has the effectof eliminating delays associated witha stockholder vote on specific issuances.Having blank check preferred stock inplace often facilitates the adoption of astockholder rights plan, financings andthe negotiation of strategic alliances.The issuance of preferred stock, however,can be used as an anti-takeover device.Stockholder Rights PlansPercentage of<strong>IPO</strong> CompaniesClassified board 60%Supermajority voting requirements to approve mergers or changecorporate charter and bylawsProhibition of stockholders’ right to act by written consent 69%Limitation of stockholders’ ability to call special meetings 74%Advance notice provisions 80%Section 203 of the Delaware corporation statute (chose not to opt out) 90%Blank check preferred stock 76%Stockholder rights plan (“poison pill”) 6%53%Should the company establish a poison pill?A stockholder rights plan, often referredto as a “poison pill,” is a contractual rightthat allows all stockholders—other thana stockholder who acquires more thana specified percentage of the company’sstock—to purchase additional securitiesof the company at a specified price. Ifsomeone triggers the rights plan, thatperson’s economic and voting power willbe significantly diluted. Supporters believerights plans are an important planningand strategic device because they givethe board time to evaluate unsolicitedoffers and to consider alternatives, andcan deter abusive acquisition techniquessuch as partial offers and “two-tier”tender offers. Opponents view rightsplans, which can generally be adoptedby board action at any time and withoutstockholder approval, as an entrenchmentdevice and believe that rights plansimproperly give the board, rather thanstockholders, the power to decide whetherand on what terms the company is to besold. When combined with a classifiedboard, rights plans make an unfriendlytakeover particularly difficult.
14PIPE and Rule 144A Market Review and OutlookFollowing an <strong>IPO</strong>, a public companymay raise additional equity capitalthrough follow-on public offerings, orthrough private placements known as PIPEor Rule 144A placements. Activity in 2008for both types of private placementsreflected broader market trends—PIPEdeal volume dropped by one-third, butdollar volume and average deal size morethan doubled to record highs, while thenumber and dollar volume of Rule 144Aplacements fell to their lowest levels inat least seven years. The flexibility of PIPEand Rule 144A placements in uncertainmarket conditions should remainattractive to many companies in <strong>2009</strong>.PIPE Financings – 2001 to 2008# of deals $ in billions1,6411,2941,3261,05422.516.6 18.4 18.62001200220032004Includes closed deals only.Source: PrivateRaise1,584200523.01,874200638.71,978200771.11,3112008121.1PIPE FinancingsThe composition of the PIPE (PrivateInvestment in Public Equity) marketchanged significantly in 2008 inresponse to broader trends in the capitalmarkets. PIPE deal volume dropped by34% from 2007, but dollar volume andaverage deal size soared to record highsas beleaguered financial institutionssought large capital infusions.Rule 144A Equity Placements – 2001 to 2008# of deals $ in billions24672.967.316714135.477 25.38124.811049.212354.34815.4The number of PIPE deals (includingregistered direct offerings) droppedfrom a record 1,978 in 2007 to 1,311in 2008. Dollar volume, however, surgedfrom $71.7 billion to a new high of $121.1billion—nearly eight times the size of theRule 144A market. Multi-billion-dollarPIPE financings in the financial servicessector pushed average deal size to a record$92.4 million, two-and-a-half times theprior record of $36.2 million set in 2007.In 2008, there were 19 PIPE financingsthat raised more than $1 billion each,compared to 11 billion-dollar dealsin 2007. The largest PIPE financingin 2008 raised $12.5 billion, and the top10 deals—all by financial institutions—collectively raised more than $71 billion.Companies with market capitalizationsunder $250 million were responsiblefor 84% of all PIPE financings in 2008,down slightly from 85% in 2007, whilecompanies with market caps below$50 million accounted for 52% of allPIPEs—up from 49% in the prior year.2001Includes closed deals only.Source: PrivateRaise200220032004Healthcare was the most active PIPEsector in 2008, with 25% of all deals and anaverage deal size of $14.7 million, followedby technology (18% and $13.7 million)and energy (12% and $41.4 million).Financial services companies contributed12% of the year’s deals and a whopping76% of the gross proceeds, resulting inan average deal size of $672.9 million.Of all PIPE financings in 2008, 52%were common stock (average deal sizeof $50.7 million). The next-largestsegments were convertible debt (21% ofall PIPEs and $101.1 million average size)and convertible preferred stock (13%of all PIPEs and $319.8 million averagesize). This deal breakdown reflectsa shift from common stock deals toconvertible deals that offer more downsideprotection in uncertain conditions.Fixed-price deals represented 89% of allPIPE deals in 2008, up slightly from 88%20052006in 2007. The percentage of deals withvariable pricing was unchanged at 6%.The average discount from market infixed-price common stock PIPE deals was2% in 2008. The percentage of deals thatincluded warrants was 51%, the averagewarrant exercise premium was 36%, andthe average warrant coverage was 71%.Among fixed-price convertible debtPIPE deals in 2008, the average conversionpremium was 38%, the average term wasthree years, and the average interest ratewas 8.8%. Warrants were included in65% of the deals—the average warrantexercise premium was 21% and theaverage warrant coverage was 81%.Rule 144A Placements20072008The Rule 144A market for equity securities(including convertible debt) contractedsharply in 2008. The number of placements