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Todd [email protected]
PREPARING FOR IPO OR ACQUISITION: BEST
PRACTICES FOR IN-HOUSE COUNSEL
LICENSING EXECUTIVES SOCIETYLICENSING EXECUTIVES SOCIETY
MARCH 18, 2015MARCH 18, 2015
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The Usual Disclaimer
Disclaimer: Both these materials and any statements made as part of this presentation are intended for educational and general informational purposes only. Nothing in these materials or this presentation is intended as representation of or statements made on behalf of any of Mr. Alberstone’s current or former clients or employers. These materials and this presentation are not intended as, and do not constitute, legal advice, and should not be used or relied upon as legal advice. These materials and this presentation may not be accurate with respect to the current state of the law, which is subject to constant change and, even if accurate, may not be applicable in all circumstances. Nothing in these materials or this presentation is intended to create an attorney-client relationship.
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IPO Process1. SELECTION OF UNDERWRITERS AND ADVISORS2. ORGANIZE COMPANY, BOARD, CORP GOVERNANCE, WITH PUBLIC COMPANY
CONSIDERATIONS IN MIND3. ORGANIZATIONAL MEETING4. PREPARE PROSEPECTUS5. DUE DILIGENCE6. FILE PROSPECTUS AND REGISTRATION STATEMENT WITH SEC7. RESPOND TO SEC COMMENTS8. ROAD SHOW9. LIST ON STOCK EXCHANGE10. SEC DECLARATION THAT REGISTRATION STATEMENT IS “EFFECTIVE”11. PRICE AND CLOSE SALE OF COMPANY STOCK
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12-18 MONTHS OUT FROM ORGANIZATIONAL MEETING-- EQUITY AWARDS ISSUES-- DOCUMENT ORGANIZATION-- COMMUNICATIONS-- CFO DISCUSSION ITEMS-- INSURANCE-- IP STRATEGY-- LICENSING AND MATERIAL AGREEMENTS ISSUES-- LITIGATION RESPONSE RESOURCES
Overview of Preparation for IPO
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Overview of Preparation for IPO (continued)6-9 MONTHS IN ADVANCE OF ORGANIZATIONAL MEETING-- CFO DISCUSSION ITEMS-- STRUCTURAL ITEMS-- CORP GOVERNANCE, TRANSPARENCY, OVERSIGHT-- INVESTMENT BANK MATERIALS-- ONGOING M&A ACTIVITY
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Overview of Preparation for IPO (continued)2-3 MONTHS OUT FROM ORGANIZATIONAL MEETING-- CEO AND SENIOR MANAGEMENT DISCUSSION ITEMS-- EXTERNAL COMMUNICATIONS PROCESSES AND ISSUES-- DOCUMENT ORGANIZATION-- DRAFTING TEAM-- S-1 DRAFT
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12-18 MONTHS OUT – SELECTED TOPICSEQUITY AWARDS ISSUES
-- Equity awards should be granted at FMV to avoid accounting charges and IRS issues (Section 409 of IRC). Support valuation with third party stock valuation reports. Avoid granting awards while new valuation report is in progress, since reports typically dated 1-2 months before delivery and can lead to mismatch between report and valuation sought to be supported.
-- Document ongoing compliance with securities law governing awards. See Rule 701 of ‘33 Act which can impose limits on aggregate value and create disclosure obligations. Note: registration statement filed for IPO will have to identify securities law exemption relied on for awards made within three years preceding IPO and documentation for awards may be subject to SEC scrutiny.
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12-18 MONTHS OUT – SELECTED TOPICSDOCUMENT ORGANIZATION AT THIS STAGE
Ensure adequate company records system in place for operating agreements, licenses, investment agreements, equity award documentation and other key records. Review typical underwriters due diligence list to understand scope of information that will be requested during diligence process. Generally, due diligence request will request records for past three fiscal years plus any interim period.
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12-18 MONTHS OUT – SELECTED TOPICSCOMMUNICATIONSEnsure process in place for review and approval of all external communications. Though the strict requirements during the IPO process are not yet necessary, in-house counsel should be familiar and be gearing up with those in mind.Encourage senior management to evaluate corporate marketing and public relations efforts with IPO in mind, and plan to implement any significant new campaigns or efforts before the IPO process has begun. Avoid gun-jumping. Timing of new marketing should not be so close to IPO to suggest that it is intended to support the IPO.Clear track record of ongoing, comparable public relations and marketing reports can reduce risk.No discussions of potential IPO plans with reports, public forums, etc. Mentioning IPO publicly can preclude safe harbors later.
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12-18 MONTHS OUT – SELECTED TOPICSCFO DISCUSSION ITEMS-- Reporting structure and staffing in Finance; plans for staff necessary for public company functioning.-- Review of internal controls re financial reporting. Consider outside consultant to assist.-- Forecasting process – both for IPO (underwriters’ valuation) and post-IPO (forward looking guidance in earnings calls and filings).-- Retain or change outside accountants/auditors?
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12-18 MONTHS OUT – SELECTED TOPICSINSURANCE
D&O insurance will have to be in place before IPO.Consider other appropriate insurance.
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12-18 MONTHS OUT – SELECTED TOPICSIP STRATEGY
-- Patent disclosure and evaluation process in place.-- Defensive/offensive considerations.-- IP protection strategy and cost-effective approach, including all forms of IP.
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12-18 MONTHS OUT – SELECTED TOPICSPOLICIES RE LICENSING AND POTENTIALLY MATERIAL AGREEMENTS
Confidentiality and approval requirementsTerm, termination and renewalIndemnification (length, cap, and other exposure issues)Others?
(more below, with respect to M&A)
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12-18 MONTHS OUT – SELECTED TOPICS
LITIGATION RESPONSE TEAM?
(the effect of rumors and announcements)
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6-9 MONTHS OUT – SELECTED TOPICSCFO DISCUSSION ITEMS-- Quarterly “SAS 100” review [audit standards for non-public companies] Customary to include 6-8 reviewed quarters in IPO prospectus. -- Any accounting policies not appropriate for public company? Discussions with independent accounting firm on accounting policies?-- Any non-GAAP financial or operational metrics standard in the industry or unique to the company that will have to be presented to investors? Can create disclosure challenges later.-- Any acquisitions pending or completed that are large enough to trigger need to file separate audited financial statements of target?
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6-9 MONTHS OUT – SELECTED TOPICSSTRUCTURAL ITEMS-- Founder or investor that will continue to have significant stake and want special rights post-IPO?-- Board: Independent directors? Will any existing directors leave board pre- or post-IPO?-- Audit Committee: Any directors who are qualified to act as Audit Committee “financial expert”?-- Board Committee structure – must conform to particular exchange.-- Any outstanding loans or other arrangements with executive officers? (should be eliminated before filing registration statement).
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6-9 MONTHS OUT – SELECTED TOPICSCORP GOVERNANCE, TRANSPARENCY AND OVERSIGHTDraft, adopt corporate governance policies and procedures. SOX requirements and also exchange-specific requirements. Typically (NYSE):Audit Committee CharterComp Committee CharterNominating and Governance Committee CharterCode of Business Conduct and Ethics (may be industry specific)Corp Governance GuidelinesWhistleblower procedures (may or may not be required)Insider Trading Policy
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6-9 MONTHS OUT – SELECTED TOPICSCORP GOVERNANCE (CONTINUED) – BOARD STRUCTURE-- Majority of directors must be independent.-- Executive session (as part of Nominating and Governance or Comp) must be independent.-- Audit Committee must have “financial expert.”
-- Key Board Committees:-- Audit-- Compensation-- Nominating and Governance
Consider: (broader) Finance Committee; Quality and Regulatory; Conduct and Ethics (includes whistleblower oversight); others.
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6-9 MONTHS OUT – SELECTED TOPICSINVESTMENT BANK MATERIALS
-- Review formal pitch materials provided by investment banks.-- Provide relevant materials (including IPO timing and valuation information) to equity valuation firm. This information can affect valuation reports for equity awards.-- Pitch materials also useful source of industry info and other data during prep of registration statement and investor materials.
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6-9 MONTHS OUT – SELECTED TOPICSONGOING M&A ACTIVITY
Consider potential timing implications of any potential acquisition in process or anticipated. Can affect IPO disclosure, accounting and marketing issues.
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2-3 MONTHS OUT – SELECTED TOPICSCEO AND SENIOR MANAGEMENT DISCUSSIONS
-- Discuss and develop key messages about company they will want to include in prospectus (e.g., growth strategies, competitive advantages, market protections, IP, etc.).-- Review annual reports, IPO prospectuses, etc., of any competitors or other industry-relevant public companies re how they describe themselves and position their business to investors. -- Studies, data that may be relevant re market position, market opportunities, relative strength of company, company achievements.
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2-3 MONTHS OUT – SELECTED TOPICSEXTERNAL COMMUNICATIONS PROCESSES AND ISSUES
-- At this point, centralize approval process for all external corp. communications: press releases, website and blogs, social media and all other external communications. -- Communications policy should be updated for gun-jumping considerations. -- Advise all senior management on importance of conforming to gun-jumping guidelines.
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2-3 MONTHS OUT – SELECTED TOPICSDOCUMENT ORGANIZATION
-- Collect documents for data room. -- Identify material contracts that will need to be filed as exhibits to registration statement.
(i) Redaction and confidential treatment request?(ii) Third party approvals?
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2-3 MONTHS OUT – SELECTED TOPICS
DRAFTING TEAM
-- Identify and organize management and other personnel who will participate in drafting.-- Crucial that every member of drafting team understand company’s business.
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2-3 MONTHS OUT – SELECTED TOPICSBEGIN DRAFTING S-1
If confident that company will proceed with IPO, consider preparing initial draft registration statement on Form S-1 prior to Organizational Meeting to shorten group drafting process and ensure drafting process reflects management vision from the outset.
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Overview of Preparation for Acquisition
NDA – Special considerationsWORKING WITH BOARDENGAGING INVESTMENT BANK OR OTHER FINANCIAL ADVISORSDEALING WITH POTENTIAL CONFLICTSCONFIDENTIALITY WITHIN THE COMPANYORGANIZE DUE DILIGENCE MATERIALEVALUATE POTENTIAL ANTITRUST ISSUESPUBLIC COMPANY ISSUES
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PREPARATION FOR ACQUISITION – SELECTED TOPICSNDAs –
-- For public companies, should include standstill provisions (e.g., precluding purchasing acquisition target stock, proxy contest, etc.).-- “Don’t ask, don’t waive”? Precludes potential acquirer from taking listed actions AND from asking for waiver.-- Note: may create fiduciary complications under Delaware law by suppressing competing bids during no-shop period. Board should be apprised.-- Consider “firewall” protections within potential acquirer.
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PREPARATION FOR ACQUISITION – SELECTED TOPICSWORKING WITH BOARD
-- Gauge board interest early.-- Schedule Special Meeting to discuss potential acquisition.-- If going forward, keep board informed of all material developments through negotiation process.-- Informal communication with Chair and/or key committee chairs.
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PREPARATION FOR ACQUISITION – SELECTED TOPICSINVESTEMENT BANKS AND FINANCIAL ADVISORS-- Consider with board whether investment bank or other financial advisors advisable.-- They can: serve as de facto broker; negotiation liaison; smooth completion of transaction; provide assistance in evaluating economic terms and fairness opinion.-- Potential for conflict of interest based on success bonus (see Delaware or applicable state law).-- Engagement letter: note particularly success fee terms – nature, conditions, timing, tail, termination.
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PREPARATION FOR ACQUISITION – SELECTED TOPICSDEALING WITH POTENTIAL CONFLICTS-- Board should evaluate whether the transaction poses potential conflict of interest for members of board or management.-- Watch out for conflicts arising during course of transaction (e.g., members of management team discussing/accepting positions in acquiring company).-- If appropriate, counsel should encourage board to form special committee of disinterested directors to negotiate the transaction, and whether that committee needs separate financial and legal advisors.-- Virtually all acquisitions of public companies (and many private) result in litigation, and unaddressed conflicts present a weakness in defending a transaction in litigation.
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PREPARATION FOR ACQUISITION – SELECTED TOPICSCONFIDENTIALITY WITHIN COMPANY
-- Risks for any public company (acquirer or target).-- Risks even for entirely private company transactions. Premature disclosure of potential transaction can destabilize relationships with third parties, affect morale, lead to loss of important personnel, affect ongoing operations, etc.-- To avoid premature disclosure, create internal working group and restrict number of individuals within and outside company aware of transaction.
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PREPARATION FOR ACQUISITION – SELECTED TOPICSORGANIZE AND OBTAIN DUE DILIGENCE DATA AND DOCUMENTS
-- Start early to create data room (or at least collection of files in anticipation).-- Ideally, alert as few people as possible outside of the working group, which implies certain approaches.
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PREPARATION FOR ACQUISITION – SELECTED TOPICSEVALUATE POTENTIAL ANTITRUST ISSUES
-- If filing required under Hart-Scott-Rodino (“Size of Transaction” and “Size of Person” tests), file early to allow for 30 day evaluation period, and assess whether FTC or DOJ likely to scrutinize transaction. -- If transaction is likely to involve heightened level of review, engage antitrust counsel and economic expert early in the process.
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PREPARATION FOR ACQUISITION – SELECTED TOPICSSPECIAL CONSIDERATIONS FOR PUBLIC COMPANIES
-- Blackout period on insiders’ transactions during negotiations of deal (close trading window for all employees or just working group?).-- After transaction announced, FINRA and/or SEC may investigate.-- EXPECT: (i) investigation if stock moves prior to public announcement (ii) shareholder litigation (even if shareholders overwhelmingly approve).
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LICENSING ISSUES IN ANTICIPATION OF BEING ACQUIREDKey elements:-- Scope of License-- Exclusivity-- Term of license – and renewal terms-- Transfer and revocation-- Geographic scope-- Confidentiality and notice provisions-- Use/Media/Distribution limitations-- Indemnification – capped? -- Non-compete?
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