© 2006 holland & hart llp preparing the private company for a public offering susan oakes...

© 2006 Holland & Hart LLP© 2006 Holland & Hart LLP

Preparing the Private Preparing the Private CompanyCompany

for a Public Offeringfor a Public Offering

Susan OakesSusan OakesPartner, Holland & Hart Partner, Holland & Hart LLPLLP

June 15, 2006June 15, 2006


Pre-Offering Due Diligence and PreparationsPre-Offering Due Diligence and Preparations

Advantages to PreparednessAdvantages to Preparedness

TimingTiming– Future PR and Acquisition PlansFuture PR and Acquisition Plans– Mezzanine Financing Plans (integration Mezzanine Financing Plans (integration

issues)issues)– Choosing an Underwriter Choosing an Underwriter → → “in registration”“in registration”

Clean up “messes”Clean up “messes” Settle litigationSettle litigation Bring into compliance with Investment Bring into compliance with Investment

AgreementsAgreements



Review of Material Agreements

Employee/Severance AgreementsEmployee/Severance Agreements Stockholder, Registration, and Stockholder, Registration, and

Voting Agreements - Analyze Voting Agreements - Analyze rightsrights– Pricing needs for auto-conversion?Pricing needs for auto-conversion?– Selling stockholder issues?Selling stockholder issues?– Comply or waive?Comply or waive?

Other material contracts with Other material contracts with consent requirementsconsent requirements



Review of Review of Material Agreements (cont) Agreements (cont) Customer and strategic agreements Customer and strategic agreements

– Confidential treatment needed?Confidential treatment needed? Use of customer logos or case studiesUse of customer logos or case studies Employee Benefit PlansEmployee Benefit Plans

– ERISAERISA– Securities laws (e.g., 701 compliance – the Securities laws (e.g., 701 compliance – the

Google fiasco)Google fiasco)– Shares in Option Plan? Shares in Option Plan? – Adopt other Plans?Adopt other Plans?

Credit and loan agreementsCredit and loan agreements



Revising Articles and Bylaws

Types of Anti-Takeover Devices:Types of Anti-Takeover Devices:1.1. Undesignated (Blank check) preferred Undesignated (Blank check) preferred

stockstock

2.2. Classified BoardClassified Board

3.3. Elimination of cumulative votingElimination of cumulative voting

4.4. Poison Pill plansPoison Pill plans

5.5. Dual class stock structure – one with Dual class stock structure – one with super-voting rightssuper-voting rights

6.6. Application of state anti-takeover Application of state anti-takeover measuresmeasures



Revising Revising Articles and and Bylaws (cont)Bylaws (cont)

Advantages to anti-takeover provisionsAdvantages to anti-takeover provisions– Adopting before needed looks better in Adopting before needed looks better in

context of a takeover fightcontext of a takeover fight– Give control over timing and processGive control over timing and process– Encourage bidders to negotiateEncourage bidders to negotiate– Higher price end resultHigher price end result– Long-term perspectiveLong-term perspective

DisadvantagesDisadvantages– Discourage sophisticated investorsDiscourage sophisticated investors– May serve to entrench managementMay serve to entrench management


Non-Legal Preparations and ConsiderationsNon-Legal Preparations and Considerations

Accounting Changes

Examples: Examples: revenue recognition policies, revenue recognition policies, deferred charges, business combinations, deferred charges, business combinations, related party transactions, stock-based related party transactions, stock-based compensationcompensation

Discuss with accountants and Discuss with accountants and underwritersunderwriters

Prepare for likely SEC questionsPrepare for likely SEC questions Internal Control requirementsInternal Control requirements Stub periods to be audited?Stub periods to be audited?



Evaluation of Employees/Executive Team

Right rolesRight roles New employee needsNew employee needs

– Legal - SEC expertLegal - SEC expert– Accounting – Internal controls expert Accounting – Internal controls expert

and/or SEC reportingand/or SEC reporting– Investor relations manager or VPInvestor relations manager or VP

Don’t overhire!Don’t overhire!


Director & Officer Insurance and Indemnity

Evaluate current insuranceEvaluate current insurance Price and evaluate post-IPO coveragePrice and evaluate post-IPO coverage

– ““Claims-made” policiesClaims-made” policies– A, B, and C coverageA, B, and C coverage

Side ASide A: Protects officers and directors on claims for which : Protects officers and directors on claims for which company cannot indemnify themcompany cannot indemnify them

Side BSide B: Protects officers and directors indirectly by : Protects officers and directors indirectly by reimbursing company for claims where it is required to reimbursing company for claims where it is required to indemnifyindemnify

Side CSide C: Entity coverage for claims made against the : Entity coverage for claims made against the company, so don’t need to negotiate allocation between company, so don’t need to negotiate allocation between company and D&Oscompany and D&Os

– Examine Exclusions and DefinitionsExamine Exclusions and Definitions Indemnification AgreementsIndemnification Agreements


Financial and Legal ComplianceFinancial and Legal ComplianceCheap Stock Issues

Tax consequences I.R.C. Tax consequences I.R.C. § 409A§ 409A– price less than FMV is a “deferred comp” price less than FMV is a “deferred comp”

arrangement arrangement →→adverse tax consequences for adverse tax consequences for employer and employee (taxation and employer and employee (taxation and withholding on vesting, instead of exercise or withholding on vesting, instead of exercise or sale) plus 20% additional taxsale) plus 20% additional tax

– Review previous option grants and stock Review previous option grants and stock issuances – decide how or whether to cure issuances – decide how or whether to cure issuesissues

Accounting consequences – expense Accounting consequences – expense chargescharges

Compensation needs can outweighCompensation needs can outweigh


Financial and Legal ComplianceFinancial and Legal Compliance

Cheap Stock Issues (cont)

Valuation MethodsValuation Methods– Status Quo: Status Quo: fine so long as FMV in fact = or > fine so long as FMV in fact = or >

exercise exercise price →but burden of proof is on company to price →but burden of proof is on company to prove this method was reasonableprove this method was reasonable

– Informal Valuation: Informal Valuation: company performs internal company performs internal valuation using 5 specified factors valuation using 5 specified factors →but burden of →but burden of proof is on company to prove this method was reasonableproof is on company to prove this method was reasonable

– Presumptive Valuation Methods: Presumptive Valuation Methods: put burden on IRS to show that the option prices are put burden on IRS to show that the option prices are

below FMV below FMV andand that the company did not use a that the company did not use a reasonable valuation methodreasonable valuation method

must use consistently for all equity-based must use consistently for all equity-based compensation plans compensation plans



Cheap Stock Issues: Presumptive Valuation Methods (cont)

Independent appraisalsIndependent appraisals Clearest presumption available (best Clearest presumption available (best

protection)protection) can be no more than 12 months oldcan be no more than 12 months old update quarterly or more often, as update quarterly or more often, as

needed to reflect financings, increased needed to reflect financings, increased sales, improved (or negative changes sales, improved (or negative changes to) financial conditionto) financial condition




Illiquid Start-Up PresumptionIlliquid Start-Up Presumption Can’t use if expect to go public in the Can’t use if expect to go public in the

next 12 monthsnext 12 months Must be a non-public company in Must be a non-public company in

business for less than 10 yearsbusiness for less than 10 years must meet 5 requirements:must meet 5 requirements:

– written reportwritten report– present value of future cash flowspresent value of future cash flows– comps from public or private companiescomps from public or private companies– whether method is used for other purposeswhether method is used for other purposes– was all information taken into accountwas all information taken into account




Binding formulas (e.g., in Binding formulas (e.g., in stockholder agreement)stockholder agreement)– formula price must be used for all formula price must be used for all

noncompensatory purposes requiring noncompensatory purposes requiring the valuation of the company’s stockthe valuation of the company’s stock

– not available if the stock may be not available if the stock may be transferred outside of the stockholders transferred outside of the stockholders (buy-sell) agreement under which the (buy-sell) agreement under which the formula price applies formula price applies



Sarbanes-Oxley Compliance

Officer Loans – be sure are none or Officer Loans – be sure are none or make arrangements to be re-paidmake arrangements to be re-paid

Internal Control Compliance [Internal Control Compliance [§404 of S-§404 of S-Ox] – work with auditors re necessary Ox] – work with auditors re necessary timing for compliancetiming for compliance– underwriters may require to be in place at underwriters may require to be in place at

IPO dateIPO date


Composition of the BoardComposition of the Board

NYSE and NASDAQ Rules

Begin Board recruiting process earlyBegin Board recruiting process early Rules require:Rules require:

– Majority IndependentMajority Independent– Audit CommitteeAudit Committee

All IndependentsAll Independents Financial ExpertFinancial Expert CharterCharter

– Nominating and Compensation CommitteesNominating and Compensation Committees NYSE: All IndependentsNYSE: All Independents NASDAQ: Majority IndependentsNASDAQ: Majority Independents


Reincorporation in Delaware?Reincorporation in Delaware?

Cost Cost – Legal Fees of reincorporationLegal Fees of reincorporation– Franchise TaxesFranchise Taxes

BenefitsBenefits– sophistication of courtssophistication of courts– depth of case lawdepth of case law– known commodityknown commodity


Pre-Offering Publicity RulesPre-Offering Publicity Rules

Categories of Issuers

““Well Known Seasoned Issuer”Well Known Seasoned Issuer” ““Seasoned Issuer”Seasoned Issuer” ““Unseasoned Issuer”Unseasoned Issuer” ““Non-Reporting Issuer”Non-Reporting Issuer”



Non-Reporting Issuers

Non-Reporting Issuers may continue to Non-Reporting Issuers may continue to publish “regularly released factual publish “regularly released factual business information”business information”– Consistent with past practiceConsistent with past practice– Customary formCustomary form– No projectionsNo projections

All Issuers: Safe harbor for All Issuers: Safe harbor for communications more than 30 days communications more than 30 days prior to filing registration statementprior to filing registration statement



Putting a Program into Place

Educate executives and PR/MarketingEducate executives and PR/Marketing Website reviewWebsite review Pre-approve all releases, speeches, Pre-approve all releases, speeches,

marketing campaigns, website marketing campaigns, website updatesupdates

One designated person for pre-One designated person for pre-approval approval

One designated person for non-One designated person for non-routine press and PR inquiriesroutine press and PR inquiries


Writing the Registration StatementWriting the Registration Statement

Useful for company to draft:Useful for company to draft: Risk Factors – cheap insurance policyRisk Factors – cheap insurance policy Technology DescriptionTechnology Description Patents & TrademarksPatents & Trademarks Executive CompensationExecutive Compensation Stock OwnershipStock Ownership

Don’t have pride of authorshipDon’t have pride of authorship Consider confidential treatment Consider confidential treatment

issues – begin early!issues – begin early!


Bottom LineBottom Line

Keep alert to IPO potential well in Keep alert to IPO potential well in advance advance → easier and less expensive to fix → easier and less expensive to fix issues in advance than to fix during processissues in advance than to fix during process

Be organizedBe organized Be prepared – Be prepared – stay ahead of the processstay ahead of the process

Make sure your client Make sure your client understands process and reasons understands process and reasons for processfor process

© 2006 holland & hart llp preparing the private company for a public offering susan oakes...

Documents

preparations preoffering

holland hart llp preoffering

voting agreements

investment agreements

preparations advantages

strategic agreements

andbylaws cont preoffering

loan agreements credit