From PLI’s Treatise Initial Public Offerings:A Practical ... · Initial Public Offerings:A...

From PLI’s TreatiseInitial Public Offerings: A Practical Guide to Going Public#19784

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PREPACKAGED BANKRUPTCY ANDPREARRANGED BANKRUPTCY PROCESS

Deryck PalmerJessica FinkCadwalader, Wickersham & Taft LLP

Disclaimers and Suggested References: The outline

that follows provides a general overview of retiree

medical benefit VEBAs, with specific focus on the

VEBAs recently proposed by the Big Three U.S.

automakers. The author is by no means an expert on

medical benefit plans or VEBAs. Nor can the author

claim special insight into any aspect of the Big Three

VEBAs. The information in this outline is gleaned

entirely from public sources. For two very practical

references on retiree medical and VEBAs see: (1) the

ABA-JCEB teleconference “Shifting Retiree Health

Benefits from Employers to VEBAs” (December 6,

2007—available in archived teleconf format or CD), in

which Nell Hennessey, Douglas Greenfield, Karen

Handorf and Vicki Hood do a terrific job describing the

background on union retiree medical and the Big Three

VEBAs and (2) Jones Day Commentary—Who Killed

Yard-Man (Apr. 2007), a Jones Day client newsletter

available on-line which provides an excellent summary

Chapter 9

Assembling the IPO Team

§ 9:1 Introduction§ 9:2 Management and Employees

§ 9:2.1 CEO and CFO§ 9:2.2 New Positions

[A] Controller[B] Additional Finance and Accounting Staff[C] General Counsel[D] Investor Relations Personnel[E] Stock Plan Administrator[F] Internal Auditor[G] Webmaster

§ 9:3 Board of Directors§ 9:3.1 Board Composition§ 9:3.2 Compensation for Outside Directors

§ 9:4 Company Counsel§ 9:4.1 Selection Criteria§ 9:4.2 Sample Questions/Requests for Company Counsel

Candidates§ 9:5 Independent Accountants

§ 9:5.1 Big 4 or Not?§ 9:5.2 Switching Auditors Prior to an IPO§ 9:5.3 Sample Questions/Requests for Independent Accountant

Candidates§ 9:6 Managing Underwriters

§ 9:6.1 Identifying Possible Candidates§ 9:6.2 Bases for Evaluating Potential Managing Underwriters

[A] Track Record[B] Team Members[C] Commitment to the Company[D] Distribution Reach and Mix[E] Aftermarket Support

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[F] Prestige and Reputation[G] Client Satisfaction[H] Economic Factors[I] Financial Strength and Stability[J] Other Capabilities

§ 9:6.3 The Selection Process[A] Narrowing the Field[B] Designating Lead Managing Underwriters[C] Selecting Co-Managers[D] Being Evaluated by the Underwriters[E] Confidentiality Agreements

§ 9:6.4 Sample Questions/Requests for Managing UnderwriterCandidates

§ 9:7 Underwriters’ Counsel§ 9:8 Consultants and Advisors

§ 9:8.1 Compensation Consultant§ 9:8.2 Investor Relations Firm§ 9:8.3 Accounting Consultant§ 9:8.4 IPO Consultant

§ 9:9 Outside Vendors§ 9:9.1 Financial Printer§ 9:9.2 Transfer Agent§ 9:9.3 Virtual Data Room Provider§ 9:9.4 Electronic Road Show Host§ 9:9.5 Banknote Company§ 9:9.6 Option Administrator

§ 9:10 Changes in the IPO Team

§ 9:1 Introduction

As part of its IPO preparations, the company must assemble thegroup of employees, board members, outside professionals, andadvisors who are needed for the IPO journey and subsequent life asa public company. In addition to company management and new hireswith specific skill sets, the IPO team will include company counsel,independent accountants, managing underwriters, underwriters’counsel, other advisors, and various vendors. This chapter describesthe principal members of the IPO team, in the approximate order inwhich they should be in place, and suggests selection criteria for each.In assembling its IPO team, the company should always rememberthat there is no substitute for experience when the stakes are high andtime is short—hallmarks of every IPO.1

1. The roles of the key IPO participants are discussed in chapter 10.

§ 9:1 INITIAL PUBLIC OFFERINGS

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§ 9:2 Management and Employees

§ 9:2.1 CEO and CFO

The CEO and CFO are essential to the success of the company ’sIPO. If the incumbents do not possess the combination of experience,knowledge, communications skills, vision, and integrity needed tolead the company through the IPO process, woo investors on the roadshow, and tend to public company obligations after the closing—allwhile managing the company ’s operations—the board will need toconsider deferring the IPO or changing the company ’s leadership. Theskills needed to manage a company from formation through privatefunding and expansion are very different from those required for theIPO process and public company life; many entrepreneur-CEOs do notfit both roles equally well. Similarly, it is not uncommon for acompany going public to seek a more seasoned CFO, even when theexisting CFO has been more than adequate for the company ’s needswhile privately held.

§ 9:2.2 New Positions

On top of normal hiring to meet its growing business needs, mostIPO companies need to add other capabilities.

[A] ControllerThe company should have a controller on board before completing

the IPO, and preferably six to twelve months before the organizationalmeeting—particularly if the CFO has more of a finance than anaccounting background. The controller should be well grounded inaccounting and public company reporting. Many controllers have priorwork experience in public accounting firms, although the companymust be mindful of the restrictions on hiring out of their ownindependent accounting firm. Familiarity with industry-specificaccounting issues is very helpful.

[B] Additional Finance and Accounting StaffAdditional finance and accounting employees will be needed to

assist with various public company responsibilities, including prepara-tion for section 404 of the Sarbanes-Oxley Act and public reportingmatters. The size and timing of these staffing needs vary amongcompanies, but generally some new employees are hired during theIPO process and others are added as the company ’s needs develop overtime. Prior experience with their anticipated responsibilities is veryimportant for these hires, since few IPO companies can afford theluxury of on-the-job training for new employees.

Assembling the IPO Team § 9:2.2

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[C] General CounselA general counsel can make significant contributions to the IPO

process, particularly if hired at least six to twelve months before theorganizational meeting—in time to become familiar with the com-pany ’s business, contracts, and corporate affairs, and to participatewith outside company counsel in public company preparations. Even ifthe company does not intend to rely on its general counsel forsecurities related work—which has become increasingly challengingwith the growing complexity of and rapid change in securities law—itis always desirable, and sometimes necessary, for the general counselto have at least some public company experience. Industry familiarityis helpful, and prior experience as a general counsel or senior in-houselawyer is also useful. If the general counsel does not have publiccompany or securities experience, the company may need to add asecurities lawyer to its legal staff; many companies also hire a paralegalat this point.

[D] Investor Relations PersonnelAlthough some private companies employ public relations person-

nel, most private companies rely on the CEO or CFO to handle anystockholder relations matters that come up. Following an IPO,additional resources must be devoted to investor relations. Somecompanies combine internal staff with professional advisors, whileother companies rely entirely on outside firms. (For better or worse,the CEO and CFO usually must master many investor relations skillsto survive in a public company.) By the time the IPO is closed, thecompany should have plans in place to fill this function. Key attributeshere include professional experience, knowledge of the company, andfamiliarity with its industry.

[E] Stock Plan AdministratorIn most private companies, there is no formal stock plan function.

Stock and option records are usually maintained by the CFOor counsel, and agreements are generated by counsel, or by theCFO using forms supplied by counsel. An IPO company musthire a qualified transfer agent to handle stock transfers and recordkeeping. Although some stock plan functions also can be outsourced,most public companies have a need for an internal stock planadministrator—who usually resides within the human resourcesor finance groups—because of the complexity of public companystock plans and the need for timely and accurate stock optiondocumentation. Many of the option backdating problems that havecome to light in public companies were caused by sloppy or incom-plete record keeping.

§ 9:2.2 INITIAL PUBLIC OFFERINGS

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[F] Internal AuditorThe basic role of an internal auditor is to provide an objective

evaluation of the company ’s internal controls, identify actual andpotential problems, and recommend corrective action. The internalauditor may also monitor compliance with policies, procedures, andregulations, assess the efficiency of business processes, and performother audit functions. Although the internal auditor is not an adjunctto the company ’s independent accounting firm, the external auditor ispermitted within professional guidelines to take the internal auditor ’sfindings into account when auditing the company ’s financial state-ments or its ICFR. The internal auditor usually has a dual reportingrelationship to the company ’s management and audit committee. Insome companies, the internal auditor is an employee, while othercompanies outsource this function to an accounting firm other thanthe company ’s independent auditor. Although not required by SECrules, the internal audit function can be an important component of acompany ’s overall system of financial and accounting controls. Fewprivate companies have an internal auditor, but many companiesestablish this capability after going public.2 As with other financeand accounting personnel, an internal auditor—whether a companyemployee or an accounting firm to whom the function has beenoutsourced—should have public company experience and be familiarwith the company and its industry.

[G] WebmasterImmediately after an IPO, the company ’s website must begin to

function as a timely and reliable repository of various types of investorinformation due to SEC requirements, stock exchange rules, andinvestor expectations. These new responsibilities are accompaniedby potential liability, since the federal securities laws generally applyin the same manner to the content of a company ’s website as to anyother statements made by or attributable to the company. Thecompany will need to designate someone familiar with the applicablelegal rules and knowledgeable about the company to review andapprove all material before it is posted on the website.3

2. NYSE rules require all listed companies to have an internal audit function.3. This and other issues related to the company ’s website are discussed in

detail in chapter 23. See section 23:7 et seq.


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§ 9:3 Board of Directors

§ 9:3.1 Board Composition

The IPO presents both a need and an opportunity to reset theboard. As IPO planning progresses, the company should reevaluate thepost-IPO composition of its board of directors and board committees,4

for the following reasons:

• The board will need to satisfy independence standards underSEC and applicable stock exchange rules.

• The audit committee should have at least one “audit committeefinancial expert,” as defined by SEC and applicable stockexchange rules.

• There are securities law advantages if each compensationcommittee member qualifies as a “non-employee director” forpurposes of section 16 of the Exchange Act5 and tax lawadvantages if each is an “outside director” for purposes ofsection 162(m) of the Internal Revenue Code.6

• It may be necessary or desirable to add board members withpublic company experience.

• Additional independent directors may be useful to share theburden of the board’s three principal committees—generally, atleast five independent directors are needed to enable a reason-able allocation of committee duties.

• Directors appointed by venture capital investors often departafter the IPO lockup period ends and their funds’ shareholdingsare distributed to their limited partners.

Although phase-in rules apply to the director independence stan-dards and there is no technical deadline for most of the otherrequirements summarized above, the board should begin discussingpotential changes in board composition approximately a year beforethe IPO. Time will be needed if new members are to be recruited: Thepool of qualified and willing board candidates has shrunk in recentyears, due to more stringent independence requirements, increasedworkloads (effectively limiting the number of boards on which anindividual may sit), and a perception of increased personal exposure toliability. Every director of the company regardless of tenure—even

4. SEC, stock exchange, and Internal Revenue Code requirements applicableto board and board committee membership are discussed in chapter 5.

5. The composition of compensation committees is discussed in chapter 5.See section 5:4.2[A].

6. For discussion of the section 162(m) requirements for qualification as an“outside director,” see section 22:8.2.


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including persons named in the Form S-1 as having agreed to becomedirectors, whether or not they have actually assumed the role—haspotential liability for the contents of the Form S-1.7 As a result,candidates typically join a board sufficiently in advance of the IPOto participate in the review of the Form S-1 along with the otherdirectors, or defer their candidacy (without being named in theForm S-1) until after the IPO.

Planning TipIf new directors are to be added to the board of directors inconnection with the IPO, they generally should join at leastsix months before the organizational meeting in order to getfamiliar with the company and contribute to the IPOprocess.

§ 9:3.2 Compensation for Outside Directors

The board also needs to establish—and disclose in the Form S-1—acompensation package for outside directors. Private companiestypically grant stock options or restricted shares to outside boardmembers, but do not pay cash director fees. In general, publiccompany board compensation consists of a combination of stockand cash, but the permutations are nearly limitless. Stock-basedawards may be in the form of options, restricted or unrestricted shares,a combination of options and shares, or more esoteric instruments.Some companies make stock-based awards to all outside directors inequal annual amounts, while other companies make larger grantsupon a director ’s initial election and smaller grants annually there-after. Cash may be paid on a retainer (annually or quarterly) or on aper-meeting basis, or both, and additional payments generally aremade to the chairs or all members of the board committees that carrythe heaviest workloads—typically, the audit committee followed by thecompensation committee. Board compensation is almost never paid todirectors who are company employees. Directors affiliated withventure capitalists or other institutional investors often forego boardcompensation, as a matter of policy or appearance rather than any legalrequirement. Most boards of IPO companies attempt to benchmarkdirector compensation against public company peers. A compensationconsultant can help identify comparable companies and make recom-mendations for board compensation following the company ’s IPO.

7. Liability issues are discussed in more detail in chapter 12.


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§ 9:4 Company Counsel

With the primary responsibility for preparing the Form S-1 andcoordinating the entire IPO process, company counsel is a centralplayer in the working group.

§ 9:4.1 Selection Criteria

What should the company look for when choosing counsel to leadan IPO? The three most important factors are experience, experience,and experience—substantial, relevant, and recent experience:

• serving as company counsel in many IPOs, preferably includingofferings by companies in the same or similar industry;

• handling recent IPOs—law firms with little IPO deal flow in thepast five or ten years will find the rules and practices verydifferent now;

• advising public companies on their ongoing reportingobligations; and

• navigating both the lore and the law of IPOs.

Another dimension of experience is SEC work experience. FormerSEC staff members can often draw on prior working knowledge toexpedite the resolution of issues or identify the appropriate decisionmaker within the SEC (although the company should not expect toreceive preferential treatment simply because a member of the com-pany counsel team formerly worked at the SEC). An added bonus is ifcompany counsel has significant experience in representing bothcompanies and underwriters in IPOs, since an understanding of thepriorities and expectations of underwriters will facilitate the offeringprocess on the company ’s side.

The composition of the deal team is another important facet of thecompany counsel decision. The company should consider the experi-ence and capabilities of the individual lawyers who will serve ascompany counsel in the IPO, and not simply the firm’s experienceor reputation. After interviewing the lead partner, the company shouldmeet some of the more junior lawyers who will be involved—the“second chair” on the offering may well be the company ’s principalpoint of contact for many parts of the IPO process. Countless hourswill be spent with counsel, and the company will need a comfortableworking relationship with each member of the IPO legal team. Strongchemistry between the company and outside counsel can make theIPO process much more pleasant—and productive.

In selecting counsel, the company should also consider the full-service capabilities of the candidate firms. The company will inevitablyhave legal needs in a wide range of other areas, both during and after


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the IPO process, and the ability of one firm to take on all or most of thecompany ’s legal work will present efficiencies and other advantages.Most companies going public will, over time, call on outside counselfor assistance in the areas of mergers and acquisitions, executivecompensation, intellectual property, labor and employment, antitrustand other regulatory matters, taxation, commercial and bankruptcylaw, real estate, and litigation, often including—regrettably—securitieslitigation. Many companies will also have international legal needs.For senior executives, estate planning expertise is another usefulcapability for company counsel to have.

The company should check the client references of the law firmsand individual lawyers vying for the IPO engagement. If a lawyer ’sreferences are not unabashedly supportive, or the clients have notworked on a recent IPO with him or her, the company should probablylook elsewhere, since the candidate presumably has hand-picked thebest available references. The company will have limited ability toevaluate a lawyer ’s securities law knowledge, but inquiries of otherclients can be made concerning the elements of outstanding legalservice, such as commitment to the client, responsiveness, judgment,communication skills, problem-solving ability, energy, work capacity,diligence, collegiality, integrity, and decisiveness (as an old adage goes,clients need a “one-handed lawyer”—one who does not always respond“on the one hand . . . , but on the other hand . . . ”).

The leading law firms for representing companies and underwritersin IPOs are clustered in California, Boston, and New York City; and forenergy-related IPOs, in Texas. Many IPO candidates are also located inthese areas—the states of California, Massachusetts, New York, andTexas collectively produce about half of all U.S. IPOs—and need notworry about the geographic location of outside counsel. For othercompanies, physical proximity to outside counsel can be a convenience,but is less important than the requisite experience and skill sets. Mostattorney-client communications are conducted by telephone or email,and for an engagement as important as an IPO, no lawyer will object totraveling to the client’s location as frequently as needed.

In the course of the IPO process, company counsel will becomeintimately familiar with the company and its business. Prior workingexperience with the company will, therefore, give counsel a head-start,which is why the company ’s incumbent counsel should be consideredfor the IPO. It is usually preferable, however, to select a new firm withdeep IPO experience than to forge ahead with existing counsel thatknows the company but has limited IPO or public company experi-ence. If the company plans to switch counsel in connection with theIPO, it is preferable to do so well before the formal commencement ofthe IPO process. Although skilled IPO counsel can jump in as late asthe organizational meeting and perform well, the process will be


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smoother for all concerned if new counsel is lined up at least three tosix months before then.

§ 9:4.2 Sample Questions/Requests for CompanyCounsel Candidates

Deal Team

r Which of your firm’s lawyers will handle our IPO? Do thejunior members of the team have any IPO or public companyexperience? Will we be able to meet them before hiring yourfirm?

r Please describe the experience of the proposed lead partner inhandling IPOs and representing public companies.

r Please provide three CEO, CFO, or general counsel referencesfrom other IPOs or public company representations handled bythe proposed lead partner.

r Do the senior members of the proposed deal team havesufficient time to devote to our IPO?

r What is your philosophy for the allocation of assignmentsamong team members with different levels of experience andbilling rates?

r How will the deal team change after we complete our IPO andyou begin to represent us on an ongoing basis as a publiccompany?

r Please describe how you typically work with a company ’sgeneral counsel, both during and after the IPO process, includ-ing any strategies you have found to be especially effective. If wedo not have a general counsel during the IPO process, how doyou envision interacting with us?

Experience

r Over the past one, five, and ten years, how many IPOs has yourfirm completed as company counsel? As underwriters’ counsel?

r How many of the companies that your firm has taken publicover the past five years no longer use your firm as companycounsel, other than as a result of being acquired, and why?

r For how many public companies does your firm serve as theprimary outside corporate counsel?

r Please describe your firm’s experience representing companiesin our industry.


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r How many partners in your firm have past employmentexperience with the SEC? Will the deal team have ready accessto these lawyers as needed?

r Are there any law firms that you believe your firm worksparticularly well with as underwriters’ counsel?

Other Legal Services

r Please describe the other legal services your firm offers that youbelieve will be of interest to us during the IPO process andthereafter as a public company.

r How do these services differentiate your firm from other lawfirms?

r Are there any legal services that your firm’s other publiccompany clients regularly go to other law firms to obtain?

Billing

r What are your firm’s billing rates and policies?

r How do you ordinarily address legal fees for a failed IPO?

r Are you willing to consider alternatives to traditional hourlybilling, such as a discount for a failed IPO coupled with apremium for a successful offering?

r How much do you believe we should budget for legal fees in theIPO? And how much for legal fees on “routine” SEC compli-ance work following the IPO?

§ 9:5 Independent Accountants

§ 9:5.1 Big 4 or Not?

Does a company need to hire a “Big 4” accounting firm to go public?Of course not. But a strong majority of companies do. There are morethan 1,800 independent public accounting firms registered with thePCAOB, but the Big 4 (Deloitte & Touche, Ernst & Young, KPMG, andPricewaterhouseCoopers) were the auditors for 77% of IPO companies,based on combined data from all U.S. IPOs completed in 2007 and2008.8 When the next three largest audit firms—BDO Seidman, GrantThornton, and McGladrey & Pullen—are added, the percentage nearlyhits 90%.

Although mid-size and regional audit firms enjoy a thriving busi-ness serving smaller public companies and private companies and

8. The Big 4 should probably be called the “Gigantic 4,” as each firm hasmore than 100,000 employees worldwide and $15 billion in annualrevenue.


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often have reputations for superior service and better value in servingthese clients, Big 4 accounting firms dominate the IPO market forseveral reasons:

• SEC Experience: Every independent registered public account-ing firm will be familiar with Regulation S-X, GAAP, andPCAOB auditing standards, but the Big 4 can tap into a well-spring of institutional experience concerning the SEC and IPOs.Much of this knowledge resides within the firm’s “national”office, which works primarily with company engagement part-ners on SEC issues and not directly with companies.

• Bench Strength: With large staffs in nearly every major metro-politan area in the United States, the Big 4 have the bandwidthto meet the demanding schedule of an IPO and can service theaudit needs of companies with widely dispersed operations.

• Additional Services: The Big 4 offer a variety of tax and advisoryservices in addition to traditional audit services, often enablingcompanies to benefit from “one-stop shopping” globally.9

• Brand Name: Underwriters and investors often draw comfortfrom the inclusion of a Big 4 audit opinion in an IPOprospectus.

It is probably no coincidence that the success of the law firms withthe largest IPO practices could be attributed to similar factors. For thatmatter, similar statements could be made about the major investmentbanking firms.

§ 9:5.2 Switching Auditors Prior to an IPO

There is significant value to continuity in the audit firm used by thecompany. To an even greater extent than counsel, the audit firm mustbe very familiar with the company and its industry in order to serveeffectively. The selection of an independent registered public account-ing firm for an IPO is, in effect, made by many companies at the timeof formation—venture capital–backed companies, who are the mostlikely startups to pursue an IPO some day, routinely start life with aBig 4 firm. For other IPO candidates, the advantage of familiarity mustbe weighed against the need for extensive IPO and public companyexperience in its audit firm. IPO candidates who are not using one ofthe Big 4 firms, another national firm, or a highly regarded regionalfirm with at least some IPO experience, should consider switching toan audit firm with more IPO and public company experience. This

9. Subject to limitations on non-audit services imposed by the Sarbanes-Oxley Act, as discussed in chapter 4.


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decision is often a natural consequence of a company outgrowing alocal audit firm that met the company ’s needs while it was private butlacks the experience and resources for an IPO.

If a new audit firm is engaged, previously audited financial state-ments will need to be re-audited if required by the new audit firm orthe managing underwriters, or if the former audit firm is unwilling toconsent to the use of its prior audit report. Any re-audits could involvesubstantial time and expense. To avoid potential offering delays, aswitch in auditors generally should be made six to twelve monthsbefore beginning the IPO process, so that the new firm has time to getup to speed and complete any necessary re-audits. Several disclosuresare required in the Form S-1 if the company changes auditors.

§ 9:5.3 Sample Questions/Requests for IndependentAccountant Candidates

Engagement Team

r Please identify the proposed engagement partner, concurringpartner, and manager for our account.

r In the past five years, has the proposed engagement partnerrotated off of an audit client sooner than required, at theclient’s request or otherwise?

r Please describe the experience of the proposed engagementpartner with companies in our industry and with IPOs.

r Can your firm provide field service support in all geographiclocations where we operate or intend to operate?

r Please provide three CFO references from other IPOs or publiccompany engagements led by the proposed engagementpartner.

Eligibility

r Is your firm registered with the PCAOB?

r Are you aware of any financial, employment, or other issuesthat would affect your firm’s independence?

r Has your firm conducted internal procedures to determinewhether there are any independence issues?

Experience

r Over the past one, five, and ten years, how many companies forwhom your firm was the independent registered public ac-counting firm have completed IPOs?


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r Of these companies, how many subsequently switched fromyour firm to another independent registered public accountingfirm?

r For how many public companies does your firm serve as theindependent registered public accounting firm?

r Please describe your firm’s experience with companies in ourindustry.

r How many partners in your firm have past employmentexperience with the SEC? Will our engagement team haveaccess to these partners as needed?

r Please summarize all investigations and disciplinary proceed-ings brought by the SEC, PCAOB, or any other regulatoryauthority against your firm or any personnel at your firm inthe past five years, including any sanctions imposed, andspecifically identifying any such proceedings with which anymember of the proposed engagement team was involved.

Accounting Matters

r Based on your knowledge of our company and our industry,what do you see as the key accounting issues we face?

r What are the most common SEC comments that companieslike us receive?

r In general, what is your view on the best way for a companygoing public to prepare for compliance with section 404 of theSarbanes-Oxley Act?

r As a condition to accepting our engagement, will you requirethat our previously audited financial statements be re-auditedby your firm?

r Please describe the expected involvement of your national officein our IPO filings and subsequent SEC filings. What is theprocess for communicating with the national office?

Audit Committee Matters

r Please provide references from audit committee chairs at threepublic company clients.

r Please describe your typical working relationship with the auditcommittee.

r How frequently do you typically meet with the auditcommittee?


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r In your opinion, what are the attributes of an outstanding auditcommittee?

Other Services

r Please describe the assistance you typically provide a client inpreparing for an IPO and public company life.

r Please describe the permitted non-audit services your firmoffers that you believe will be of interest to us during the IPOprocess and thereafter as a public company.

r How do these services differentiate your firm from other publicaccounting firms?

Policies and Practices

r Does your firm have any auditing or disclosure policies orpractices that are not required by SEC or PCAOB rules orGAAP?

r During the SEC review process, what role will you play in anydiscussions with the SEC staff regarding accounting matters, ifnecessary?

r In the event that your firm is subsequently replaced as ourindependent registered public accounting firm, what is yourpolicy on providing consents in future SEC filings for your prioraudit reports on our financial statements?

Billing

r What are your firm’s billing rates and policies?

r How much do you believe we should budget for accounting feesin the IPO?

r For companies similar to us, what is the range of typical annualfees for annual audit and quarterly review services?

§ 9:6 Managing Underwriters

The selection of managing underwriters—in particular the leadmanaging underwriters—is perhaps the single most important deci-sion the company will make as part of the IPO process. The invest-ment banking firms serving as managing underwriters play a crucialrole in refining the company ’s core message and market positioning,conducting due diligence, helping to develop a compelling Form S-1,marketing the offering to investors, providing critical IPO aftermarketsupport, and, in many cases, advising the company on subsequentcapital markets and M&A transactions. A “bulge-bracket” underwriterwith relevant industry experience will enhance any company ’s IPO,

Assembling the IPO Team § 9:6

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particularly when market conditions are difficult. No underwriter canguarantee that an IPO will be successful, but the company can increasethe likelihood through its choice of managing underwriters.10

Planning TipLong before beginning the formal selection process, thecompany should identify the leading underwriters of IPOsin its industry and begin to build relationships withinvestment bankers and key research analysts. Invest-ment bankers can offer useful planning guidance earlyon, at no cost to the company.

§ 9:6.1 Identifying Possible Candidates

The universe of potential managing underwriters is well known.Over the past decade, the sheer number of investment banking firmshas shrunk substantially, and relatively few now dominate the U.S.IPO market. All major investment banking firms base their capitalmarkets functions in New York City and have offices in financialcenters around the world. The company ’s directors, outside counsel,professional investors, and audit firm probably will have contactswithin suitable investment banking firms and be able to introducethe company, if desired. In some cases, investment banks initiatecontact with a company they believe is an attractive IPO candidate. Itis not uncommon for a high-profile private company—perhaps onethat has announced large venture capital or strategic financings or wonprominent industry awards—to be approached by investment bankerstrying to arrange meetings. Whether the courtship begins with thecompany or the investment banking firm, however, the company shouldbegin to cultivate relationships with the contenders six to twelvemonths before the anticipated date of the organizational meeting.

§ 9:6.2 Bases for Evaluating Potential ManagingUnderwriters

Companies weigh various factors differently, but the followingcriteria are generally considered relevant in choosing from amongcompeting investment banks.

10. The underwriting process is discussed in detail in chapter 19.


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[A] Track RecordAn investment bank’s prior experience and success is arguably the

most germane factor, and has three dimensions: overall track record(its roster of completed public offerings and other financing transac-tions); IPO experience (the number and performance of IPOs it hasled); and familiarity with the company ’s industry (measured by thenumber of IPOs and other offerings it has handled in the same orrelated industries). This data is publicly available and will usually beproffered by the banks themselves—although every self-respectinginvestment banking firm can produce at least one ranking with itsname on the top. A bank’s experience with similar-sized offerings isalso relevant, since a company pursuing an IPO of modest size may getlittle attention from the sales force of a bank that primarily handlesmuch larger offerings.

[B] Team MembersWhen selecting the managing underwriters, the company should

understand that the package includes more than investment bankers.The investment banking personnel will be the company ’s principalpoints of contact and should have a strong rapport with management,but other team members also play key roles. In particular, the researchanalysts employed by investment banking firms develop earnings esti-mates used in the marketing of the offering, help educate the sales forcesof the managing underwriters about the company and its investmentmerits, and can generate investor interest in the company after the IPOthrough their research coverage. Although investment banking firmscannot make any commitments about the nature of analyst recommen-dations in advance, a firm’s research department is allowed to agree thatit will initiate coverage following the IPO. The company shouldmeet theresearch analysts employed by the contending investment banks whocover the company ’s industry (investment banking personnel cannot bepresent), read their published research reports, review their rankings inindustry publications, and do reference checks among the companiesthe analysts cover and the institutional investors the company hopes toattract. The caliber and reputations of the research analysts employed byprospective managing underwriters often sway a company ’s decision.Another less visible, but very important, component of an investmentbank is the equity capital markets group. These are the people whogauge investor interest, take orders, assess market conditions, andrecommend the offering size and price. If the offering is expected tohave a syndicate beyond the managing underwriters, the bank’s syndi-cate group should also be considered.


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[C] Commitment to the CompanyThe company will be one of many clients, including other IPO

candidates, that an investment banking firm is working with at anygiven time. The company should inquire about the number and statusof other IPOs and major transactions with which the proposed teammembers are actively involved. The company should be sure that themanaging underwriters it chooses are committed to the company, thatthe company will be an important client, and that the deal teams havesufficient capacity to devote to the company.

These concepts are largely subjective, but inferences can be drawnfrom the attention and enthusiasm directed toward the company. Didthe bank invest the time to understand the company and its industrythoroughly? Were the senior people at the bank substantively engagedin the process? Did the bank offer original insights about the company,its strategy, or potential market positioning? Has the bank sought tobuild a relationship beyond introductory meetings? Did the bank seizethe initiative and outline the key messages for the business section ofthe Form S-1? (Some companies request that managing underwritercandidates prepare a draft of the business description to be included inthe prospectus summary, or even the entire business section; but thistakes significant time and provides little real value.) Did the bankrespond fully and promptly to the company ’s information requests?One situation to watch for is when an investment bank works with acompany competitor. Some companies are instinctively bothered bythis, feeling that it might result in a lack of commitment or a conflictof interest; other companies are more sanguine about the situation,recognizing that it might enhance the bank’s industry knowledge. Ifthe company objects to the firm’s investment banking personnelworking with specific competitors, it should raise the issue early inthe selection process.

[D] Distribution Reach and MixThe managing underwriters collectively must have sufficient dis-

tribution clout to sell the entire IPO and the ability to achieve thetarget mix of institutional, retail, domestic, and international inves-tors. This is not much of an issue with the leading investment bankingfirms, all of which have access to major institutional investors andretail customers, but becomes an important selection criterion withsmaller underwriters. The company should inquire about each bank’sdistribution capability and test the responses by carefully reviewing thebank’s track record in similar IPOs.


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[E] Aftermarket SupportAn IPO can quickly sour if an active trading market does not

develop or the stock underperforms the market after closing, andsecurities litigation often follows a sudden drop in the stock price.One of the lead managing underwriters will act as “stabilization agent”on behalf of all the underwriters immediately after the offering, andother lead managers thereafter may help maintain liquidity throughmarket-making activities. Post-IPO research coverage by the analystsemployed by the managing underwriters can also help stimulateinterest in the company. One measure—albeit imperfect—of an in-vestment bank’s aftermarket support is the stock performance of thecompanies it takes public in relation to overall market performance.Needless to say, the stock performance of individual companies can bedue to factors wholly unrelated to the caliber or efforts of theirinvestment bankers.

[F] Prestige and ReputationThe investment banking industry tends to be hierarchical. Not

everyone would agree on each underwriter ’s exact slot in the peckingorder, and perceptions of relative rankings can vary across companyindustries; but few directors or institutional investors would havedifficulty identifying those potential managing underwriters theyconsider to be more (or less) prestigious than others. Investmentbanking reputations tend to be grounded in lengthy track recordsand are not necessarily illogical. The mistake to be avoided is selectinga managing underwriter solely on the basis of its prestige or generalreputation without confirming that it compares favorably on otherrelevant criteria—most importantly, the commitment to the companyand the availability of a highly qualified and motivated team.

[G] Client SatisfactionThe company should speak with the CEOs and CFOs of other

companies taken public by the proposed managing underwriters. Afterthe glow of an IPO has faded, companies can be surprisingly candid indiscussing what they liked and disliked about their managing under-writers. The investment banks will probably offer references to thecompany, but inquiry need not stop there, since information concern-ing a bank’s past IPOs is readily available. One indication of acompany ’s satisfaction (or dissatisfaction) with its managing under-writers is whether the same underwriters were retained as managingunderwriters for a follow-on offering conducted by the company afterthe IPO.


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[H] Economic FactorsEach investment bank should provide a preliminary valuation

methodology for the company. The company ’s IPO valuation ulti-mately will be determined by market conditions and investor interestat the time of pricing, but the lead managers can influence the offeringprice through the valuation metrics, multiples, and comparable com-panies it presents during price talk with potential investors. At thispoint in the process, estimates of the company ’s valuation as a publiccompany are less important than the methodology employed. In somecases, it may be in the company ’s best interests to defer any discussionof a specific valuation range during the selection process because sucha range often is of little predictive value and can have unintendedconsequences for the company ’s financing and option granting activ-ities prior to the completion of the IPO—which will not occur for atleast six months after discussions begin with potential underwriters.The underwriting discount is rarely relevant in the selection process. Ifthe company anticipates a large IPO and hopes to negotiate a discountbelow the generally prevailing 7% rate, the topic should be discussedwhen banks are competing for the engagement.

[I] Financial Strength and StabilityMore than a passing thought should be given to the financial

strength and stability of each investment banking firm under con-sideration. The sale of Bear Stearns and the bankruptcy of LehmanBrothers in 2008, coupled with steps taken by other major investmentbanking firms to shore up their balance sheets, serve as stark remin-ders that no financial institution is immune from broad shocks to themarket.

[J] Other CapabilitiesAssuming the IPO goes well, the company will probably look to the

managing underwriters for additional services over time, includingfollow-on public offerings, M&A engagements (as buyer or seller) andassistance in takeover defenses, investor relations, and other capitalmarkets matters. The company should assess each candidate’sstrengths in the areas of the company ’s likely future needs. If thecompany contemplates a “dual track” process,11 it should also con-sider the bank’s M&A capabilities and track record.

11. Dual tracks are discussed in chapter 21. See section 21:2 et seq.


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§ 9:6.3 The Selection Process

[A] Narrowing the FieldAs the planned date of the organizational meeting approaches, the

company will need to complete the evaluation process and pick themanaging underwriters. Companies vary in the degree of formality theyemploy at this point. Some companies ask the contenders to submitwritten responses to a formal request for proposals, in which thecompany poses a number of questions and requests various informationthat it considers relevant to its decision-making process, and then selectsfinalists on this basis. Other companies may feel they know enoughfrom prior contacts with the candidates to work directly from a shortlist.Regardless of the approach it takes to narrow the field, the companygenerally will meet again with each firm under final consideration. Inattendance for the company typically are the CEO, CFO, generalcounsel, and often several directors or even the entire board; outsidecounsel may also participate. The investment bank will be representedby its proposed deal team, ranging from one or more managing directorsdown to more junior members (but excluding the bank’s researchanalysts, who are not permitted to solicit underwriting business). Inthese meetings, the bank will present its case and respond to questions.At the end of this process—often called the “beauty contest,” “bakeoff,”or “dog-and-pony show”—management will make its recommenda-tions, and the board will select the managing underwriters.

[B] Designating Lead Managing UnderwritersPart of the board’s decision will be to designate the lead managing

underwriter or underwriters. In close cases, management and theboard may request that a small number of banks return for additionalinterviews, in order to help reach a consensus as to the lead managersto be selected. Investment banking firms may argue that a sole leadmanager is in the company ’s best interest, but in recent years themajority of all IPOs have had multiple lead managers—typically two.Lead managers earn a greater share of the underwriting compensation,get “league table” credit for lead managing the offering, and are listedon the top line of the underwriter listings at the bottom of theprospectus cover. (League tables are third-party rankings of investmentbanking market share that are used for competitive purposes and thusare taken very seriously.) If the board selects joint lead managers, onlyone can be named on the top line at the far left of the list ofunderwriters shown on the prospectus cover. This placement is largelysymbolic, assuming the lead managers have equal economic arrange-ments, but can be of great importance to investment banking firms—to the point where a bank may refuse to accept an underwritingassignment if it objects to the order in which the lead managers would


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be listed on the prospectus cover. In many offerings, co-managers arenot selected until after the initial Form S-1 filing.

[C] Selecting Co-ManagersThe company must also select co-managing underwriters, or co-

managers, usually in consultation with the lead managers. One ormore of the investment banking firms that were not chosen to be leadmanagers may be invited to act as co-managers, although some maydecline the lesser role. The company should view the selection of co-managers as an opportunity to round out the underwriting team withfirms of complementary skills. For example, a co-manager mayemploy an outstanding research analyst; have distribution capabilitiesin retail, institutional, industry, geographic, or other sectors that areserved less well by the lead managers; offer superior trading or market-making expertise; or be particularly skilled at the types of engage-ments, such as M&A transactions, for which the company anticipatesa future need. In many offerings, co-managers are not selected untilafter the initial Form S-1 filing.

[D] Being Evaluated by the UnderwritersWhile the company is evaluating investment banking firms to serve

as managing underwriters, those banks are also evaluating the com-pany. In accepting an IPO engagement, an investment banking firm ismaking a major commitment of time, resources, and reputation. Evenbefore winning the mandate, the bank will ask itself whether it wantsthe assignment. Without initiating the formal due diligence process,the candidates will request financial information, business plans, andother information from the company; assess the experience andcapabilities of management; review the company ’s website; undertakeInternet research; and possibly speak with business contacts who arefamiliar with the company, its products or services, and its manage-ment. Eventually each managing underwriter will need approval fromits commitment committee before proceeding with an offering, and abank’s preliminary research is intended to inform its decision aboutwhether to continue with the process.

[E] Confidentiality AgreementsDuring the selection process, some companies ask each investment

banking firm to sign a confidentiality agreement—and usually aresurprised when the request is declined. Historically, underwriters haveresisted signing confidentiality agreements on the basis that doing socould conflict with a disclosure obligation in the Form S-1, is incon-sistent with the nature of the underwriting and IPO process, or isunnecessary because an investment bank owes a duty of trust andconfidence to each client. None of these reasons is an absolute barrier


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to a properly worded confidentiality agreement, but some banks maystill object as a matter of policy. If a bank refuses to sign a confidenti-ality agreement, the company will need to decide whether to eliminatethe bank from consideration. The alternative is to avoid sharing trulysensitive information (as opposed to routine business information that,although not generally available to the public, poses fewer concerns)during the selection process, and to understand that the company willneed to get comfortable with not having a written confidentialityagreement with that bank if it is selected. Most companies concludethis poses little practical risk.

§ 9:6.4 Sample Questions/Requests for ManagingUnderwriter Candidates

Deal Team

r Who will be the members of the investment banking team forour IPO? Are the senior members committed to attending theorganizational meeting, drafting sessions, and other keymeetings?

r Please provide the names and contact information for theCEOs and CFOs from three other companies whose IPOswere led by the proposed investment banking team for our IPO.

r Who will lead the equity capital markets and syndicationfunctions for our offering?

r Who is the most senior sponsor of our IPO within your firm?

Recent IPO Experience

r Please provide a list of all completed or withdrawn IPOs inwhich your firm has participated over the past two years,indicating your role in each, and specifying the date and sizeof each that was completed.

r Please provide a list of all IPOs on file in which your firm isparticipating, indicating your role in each and its presentstatus.

r In the past two years, has your firm been chosen as a managingunderwriter in any IPOs and then withdrawn or been replacedbefore pricing?

Company Positioning

r What is your recommended positioning of our company?

r Do you see any potential issues that our company ’s business orindustry pose for the marketing of the offering?


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r Please supply a list of the key messages you believe should beconveyed in the opening paragraph for the business section ofthe prospectus.

Timing and Preparedness

r What is the timing and process of your firm’s commitmentcommittee process, including research analyst involvement?

r Please provide a recommended IPO timetable from the organi-zational meeting through pricing.

r What is your current view of IPO market conditions as theyrelate to companies in our industry? Do you foresee significantmarket changes, positive or negative, over the next six to twelvemonths?

r What do you consider the biggest risks or uncertainties in thesuccessful completion of our IPO, other than marketconditions?

r From your perspective, what gaps in our board or managementmust we address in order to complete an IPO successfully?

Size and Valuation

r Based on present market conditions, what deal size do youconsider appropriate? What is the minimum deal size that youwould consider feasible or that you are willing to underwrite?

r Please provide a description of your valuation methodology forour company, the names of the comparable companies used inyour analysis, and the principal operating metrics of thosecompanies.

r What is your view of the optimal progression of the marketprice, from setting the proposed range to pricing the offeringand through our first earnings release?

Offering and Disclosure

r What is your firm’s policy, or recommended practice, withrespect to the audit of interim financial statements includedin the Form S-1?

r Does your firm have any disclosure policies or practices that arenot required by SEC rules and are not generally followed in thesecurities industry?

r Are you receptive to the inclusion of selling stockholders in ourIPO? If so, what is the maximum percentage of the overalloffering you recommend for a secondary component? If mem-bers of management or the board are included, what is the


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maximum percentage of their holdings that you suggest they beallowed to sell?

r From whom will you request lockup agreements?

r What are your thoughts on the inclusion of a directed shareprogram in our IPO? If a DSP is included, what maximum sizedo you recommend? Does your firm have the ability andwillingness to administer a DSP?

r What maximum “overhang” do you believe we can have in ourstock option plan without adversely affecting the marketing ofthe IPO? Do you think an “evergreen” provision providing forautomatic annual increases of up to 5% of the outstandingshares will have an adverse effect?

Syndicate Structure

r Howmany lead managers and co-managers do you recommendfor our IPO, and why?

r Are you willing to serve as a joint lead manager if selected, andwhat are your minimum economics to serve in this capacity?

r Which investment banks do you believe your firm worksparticularly well with as joint lead managers?

r Which investment banks do you consider most complementaryto your firm’s capabilities as a joint lead manager?

r If you are selected as a lead manager, how do you propose toallocate the underwriting discount among all managingunderwriters?

r What process do you follow for identifying firms to serve asnon-managing underwriters? What role does the company playin that process?

Sales and Marketing

r Please describe your domestic and international institutionaland retail sales capabilities, including market share and marketpresence information if available.

r What are your preliminary thoughts regarding the allocation ofshares among types of investors?

r Who will be the target investors for our IPO?

r Can we meet the equity capital markets personnel who will beinvolved with our offering?

r Please indicate the likely duration and locations for our roadshow. Do you recommend going to Europe? Do you anticipateincluding an electronic road show?


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Pricing and Stock Performance

r Please describe your firm’s pricing process, indicating the levelsof transparency available to us relating to management of theorder book, pricing and sales activity.

r What process do you follow for allocating shares? What roledoes the company play in that process?

r Please describe your policies and processes to minimize flip-ping. In each of the completed IPOs in which your firm servedas a lead manager in the past two years, what percentage of theshares were sold by the initial buyers on the first day?

r For each of the completed IPOs in which your firm served as alead manager in the past two years, please provide:

r the initial price range;

r the revised price range, if any;

r the final offering price;

r the size, composition (primary versus secondary), and uti-lization of the underwriters’ over-allotment option;

r the closing market price on the first day and 30, 90, 180,and 200 days after closing; and

r any special lockup arrangements.

Public Company Preparations

r Please describe the assistance you typically provide an IPOcompany in preparing for public company life, including in-vestor relations matters.

r As a new private company, we will not be required to complywith section 404 of the Sarbanes-Oxley Act at the time of theIPO. What are your expectations for our level of section 404preparedness?

r What anti-takeover measures do you believe best serve compa-nies like us?

Aftermarket Support

r What are your firm’s views on stabilization activities andstrategies, including willingness to commit capital?

r Can we meet the individual who will be primarily responsiblefor trading our stock on behalf of your firm, and will thatperson be accessible to us after the IPO?

r Please describe your firm’s aftermarket services, including non-deal road shows.


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r What conferences and other industry or investor events doesyour firm sponsor that are suitable for our participation?

r For each of the completed IPOs in which your firm served as alead manager in the past two years, please provide the followinginformation:

r Has the company undertaken a follow-on offering? If so,what was your firm’s role? What was the split betweenprimary and secondary shares in each?

r Has the company engaged in any M&A transactions? If so,did your firm participate in an advisory capacity?

Research Coverage

r Has your firm initiated research coverage on each of thecompanies for which you served as a lead manager in thepast two years?

r Has your firm dropped research coverage for any of thesecompanies? If so, why?

Other Questions

r Why do you believe you are a good match for us, and us foryou?

r What qualitative factors do you believe distinguish your firmfrom others?

r What law firm do you anticipate engaging as underwriters’counsel? Are you receptive to input from us on the selection?

r Is your firm working with any of our competitors on IPOs orother engagements? If so, how do you plan to address potentialconflicts of interest?

§ 9:7 Underwriters’ CounselThe lead managers will select an outside law firm to serve as under-

writers’ counsel, but will often consider the company ’s views. Many lawfirms are qualified to act as underwriters’ counsel. From the company ’sperspective, what are the most important factors in the decision?

First and foremost—not surprisingly—is experience with IPOs andthe company ’s industry. But the lead managers are very unlikely toselect an inexperienced firm as counsel, so what kind of meaningfulinput can the company realistically provide? There are several possi-bilities. If company counsel has had especially good working experi-ences with another law firm on several IPOs, that firm could besuggested for consideration as underwriters’ counsel. Conversely, ifcompany counsel has reason to believe that a particular firm would be


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a poor match for the company ’s IPO, that fact could also be shareddiplomatically with the lead managers. Sometimes the company picksits counsel from between two law firms that are equally experienced,capable, prepared, and enthused; in this case, the company may wish tosuggest that the runner-up be considered as underwriters’ counsel. If thelead managers are uninterested in the company ’s input, however, thecompany should not be unduly concerned, since the choice of under-writers’ counsel from among many possible firms is not as important tothe success of the IPO as the selection of company counsel.

§ 9:8 Consultants and Advisors

IPO companies regularly retain additional consultants and advi-sors, including compensations consultants, investor relations firms,and accounting consultants.

§ 9:8.1 Compensation Consultant

Many companies going public engage a compensation consultingfirm to help them with a variety of compensation-related issues anddecisions that accompany an IPO. When selecting a compensationconsultant, the company should seek a firm that is familiar with thecompensation programs and practices of the company ’s peers and othersimilar companies. One obvious way to find potential candidates is toask the CEO or CFO of other recent IPO companies which compensa-tion consultant firm they used. Companies often finalize their post-IPOcompensation arrangements during the lull while awaiting initial SECcomments on the Form S-1, so if a compensation consultant is going tocontribute to these decisions it must be retained before this point.

Planning TipThe company should consider engaging a compensationconsultant for the fiscal year prior to the anticipated filingof the Form S-1—the period that will be covered by theCD&A in the prospectus. The involvement of a compen-sation consultant during this period should permit thediscussion of compensation decisions to reflect consid-eration of third-party comparisons, such as benchmark-ing data, that otherwise may be unavailable to the boardand compensation committee.


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§ 9:8.2 Investor Relations Firm

Many IPO companies retain an investor relations firm. In light ofthe publicity restrictions that apply to an IPO, there is not much of arole for an investor relations consultant during the IPO process,although some companies use one to help set up the investor relationsportion of their website that will go live after the IPO is priced. Theinvestor relations firm selected by the company should have a solidgrounding in the relevant public company rules, such as RegulationFD, and be knowledgeable about the company and its industry.Positive experiences that the CEO or CFO has had with investorrelations firms during prior employment often lead the company tosuitable candidates.

§ 9:8.3 Accounting Consultant

If the company requires assistance on an accounting issue—forexample, for a thorny matter raised for the first time during SECreview, or for tax accounting—the company may need to engage anaccounting consultant. The company ’s counsel or audit firm often cansuggest accounting firms other clients have engaged in similar situa-tions in the past. (Many companies also retain accounting consultantsfor assistance in Sarbanes-Oxley Act compliance.)

§ 9:8.4 IPO Consultant

A company going public occasionally hires an “IPO consultant.”Typically consisting of former investment banking professionals, anIPO consultant can assist with the development of financial models,help select underwriters, and generally advise the company on the IPOprocess. If the company has seasoned finance personnel and companycounsel, the incremental expense of an IPO consultant usually isunnecessary.

§ 9:9 Outside Vendors

The company will need to line up several vendors as part of the IPO.Their roles are not glamorous but they serve essential functions.

§ 9:9.1 Financial Printer

An outstanding financial printing firm is an underappreciated assetin the IPO process. Although most of the printer ’s IPO tasks aremundane—typesetting the Form S-1, making changes requested by theworking group, assembling exhibits, submitting filings on EDGAR,and printing and delivering the prospectuses—all take on a magnifiedimportance in an IPO, when there invariably is time pressure and noroom for mistakes. A few financial printers dominate the market and


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are well known to IPO regulars. Printers compete on the basis ofservices, price, and convenience. Major printers generally offer verysimilar services and are largely indistinguishable based on objectivefactors. The company can ask several printers to compete for thebusiness, but bids are often difficult to compare and based on assump-tions that prove unrealistic. Some printers will bundle their IPOservices with future public company services, primarily the submis-sion of Exchange Act reports on EDGAR and the typesetting andprinting of the proxy statement and annual report. Others will treatthe IPO work as a loss leader in order to win more lucrative post-IPOprinter assignments, such as for follow-on offerings and M&A trans-actions. In many cases, a financial printing firm is chosen based ongeographic location and the past experience of company counsel andmanagement in working with the printers under consideration. Thefinancial printer should be selected by the time of, or shortly after, theorganizational meeting so that it can begin typesetting financialstatements and assembling exhibits in advance of the Form S-1 filing.

§ 9:9.2 Transfer Agent

Transfer agents for public companies are required to register withthe SEC or (for banks acting as transfer agents) an applicable bankregulatory agency and must comply with various reporting, record-keeping, and other rules. In order to list its common stock on Nasdaqor the NYSE, the company must choose a transfer agent that meets theinsurance and connectivity requirements to operate in the directregistration system of Depository Trust Company (DTC).12 IPOcompanies can select a transfer agent from among numerous possibi-lities and typically base decisions on factors such as management’spast working relationships, counsel recommendations, and price.

§ 9:9.3 Virtual Data Room Provider

To facilitate the due diligence process, particularly when the partiesare geographically dispersed or if a dual track process is contemplated,the company may wish to establish a virtual data room in whichelectronic copies of documents are posted on an external website forremote access by authorized users. Financial printers and othervendors provide this capability, competing on the basis of price andservices.

12. Stock exchange listing is discussed further in chapter 15.


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§ 9:9.4 Electronic Road Show Host

If the company utilizes an electronic road show, it will probably behosted by an outside vendor. Several companies provide this hostingservice. Arrangements are usually made by the managingunderwriters.

§ 9:9.5 Banknote Company

Historically, physical stock certificates were printed by a specialkind of printer called a “banknote company.” With the elimination ofthe exacting design and engraving requirements that applied to stockcertificates in decades past, any number of providers—including sometransfer agents—can supply an inventory of stock certificates. Com-panies usually pick a banknote company or other supplier of stockcertificates based on cost and recommendations from its transfer agentor counsel.

§ 9:9.6 Option Administrator

If the company has a large number of optionees or frequent optiongrants, it may wish to outsource the option administration function toan external provider.

§ 9:10 Changes in the IPO Team

Despite a thorough and thoughtful selection process, sometimesthe IPO team does not work out as planned. What should thecompany do? The answer depends on the nature of the problem andthe parties involved.

Serious issues can arise from the unexpected unavailability of any ofthe principal players. Although the company would have consideredthe general reputation of any investment banking firm selected as alead manager, in all likelihood it was the specific deal team orindividuals at that bank that attracted the company, built relation-ships with senior management, and invested the time and effort tolearn about the company and its industry. If key members leave thebank or are unable to participate fully in the IPO process, for anyreason, the company may have to reevaluate the bank’s role as a leadmanager. Less frequently, a lead manager may perform so poorly that achange becomes necessary. Regardless of the reason, a switch in leadmanagers is disruptive and may cause delays and should be under-taken only when necessary to salvage the offering.

A similar—and more common—problem is posed by the departureof a managing underwriter ’s research analyst during the offeringprocess. Anticipated coverage by the analyst after the closing mayhave been an important reason for the company ’s selection of the bank


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as a managing underwriter, and loss of that analyst may eliminate therationale for the bank’s participation. If an analyst moves to anotherfirm, the company may be tempted to bring in the analyst’s newemployer as a managing underwriter. In most cases, however, this isneither feasible nor sensible.

Somewhat different considerations apply to the departure or un-availability of key members of the company ’s counsel or independentaccountants. Although the company may have loyalties to particularindividuals at its law and accounting firms, it is usually possible forother persons at these firms to step in, with minimal disruption orinefficiency, if staffing changes become necessary. Moreover, as dis-cussed above, a change in accounting firms would precipitate prospec-tus disclosure that is often considered undesirable, and it could resultin re-audits of prior periods if required by the new accounting firm or ifthe former accounting firm refuses to consent to the use of its prioraudit report.

Minor disagreements and personality clashes among members of theworking group are commonplace as the IPO process wears on, butexperienced professionals can almost always overcome these distrac-tions. In rare cases, the behavior of one personmay present a substantialimpediment to the successful completion of the offering. If this happens,the company should simply request that the person be replaced.

• • •

The company ’s senior management and outside professionals—particularly the managing underwriters, company counsel, and auditfirm—play indispensable roles in the IPO process and have substan-tial influence over the ultimate outcome of the effort. The com-pany ’s selections can markedly increase the odds of a smooth,successful IPO. With the company ’s pre-IPO planning completeand its team in place, the IPO process can begin.


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