Entrepreneurial Governance Noteworthy Legal Issues for Pre-IPO and Small-Cap Directors Interview by Adam J. Epstein Peter M. Astiz, partner and co- and expensive process doesn’t sustain the aftermarket trading head of the Global Technology result in an offering for so many price? In addition, boards con- Sector Practice of DLA Piper in companies. What are the least sidering an IPO must factor in its Palo Alto, Calif., offjce, focus- understood fjduciary obliga- the risks of a delayed or unsuc- es on general counsel services tions associated with a board’s cessful IPO in the company’s fj- for high-technology companies, IPO deliberations? nancing plans. If the company private and public fjnancing Even with an improved IPO will need the IPO proceeds to transactions, and mergers and market, a substantial percent- fund operations, it is critical to acquisitions. He represents both age of the companies fjling for have an alternative fjnancing issuers and underwriters in initial IPOs in the last couple of years plan. IPOs are expensive, and public offerings and follow-on have not been able to success- the distraction of the offering Peter M. Astiz is part- offerings as well as convertible fully complete their transac- can adversely impact company ner and co-head of the debt offerings under Rule 144A. tions. The recently enacted performance. Companies with Global Technology Sec- Among his many IPOs, Astiz rep- JOBS Act will reduce certain the need to obtain fjnancing tor Practice at DLA Piper. resented Salesforce . com in the of the costs and burdens for following a failed IPO attempt fjrst SaaS IPO, and the under- “emerging growth companies” face substantial challenges, and writers in connection with the pursuing IPOs. However, at boards need to balance the cost Groupon IPO. He also represents least for the near term, there is versus the benefjts of arranging buyers and sellers in public and no indication that it will result for additional fjnancing as secu- private merger and acquisition in increased investor demand, rity prior to the IPO process. As transactions, and issuers and and therefore is not likely to in- in all matters, in making these venture capitalists in venture crease the percentage of IPO decisions independent directors capital and other private place- fjlings that lead to a successful must focus on the interests of all ment fjnancings. NACD Director- offering. Even for those compa- stockholders, not just the desires ship interviewed Astiz about the nies that have completed their of management or key investors, legal implications for directors of IPOs, many have been priced particularly if existing inves- pre-IPO and small-cap compa- below original expectations, tors are likely the source of any nies arising out of various issues and post-IPO stock performance needed fjnancing. making news of late. has been very mixed. Many, if not most, companies consider- The SEC recently has brought The JOBS Act and related ing an IPO are balancing pur- a number of actions arising out IPO on-ramp provisions have suing the IPO against an M&A of the increasingly vibrant sec- brought a renewed focus on exit. In assessing a potential ondary market for shares of pri- IPOs and their importance to M&A exit, boards need to factor vately held companies. What the U.S. economy. That said, in how achievable is the “IPO legal issues should directors be the decision by a private com- premium”: Will the deal actu- aware of if shares in their com- pany board to undertake an ally get done, and will it price pany trade in these secondary IPO is complex, especially inas- at the level originally anticipat- markets? much as the lengthy, distracting ed? Will the company be able to There are two signifjcant legal May/June 2012 www.directorship.com 63
Entrepreneurial Entrepreneurial Governance issues for boards to focus on in connection be sensitive to taking actions that facilitate “Controlled companies” are compa- with secondary sales. The fjrst is that com- sales by some stockholders (particularly nies with respect to which more than 50 panies face a risk of claims based upon the insiders) without providing the same op- percent of the voting power is controlled information provided in secondary trans- portunities to other stockholders. Separate by one person or a group. Traditionally, actions, particularly if the sellers include from the legal issues, the board should be the controlled-company exceptions most any company insiders. Buyers may claim cognizant of the changing dynamics and commonly arose in connection with pri- fraud based upon inaccurate or incom- shift in priorities that can happen when vate equity-backed IPOs. However, many plete information. Sellers may also make founders, key employees or major inves- of the more recent high-profjle venture- claims if they sell at too low a price as a tors gain liquidity prior to a liquidity event backed IPOs have included dual class result of incomplete information from the for all stockholders. voting structures, with founders retaining company. Boards should be actively en- control as a result of super-voting shares. gaged in the process of determining what Facebook’s IPO has inspired extensive Exchange rules exempt controlled com- information the company provides (or commentary with respect to the con- panies from the general requirements to allows to be provided) to third parties to trolled-company exemptions implement- have a majority of the board be indepen- minimize the risk of claims. The second ed by various stock exchanges. What dent, as well as the requirements for fully issue relates to differential treatment of dif- are some legal issues that independent independent compensation and nomi- ferent stockholders. The board has a fjdu- directors on controlled-company boards nating committees. Independent direc- ciary duty to all stockholders and needs to should be particularly cognizant of? tors need to be mindful that the exchange NACD Board Leadership Conference 2012 October 14-16 S AV E WHO More than 750 top public company directors, corporate offi cers, C-suite executives, and TH E the country’s leading governance experts. WHAT DAT E NACD’s annual conference committed to advancing exemplary board leadership — the largest and most premier thought-leadership event on the Early Bird Savings End July 31 corporate governance calendar each year. WHERE Gaylord National Resort & Convention Center NACDonline.org/Conference National Harbor, Maryland
exemptions do not change the funda- These include staggered boards, lack of might have been considered to be best mental fjduciary duty of the directors to independent chair or lead independent practices. For those matters, with respect represent the interests of all stockhold- director, plurality voting, and restrictions to which there are specifjc requirements, ers, and that best practices should still in- regarding calling stockholder meetings, most boards seek to carefully comply with clude steps to facilitate the most effective board nominations and raising stockhold- the requirements. In particular, the em- participation of the independent direc- er proposals. phasis on board independence and audit tors, such as executive sessions without committee qualifjcations has had an im- management and active engagement in Now that we’re approaching the 10th pact on the composition of boards. That the development of board agendas and anniversary of the Sarbanes-Oxley Act, said, there is substantial question as to board processes and procedures. Separate have you witnessed material changes in whether the manner in which boards con- from the controlled-company issues, all board conduct, or have you mostly seen duct their routine business has material- boards considering an IPO should thor- lip service in the small-cap environment? ly changed as a result of Sarbanes-Oxley oughly review and consider the proposed As a result of the Sarbanes-Oxley and the related regulations. As with all corporate governance structure. For ex- Act, companies pursuing an IPO must matters, boards must focus on performing ample, substantially all venture-backed now adopt a variety of specifjc policies their duties consistent with the spirit of IPO companies adopt structures that are and procedures that historically were not best corporate governance principles, and in confmict with what are generally viewed required. For the most part, these policies not by just checking off compliance with a list of specifjc requirements. D as best corporate governance practices. and procedures represent what otherwise Everyone wants to grow. But grow how? In which markets? At what cost? To grow wisely, you need an advisor who really knows your business...and knows you. Who can deliver tailored solutions that create opportunities, maximize effjciency and build business. EisnerAmper is that advisor. We roll up our sleeves to get to the bottom of your toughest challenges so you get the advice and strategies you need to create sustainable growth. Charles Weinstein Howard Cohen Chief Executive Offjcer Chairman 212.949.8700 732.287.1000 charles.weinstein@eisneramper.com howard.cohen@eisneramper.com EisnerAmper LLP Accountants & Advisors www.eisneramper.com NEW YORK | NEW JERSEY | PENNSYLVANIA | CALIFORNIA | CAYMAN ISLANDS Independent Member of PKF International May/June 2012 www.directorship.com 65
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