IPO Insights: Corporate Governance Practices for New Public Companies

Conducting an initial public offering is a transformative event in a company’s lifecycle.  Becoming a public company requires numerous significant changes that are necessary to comply with SEC regulations and an accelerated and heightened financial reporting process, as well as handle constant market and investor scrutiny, while maintaining positive investor relations.  Companies often hire a general counsel, a CFO and additional finance personnel, and additional IR/marketing support in anticipation of an IPO.  In addition, due to the corporate governance listing standards of the Nasdaq and NYSE, most companies are required to implement significant corporate governance changes at the time of an IPO.  These changes include recruiting additional board members, creating independent board committees, and holding executive sessions with independent board members, which are detailed in “IPO Insights. Assembling your Public Company Board of Directors.”

Public company boards are also subjected to more scrutiny from shareholders than prior to the IPO.  The investment bankers taking a company public and the investors that invest in an IPO will expect a company to comply with the corporate governance requirements of the national securities exchange on which the company’s shares are being listed at the time of the IPO. Certain investors, including institutional investors, may have corporate governance practices that they expect to be reflected in the governance documents and practices of the companies in which they invest. 

Immediately prior to or substantially concurrently with the closing of an IPO, companies typically amend and restate their charter and bylaws to reflect governance standards that comply with Nasdaq or NYSE listing standards and are more closely aligned with public company practice.  Anti-takeover measures in public company charters and bylaws, which are adopted to protect against the threat of shareholder activism, may vary based on whether a company is a “controlled company”  (with more than 50% of the voting power for the election of its directors being held by a single person, entity or group) and its shares are predominantly held by large institutional investors or a founder or if its shareholder base is widely distributed. They may also be impacted by whether the company is a smaller, newly public company or a larger, more established public company.  Companies should also consider the governance guidelines of institutional investors and proxy advisory firms, such as Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. (Glass Lewis), which make shareholder voting recommendations in accordance with their governance guidelines and may influence the votes at a company's shareholder meeting.

Anti-takeover protections to consider include:

• dual-class common stock structures with super voting shares;
• blank check preferred stock;
• a classified board of directors (with or without sunset);
• advance notice provisions for shareholder proposals/nominations;
• shareholder action by written consent;
• cumulative voting;
• majority or supermajority vote requirements to amend the charter or bylaws;
• limitations on removing directors without cause;
• filling board vacancies by board vote;
• the board’s ability to change the board size and fill vacancies;
• shareholder ability to call special meetings;
• statutory freeze provisions for tender offers (such as DGCL 203 in Delaware); and
• exclusive forum provisions.

Smaller, newly public companies are at times able to include a greater number of anti-takeover provisions in their charter and bylaws as a result of facing less scrutiny from the public, proxy advisory firms and shareholder activists at the outset. Sponsors are also often able to negotiate strong anti-takeover provisions with respect to their portfolio companies. Over time, companies may face pushback from the public, investors, proxy advisory firms and shareholder activists to remove certain anti-takeover provisions from their charter or bylaws and to develop better corporate governance practices.

In connection with their IPO, companies also put in place committee charters and adopt various corporate governance policies or amend existing ones to comply with stock exchange requirements, SEC rules and regulations and to align with market practice, including:

• committee charters, including audit, compensation and nominating/corporate governance committee charters and other potential committees such as risk and disclosure;
• corporate governance guidelines;
• code of business conduct and ethics (for officers and employees);
• whistleblower policy;
• insider trading policy;
• related party transactions policy;
• Reg FD policy;
• clawback policy;
• FCPA and other anti-corruption policies;
• stock ownership policies for directors and executives; and
• ESG policies, including those relating to human capital management and human rights, data privacy and cybersecurity and trade policies.

Considerable thought will need to be given to putting in place a robust governance framework in connection with an IPO to ensure that the company is able to comply with the various SEC and stock exchange requirements and the laws of the jurisdiction in which it was incorporated, as well as align its practices with those of public companies and the expectations of the public, shareholders and proxy advisory firms.

For more information, visit Orrick’s “Are You IPO Ready?” resource center.