When Going Public, Focus on Financials, Disclosure: Panel

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By Che Odom

Dec. 3 — If the company pays the chief executive officer's country-club dues, rethink that before engaging in an initial public offering.

“If there is anything in executive compensation, especially for your five most highly compensated managers, that you'd be at least squeamish about seeing in the light of an IPO, you should think about eliminating that,” said Marc Paul, a Washington-based partner at Baker & McKenzie LLP, during a Dec. 3 webinar hosted by Bloomberg BNA.

Paul, who chairs his firm's North American corporate and securities practice group, was among a panel of financial and legal experts who spoke about the challenges businesses face in going public. Though an IPO does enable companies to raise capital and the visibility of their brands, it also puts them on the radar of regulators and investors, which means much forethought should go into deciding to go public, they said.

The planning, which may take six months, two years or longer, requires an examination of the capital structure, corporate governance and history of the business, Paul said.

Examine Capital Structure

One of the first planning items should be gaining an understanding of the organization's capital structure and identifying current investors, partners and unitholders, Paul said.

“Your company may be an LLC right now with a bunch of different membership interests, or you may be a regular C-corporation that has your venture backer and a number of preferred shares,” with classes of preferred stock, he said.

When the company goes public, underwriters will require that type of capital structure be altered, eliminating preferred stock, Paul said. “You are going to have a very hard time selling common stock if there is preferred stock or any other type of interest on top of that common stock,” he explained.

This will involve changes to the articles of incorporation and other documents, such as agreements pertaining to investor rights, registration rights and shareholders, he said.

Past acquisition agreements and credit facilities should be reviewed so the leadership team understands any contractual obligations, Paul added. “You can either meet those in the IPO” or negotiate changes to those ahead of time, he said.

Craft a Story

A big part of going public is the roadshow, in which the company meets institutional investors around the country to tell its story and whip up demand for the stock, Scott Skidmore, managing director at Barclays Capital, said during the webinar.

“It is one of those seven to eight-day periods when you will be pulled in many directions,” Skidmore said.

The IPO team must establish the company's identity during this period, looking back for highlights in the organization's history that may be presented to investors and the public, Paul said.

“You'll want to discuss it in the prospectus,” he said. “You'll want to understand and be able to communicate your long-term business plan, including significant milestones you will be able to achieve and the strategy you will use to get there.”

Check the filings of competitors who have gone public to see how they have presented their story and the risk factors they face, Paul continued.

“You will need to be able to speak to those same types of risk factors not only in your prospectus but most likely in your road show,” he said, recommending that issuers explain how their specific expertise and history position them to overcome challenges.

Picking a Team

The planning stage also involves building a management team with strong public company and public communications skills, as well as post-IPO experience, Paul said.

The Securities and Exchange Commission, as well as American stock exchanges, require that half the membership of a board consist of independent directors, which, as a practical matter, means expanding the pre-IPO board to meet that requirement, Paul said. In addition, audit and compensation committees must be composed entirely of independent directors, who will need financial expertise to fulfill their duties, he added.

Other Considerations

The planning phase also should involve updating internal controls, especially over financial reporting, and putting into place a stock incentive plan for employees before the IPO closes, Paul said.

“It is important to have the stock or stock options valued appropriately,” he said. “In that regard, you need to be very careful that in the period prior to the IPO, you're not issuing shares or options that are priced below, or well below, the IPO market price.”

So-called “cheap stock” is a red flag for regulators, and the SEC will inquire into options underpriced before the IPO, Paul said.

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com


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