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Preparing to go public<br />
• Stockholder action provisions—The<br />
company can improve its defensive<br />
posture by regulating the methods<br />
by which a hostile bidder can call<br />
for and obtain a stockholder vote on<br />
director elections or other proposals<br />
that may facilitate a takeover. Charter<br />
and bylaw provisions can be used to<br />
limit the ability of the hostile bidder<br />
to call special meetings or bypass the<br />
meeting requirement altogether by<br />
the use of a written consent of the<br />
stockholders. The company may also<br />
wish to consider provisions requiring<br />
stockholders to give adequate advance<br />
notice and supply information<br />
before their proposals are added to<br />
the agenda of a regular or special<br />
meeting.<br />
• Supermajority voting—“Supermajority”<br />
voting requirements may be imposed<br />
for mergers and other specified<br />
transactions between the company and<br />
an “interested stockholder,” which may<br />
be defined, for example, as a holder<br />
of more than 10% of the outstanding<br />
shares. Thus, an 80% vote might be<br />
required to approve an acquisition of<br />
the company by a major stockholder,<br />
instead of the more typical 50% or<br />
66%. A fair price condition may be<br />
incorporated into the supermajority<br />
provision, requiring a supermajority<br />
vote, for example, when an interested<br />
stockholder proposes a merger at any<br />
price less than the highest price paid<br />
for any share of company stock by the<br />
interested stockholder.<br />
• Business combinations with<br />
interested stockholders—For example,<br />
under Delaware law, an “interested<br />
stockholder” (generally a holder of<br />
15% or more of the voting stock) is<br />
generally prohibited from engaging<br />
in a business combination with<br />
the company for three years after<br />
the holder became an interested<br />
stockholder. Although a Delaware<br />
corporation can expressly elect in<br />
its charter not to be subject to this<br />
“freeze-out” statute, it can be an<br />
effective antitakeover defense.<br />
• Issuance of shares—The company<br />
should ensure that it has a sufficient<br />
amount of common and “blank check”<br />
preferred stock authorized under its<br />
charter. In many jurisdictions, the<br />
company may include in its authorized<br />
and unissued stock a certain amount<br />
of undesignated preferred shares.<br />
The board will be authorized to<br />
issue preferred shares in one or more<br />
series and to determine and fix the<br />
designation, voting power, preference<br />
and rights of each series. The existence<br />
of blank check preferred stock allows<br />
the board to issue preferred stock with<br />
supervoting, special approval, dividend<br />
or other rights or preferences without<br />
a stockholder vote. However, NYSE<br />
rules generally require stockholder<br />
approval by a majority of votes cast<br />
before a company issues shares<br />
representing 20% or more of the<br />
outstanding voting power outside<br />
a public offering. Also, if there is a<br />
poison pill, the company should make<br />
sure it has sufficient authorized shares<br />
for the shares to be issued if the pill is<br />
triggered.<br />
• Change of control provisions—A<br />
common feature of loan agreements<br />
and other significant contracts is<br />
a provision restricting a change of<br />
control of the company, resulting<br />
in an event of default if breached.<br />
These provisions protect the lender<br />
or other contracting party, but<br />
reduce the company’s flexibility,<br />
particularly in restructuring efforts<br />
or friendly takeover transactions,<br />
as well as making the company less<br />
attractive to a potential acquirer.<br />
In 2009, the Delaware Chancery<br />
Court raised questions regarding<br />
the interpretation and validity of<br />
certain of these provisions, as a<br />
contractual term that could affect<br />
the stockholder franchise. The<br />
company should carefully consider<br />
these provisions in its existing and<br />
proposed agreements, and if they<br />
cannot be eliminated, they should be<br />
approved at the board level.<br />
Corporate housekeeping: In anticipation of<br />
going public, the company should review<br />
and clean up documents with provisions<br />
that are intended for a private company<br />
(e.g., charter documents and stockholder<br />
agreements). Similarly, it is important for<br />
the company to review corporate minutes<br />
and other records to confirm that corporate<br />
formalities have been observed and<br />
properly documented, including for the<br />
issuance of stock of the company and its<br />
subsidiaries.<br />
2.4 Providing for employees<br />
Cleary Gottlieb Steen & Hamilton LLP<br />
In preparing for an IPO, the company<br />
should review all of its employee<br />
compensation and benefits arrangements<br />
in light of the opportunities and<br />
responsibilities resulting from the IPO.<br />
The major opportunity is the ability to<br />
compensate employees with publicly<br />
traded stock. The new responsibilities<br />
include becoming subject to tax and<br />
securities laws that did not previously<br />
apply, including Section 162(m) of the<br />
Internal Revenue Code of 1986 (the<br />
Code), rules for compensation disclosure<br />
in annual reports and proxy statements<br />
and Section 16 of the Exchange Act. This<br />
chapter describes these topics for a U.S.<br />
domestic company that does not qualify as<br />
an emerging growth company. For certain<br />
differences applicable to emerging growth<br />
companies, see Chapter 4, and to foreign<br />
private issuers, see Chapter 9.<br />
The company’s compensation<br />
committee might consider hiring a<br />
compensation consultant to help structure<br />
new arrangements in light of the IPO.<br />
As required by the Dodd-Frank Act,<br />
stock exchange listing rules require the<br />
compensation committee of a post-<br />
IPO company to have the authority and<br />
adequate funding to retain or obtain<br />
advice from compensation advisers,<br />
including compensation consultants<br />
and independent legal counsel, and<br />
to be directly and solely responsible<br />
for overseeing them. In addition, the<br />
compensation committee is required<br />
to consider specific factors regarding<br />
the independence of its advisers but<br />
may nevertheless receive advice from<br />
an adviser who is not considered to be<br />
independent based on those factors.<br />
Whether or not it retains advisers, the<br />
compensation committee is required to<br />
exercise its own judgment in fulfillment of<br />
its fiduciary duties.<br />
(a) Equity compensation<br />
Incentive plans: Having publicly<br />
traded stock opens up new avenues for<br />
compensating employees of the company.<br />
26 NYSE IPO Guide