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Preparing to go public This transition relief also applies to any compensation received pursuant to the exercise of a stock option or substantial vesting of restricted stock granted under such a plan or agreement, so long as the grant occurred on or before the earliest of the specified events. Performance-based compensation: Performance-based compensation is not subject to the deduction limit of Section 162(m). To qualify as performance-based, the compensation must be paid solely on account of the attainment of one or more preestablished, objective performance goals, and the following requirements must be satisfied: • Certain actions are taken by a board compensation committee consisting solely of two or more “outside directors” (as defined in Section 162(m)). • The performance goal: • is established in writing by the committee before 25% of the performance period has elapsed and in no event later than the 90th day of the performance period; • is substantially uncertain to be achieved at the time it is established; • is objective such that a third party having knowledge of the relevant facts could determine whether it is met; and • precludes discretion to increase the amount of compensation payable that would otherwise be due upon the attainment of the goal. • The material terms of the performance goal are disclosed to, and approved by, a majority vote of shareholders before the compensation is paid, including the performance goal criteria and the maximum amount of compensation a participant could receive during a stated period. Although a newly public company will initially benefit from the IPO transition relief, it will eventually need its compensation committee to be comprised of outside directors for purposes of this performance-based compensation exception and to conform its plans and practices to the extent necessary. (c) Section 16 of the Exchange Act Upon the IPO, company directors and officers (as defined in Section 16) and 10% beneficial owners of company stock will become “Section 16 insiders” subject to the reporting and short-swing profit provisions of Section 16 of the Exchange Act. For more information about Section 16 filings, see Section 7.3. (d) Executive compensation and other arrangements The company should also review its employment, severance and change-incontrol agreements, if any, and consider the pros and cons of adopting or amending those agreements in light of the company’s changed circumstances. When making its decision, the company should keep in mind the detailed compensation disclosure that will be required both in the IPO prospectus and, going forward, in its annual proxy statements and the intense scrutiny that disclosure will receive. In addition, the company should review any arrangements that may be considered direct or indirect loans or other extensions of credit by it or its subsidiaries to any of its executive officers or directors, as these must generally be terminated prior to effectiveness of the registration statement filed with the SEC to comply with SOX. (e) Say-on-pay voting SEC rules implemented under the Dodd- Frank Act require shareholder votes on executive compensation, or “say-on-pay.” The company is required to hold the following votes at the company’s first annual meeting following its IPO: • Say-On-Pay Vote—a nonbinding shareholder vote to approve the compensation of the company’s named executive officers as disclosed and described in the company’s most recent proxy statement. The vote must occur at least once every three calendar years. • Say-On-Pay Frequency Vote—a nonbinding shareholder vote to approve the frequency of the say-on-pay vote. The say-on-pay frequency vote must occur at least once every six calendar years. These two votes are both nonbinding votes that do not overrule the compensation decisions of the company’s board of directors, and they do not impose additional fiduciary duties on the board of directors or any committee. The SEC rules also require a company to provide disclosure about compensation arrangements with executives to be entered into in connection with an acquisition, merger, consolidation or sale or other disposition of all or substantially all assets of the company. These arrangements are commonly referred to as “golden parachutes.” Unless the golden parachute compensation arrangements were previously subjected to a say-onpay vote (whether or not approved by shareholders), a nonbinding shareholder advisory vote on the arrangements must also occur at the meeting at which the company’s shareholders are asked to approve the related transaction. (f) Clawback policies The Dodd-Frank Act also requires the SEC to publish rules (to be implemented by stock exchanges) prohibiting any company from listing a security if it fails to adopt a specified clawback policy. The clawback policy, which is triggered upon an accounting restatement due to material noncompliance with the financial reporting requirements of the federal securities laws, requires recovery of any incentive compensation from executive officers that was based upon the erroneous financial data. This financial recoupment is required from any current or former executive officer during the three-year period preceding the date on which the company is required to prepare the restatement, regardless of whether there was misconduct by the covered executive officers. (The Sarbanes-Oxley Act authorizes the SEC to seek similar recoupment from the CEO and CFO, but only if the restatement is the result of misconduct, albeit not necessarily by the CEO or CFO.) Under the formula, the clawback is calculated as the excess amount paid out to such executive officers over what would have been paid out based upon the restated results. The SEC has not yet published rules implementing this requirement, 28 NYSE IPO Guide
Preparing to go public so adoption of a clawback policy is not yet mandatory. Nonetheless, as a result of shareholder proposals and good corporate governance practices, many companies have begun to implement and publicly disclose clawback policies, although not necessarily based on the Dodd-Frank model. Accordingly, a company preparing for an IPO may want to consider implementation of a clawback policy. 2.5 NYSE Governance Services: Reviewing and verifying your program, meeting regulatory standards NYSE Governance Services In anticipation of an IPO, a company should review and verify its internal readiness from an ethics and compliance standpoint, specifically taking into account the requirements of the seven “hallmarks” set forth by the U.S. Federal Sentencing Guidelines for Organizations, as amended (FSG). 15 Compliance with the FSG is vitally important since it can lead to a reduced sentence for organizations convicted of a federal crime if the organization can demonstrate that, notwithstanding the violation, it had an effective ethics and compliance program in place. In addition, each listed company must have a code of conduct and ethics complying with SEC rules and market listing requirements that is applicable to all directors, officers and employees. Therefore, having a truly “effective compliance and ethics program,” as set forth by the FSG, is one of the most important first steps in planning an organization’s IPO. According to the FSG, an effective compliance program is one through which an organization exercises “due diligence to prevent and detect criminal conduct” and otherwise promotes “an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” It is important to note that the FSG do not require that an 15 See generally United States Sentencing Commission, Guidelines Manual (“USSG”), and Chapter Eight –Sentencing of Organizations (Nov. 2010). effective program catch every instance of criminal conduct; rather, the commission emphasizes the need for a program that is “generally effective in preventing and detecting criminal conduct.” The FSG set forth seven factors used to evaluate a program’s effectiveness, including written standards, board oversight, highlevel personnel assigned to program, due diligence, training and communication, monitoring and auditing and enforcement. It is important to note that these are considered minimum requirements. Any program that fails in one of these categories would not be deemed effective, although the FSG do allow the size of the company to determine the formality of its program. In order to assess a company’s readiness for an IPO from an ethics and compliance perspective, it should take into account the requirements of the seven “hallmarks” set forth by the FSG, review and update the company’s ethics and compliance program and confirm that the organization meets all requirements for a truly effective program. To address these hallmarks while preparing for IPO, the company should consider the following: • Written standards—develop appropriate written standards, policies and procedures. If the company already maintains a code of conduct or other policies addressing ethics and compliance issues, review and verify that all areas are up-to-date and reflect best practices, as appropriate. • Board of directors oversight— delegate oversight responsibility to a subcommittee (e.g., the Audit Committee or the Corporate Governance Committee) and adopt or amend committee charters, as appropriate. • Ensure that a compliance officer is regularly reporting to a subcommittee of the board (i.e., at every regularly scheduled meeting and more often as necessary) and that the subcommittee is regularly reporting to the full board (i.e., at every regularly scheduled meeting and more often as necessary), both of which have had detailed discussions as a group about the content, format and functioning of the compliance program. • Provide code of conduct and relevant policy training to the board. The FSG do not require that the board complete the same training program administered to the organization’s employee base. Rather, the FSG state that the board should be “knowledgeable about the content and operation of the compliance and ethics program.” • High-level personnel assigned overall responsibility for the program—assign responsibility for the compliance program to an appropriate high-level individual. • Note that the FSG specifically require that the individual(s) given operational responsibility have adequate resources, appropriate authority and direct access to the governing authority or subgroup thereof. Many companies have gotten themselves into trouble (e.g., Fannie Mae) when senior management has attempted to interfere with the compliance officer reporting directly, for example, to the chair of the audit committee without “clearing” the report through senior management first. Under the stipulations of the FSG, this is not adequate. • Additionally, the FSG require that anyone who the organization knew or should have known had engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program should not be included among the group of individuals charged with responsibility for the compliance program. A robust program under the FSG would perform background checks upon hire and additional screening upon promotion and would require annual conflict of interest certifications in which those individuals responsible both for oversight and operations of the compliance program would disclose any government, vendor, customer or competitor conflicts, board memberships and substantial gifts NYSE IPO Guide 29
Page 1 and 2: NEW YORK STOCK EXCHANGE IPO Guide,
Page 3 and 4: NYSE IPO Guide For an electronic ve
Page 5: 9. Foreign private issuers 97 9.1 A
Page 8 and 9: Preface Congratulations on making i
Page 10 and 11: Introduction: Advantages of a NYSE
Page 12 and 13: Why go public? 1.1 Advantages of co
Page 15 and 16: 2 Preparing to go public NYSE IPO G
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Page 33 and 34: 3 The IPO process NYSE IPO Guide 31
Page 35 and 36: The IPO process Underwriter interna
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Page 39 and 40: The IPO process Three elements are
Page 41 and 42: The IPO process • document review
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Page 45 and 46: 4 The IPO on-ramp under the JOBS Ac
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8 Managing risk NYSE IPO Guide 83
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Managing risk certain actions. Gove
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Managing risk plan violations, rela
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Managing risk Indemnification is no
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Managing risk individuals—usually
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Managing risk Constructing a D&O li
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9 Foreign private issuers NYSE IPO
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Foreign private issuers individual
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Foreign private issuers Level III A
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Foreign private issuers the underwr
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Appendices NYSE IPO Guide 109
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Appendices Appendix IV: NYSE financ
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Appendices Appendix VI: Summary of
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Contributor profiles NYSE IPO Guide
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Contributor profiles (SEC) register
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Contributor profiles The Children
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Contributor profiles KPMG 345 Park
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Contributor profiles Morrow & Co.,
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