Here's the deal:

  • The pre-filing period is an important part of an initial public offering ("IPO"), requiring a number of management, organizational considerations and structural changes before a company can effectuate an IPO.
  • Before a company can complete an IPO, the underwriters will want to complete their due diligence process and ensure that any necessary third-party consents have been obtained.
  • A company should consider the variety of underwriting arrangements, including "firm commitment" or "best efforts" underwriting arrangements, before an underwriting agreement is finalized.
  • Throughout the pre-filing period, the company and its underwriters will want to be cognizant of the limitations on public communications in order to avoid any "gun-jumping" violations.

What's the Deal?

The pre-filing period in an IPO begins once the company and its underwriters have agreed to proceed with an IPO and continues up through the public filing of the registration statement with the Securities and Exchange Commission ("SEC").

Corporate "Housekeeping" in Preparation for an IPO

Most companies consider making legal and operational changes before undertaking an IPO. Some of these preparations and considerations often include:

  • Meeting federal securities law requirements (including those arising as a result of the Sarbanes-Oxley Act) as well as applicable exchange requirements once the IPO registration statement is filed with, or declared effective by, the SEC, or committing to satisfy these within the applicable compliance periods;
  • Adopting anti-takeover defenses, such as a staggered board of directors and blank check preferred stock;
  • Analyzing its capitalization to determine whether it will be appropriate after the IPO; and
  • Reviewing executive compensation arrangements and benefit plans.

A company will also want to address other corporate governance matters, including:

  • Board structure and directors;
  • Management committees and member criteria;
  • Senior management;
  • Identifying, disclosing and/or terminating related party transactions; and
  • Directors' and officers' liability insurance.

Reviewing Management Structure

A public company must comply with corporate governance requirements imposed by federal securities laws and regulations and the rules and regulations of the applicable stock exchange, including with respect to the oversight responsibilities of the board of directors and its committees. A critical matter is the composition of the board itself. All exchanges require that, except under certain limited circumstances, a majority of the directors be "independent," as defined by both federal securities laws and exchange regulations. In addition, boards of directors should include individuals with appropriate financial expertise and industry experience, as well as an understanding of risk management issues and public company experience. A company will want to begin its search for suitable directors early in the IPO process even if it will not appoint the directors until the IPO is consummated. The company can turn to its large investors as well as its counsel and underwriters for references regarding potential directors and also designate a committee of the board to undertake the director search.

Board Committees

In addition to assembling its new board of directors, a company will also have to consider the board committees. The passage of Sarbanes-Oxley in 2002 significantly enhanced the independence and expertise requirements for audit committees. The exchanges all require listed companies to have an audit committee, consisting only of at least three independent directors who meet certain standards. At least one of the audit committee members must be a "financial expert."

Separately, the Nasdaq Stock Markets require, subject to certain phase-in rules, a compensation committee comprised of independent directors, but not a nominating committee; while the New York Stock Exchange requires a compensation committee and a nominating/corporate governance committee consisting only of independent directors. The functions of a nominating committee can be performed either by a committee consisting solely of independent directors or by a majority of the company's independent directors operating in executive session. Pursuant to the Dodd-Frank Act and the SEC's implementing rules, exchanges must require that listed companies' compensation committees, among other things, be comprised entirely of independent directors.

Under the rules of the exchanges, the audit, compensation and nominating/corporate governance committees must maintain their own charter, which describes the specific responsibilities of the committee, including the committee's purpose, member qualifications, appointment and removal, board reporting and performance evaluations. If any of the responsibilities of these committees are delegated to another committee, the other committee must be comprised entirely of independent directors and must have its own charter.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.