corporate governance practices of u.s. s initial public offerings e … · 2013. 7. 30. · 1 davis...

Corporate GovernancePractices of U.S. Initial Public Offerings(Excluding Controlled Companies)

October 2011

Davis Polk & Wardwell llP

IPO

Go

vern

ance

Sur

vey

Table of Contents

Overview ..........................................................................................................................................1

The Companies ...............................................................................................................................1

Significant Findings..........................................................................................................................2

Primary Listing Exchange ................................................................................................................3

Classes of Outstanding Common Stock at IPO ..............................................................................3

Board Size at IPO............................................................................................................................4

Level of Board Independence at IPO ..............................................................................................4

Classified Board at IPO ...................................................................................................................5

Separation of Chairman and CEO...................................................................................................6

Lead Director ...................................................................................................................................6

Audit Committee Financial Experts at IPO ......................................................................................7

Audit Committee Independence at IPO...........................................................................................8

Voting in Uncontested Board Elections ...........................................................................................9

Supermajority Vote for Amending the Charter and Bylaws ...........................................................10

Poison Pills and Blank Check Preferred Stock..............................................................................11

Exclusive Forum Provisions...........................................................................................................12

Compensation Consultants............................................................................................................13

Shareholder Action by Written Consent.........................................................................................14

1

Davis Polk & Wardwell llP Corporate Governance Practices of U.S. Initial Public Offerings

Overview

As an advisor to underwriters and issuers in initial public offerings, we surveyed the corporate

governance practices of recent U.S. IPOs to identify current market trends. We focused on the top 50

IPOs of U.S. companies from January 1, 2009 through August 31, 2011 in terms of deal size of the

IPO.* The deal size of the examined IPOs ranged from $132.0 million to $18.14 billion.

The Companies We examined the following 50 companies, spanning 28 industries:

* Excludes controlled companies, limited partnerships, REITS, trusts and blank check companies.

**Davis Polk & Wardwell participated in the IPO.

A123 Systems, Inc.

Accretive Health, Inc.

Air Lease Corp.**

Artio Global Investors Inc.**

BankUnited, Inc.**

Bravo Brio Restaurant Group, Inc.

C&J Energy Services, Inc.

CBOE Holdings, Inc.

Cloud Peak Energy Inc.**

Cornerstone OnDemand, Inc.

Demand Media, Inc.

DigitalGlobe, Inc.**

ExamWorks Group, Inc.

Financial Engines, Inc.

First Connecticut Bancorp, Inc.

FleetCor Technologies, Inc.

Fortinet Inc.**

Fusion-io, Inc.

General Motors Co.**

Green Dot Corp.

HomeAway, Inc.

Imperial Holdings, Inc.

IntraLinks Holdings, Inc.

Ironwood Pharmaceuticals, Inc.**

LinkedIn Corp.

Molycorp, Inc.**

NetSpend Holdings Inc.

Northwest Bancshares, Inc.

Pacific Biosciences of CA, Inc.**

Pandora Media, Inc.**

Primerica, Inc.

QuinStreet, Inc.**

RealD Inc.

RealPage, Inc.

RPX Corp.

ServiceSource International**

Skullcandy, Inc.

SolarWinds, Inc.

Solazyme, Inc.**

STR Holdings, Inc.**

Swift Transportation Co.

Symetra Financial Corp.

Targa Resources Corp.

Tesla Motors, Inc.

The Chefs’ Warehouse, Inc.

The Active Network, Inc.

Vera Bradley Designs, Inc.

Verisk Analytics, Inc.**

Vitacost.com, Inc.

Zipcar, Inc.

Corporate Governance Practices of U.S. Initial Public Offerings

Significant Findings

In doing our research, we compared our findings in this survey to those in our 2009 survey. We found

that generally, despite the growing pressure for certain corporate governance provisions in seasoned

issuers, the corporate governance practices at the IPO companies that we surveyed in 2011 remained

in many ways unchanged from those in our 2009 survey. In both surveys, there were approximately

similar results for the existence of classified boards, voting standards in uncontested board elections and

the percentage of audit committee independence at the time of the IPO. Indeed, we found many fewer

companies separating the role of CEO and Chairman of the board in our 2011 survey—34% as

compared with 52% in the 2009 survey.

We did note, however, some trends, however small, towards more shareholder–friendly provisions:

■ The 2011 survey showed a 74% average level of director independence versus 66% in the 2009survey. Also, of the companies that separate the role of CEO and Chairman, 65% of thosesurveyed in 2011 had an independent chairman versus 19% in the 2009 survey.

■ The 2011 survey also saw an increase in the number of companies that had more than onefinancial expert on their Audit Committee: 32% of companies in the 2011 survey versus 14% inthe 2009 survey.

■ In the 2011 survey, no companies had a poison pill compared to the 2009 survey in which 6% ofcompanies had a poison pill.

Finally, we have added a new section, “Exclusive Forum Provisions.” This addition reflects a growing

trend of public companies to incorporate provisions in either their charter or bylaws requiring certain

litigation against the company to be brought exclusively in the state court of Delaware, the company’s

state of incorporation. The 2011 survey shows that 14% of the companies examined had exclusive forum

provisions.


2



3


Primary listing Exchange

Of the 50 companies examined:

■ 26 companies (52%) are listed on the NYSE

■ 24 companies (48%) are listed on the NASDAQ

Classes of Outstanding Common Stock at IPO


■ 41 companies (82%) had one class of outstanding common stock

■ 6 companies (12%) had two classes of outstanding common stock

■ 3 companies (6%) had three or more classes of outstanding common stock

NYSE52%

NASDAQ48%

Primary Listing Exchange

Classes of Outstanding Stock

Nu

mb

er

of

Co

mp

an

ies 41

36

0

5

10

15

20

25

30

35

40

45

One Class Two Classes Three or More Classes

Board Size at IPO


■ The average board size was 8

■ The median board size was 7

■ The board sizes ranged from 5 to 19 members

■ There is no distinct correlation between deal size and board size

level of Board Independence at IPOOf the 50 companies examined:

■ The average level of director independence was 74% of the board

■ The median level of director independence was 75% of the board

■ The levels of director independence ranged from a low of 29% to a high of 90%

Requirement for director independence at time of IPO

Subject to an exception for “controlled companies,” the NYSE and NASDAQ standards require that

the board of directors of an IPO company consist of a majority of independent directors within one

year of the date of listing.


4


02468101214161820

0 500 1,000 1,500 2,000 2,500 3,000 16,000 18,000 20,000

Deal Size vs. Board Size

Bo

ard

Siz

e

Deal Size($ millions)


5


Classified Board at IPO


■ 39 companies (78%) had classified boards

■ 11 companies (22%) did not have classified boards

Classified Boards

No22%

Yes78%

Separation of Chairman and CEO


■ 17 companies (34%) had a separate chairman and CEO

■ Of these 17 companies with a separate chairman, 11 (65%) had an independent chairman

lead Director


■ 13 companies (26%) had a lead director

■ 37 companies (74%) did not have a lead director


6


Lead Director

Yes26%

No74%

Separation of Chairman & CEO Independent Chairman

SeparateChairman34%

NoSeparation66%

Independent65%

Non-Independent35%


7


Audit Committee Financial Experts at IPO


■ 32 companies (64%) had one financial expert

■ 8 companies (16%) had two financial experts

■ 6 companies (12%) had three financial experts

■ 2 companies (4%) had four financial experts

■ 2 companies (4%) had no financial experts

Disclosure of an Audit Committee financial expert at IPO

The SEC requires a listed company to disclose in its annual report whether the board of directors

has determined that the company has at least one audit committee financial expert serving on its

audit committee, or why it does not have one.

An audit committee financial expert is a person who has the following attributes: (1) an

understanding of generally accepted accounting principles and financial statements; (2) the ability

to assess the general application of such principles in connection with the accounting for estimates,

accruals and reserves; (3) experience preparing, auditing, analyzing or evaluating financial

statements that present a breadth and level of complexity of accounting issues that are generally

comparable to the breadth and complexity of issues that can reasonably be expected to be raised

by the company’s financial statements, or experience actively supervising one or more persons

engaged in such activities; (4) an understanding of internal control over financial reporting; and (5)

an understanding of audit committee functions.

Audit Committee Financial Experts at IPO

Two16%

Three12%

Four4%

Zero4%

One64%

Audit Committee Independence at IPO


■ 39 companies (78%) had a fully independent audit committee at the time of their IPOs

■ 2 companies (4%) had a ¾ independent audit committee at the time of their IPOs

■ 9 companies (18%) had a ⅔ independent audit committee at the time of their IPOs

Audit Committee independence at time of IPO

Under NYSE and NASDAQ rules, an IPO company must have at least one independent member of

the audit committee at the time of listing, a majority of independent members within 90 days of its

registration statement being declared effective and a fully independent audit committee within one

year of its registration statement being declared effective.

In addition to the NYSE/NASDAQ independence standards applicable to all independent directors,

audit committee members are required to meet additional specific independence requirements set

forth by the SEC, which provide that a director who serves on the listed company’s audit committee

may not, other than in his or her capacity as a member of the audit committee, the board of directors,

or any other board committee: (1) accept any consulting, advisory, or other compensatory fee from

the listed company (excluding fixed, noncontingent payments under a retirement plan for prior

service with the listed company); or (2) be an “affiliated person” of the listed company.


8


Audit Committee Independence at IPO

¾ Independent

4%

Fully

Independent

78%

⅔ Independent

18%

Voting in Uncontested Board Elections


■ 47 companies (94%) required a plurality standard for board elections

■ 3 companies (6%) required a majority standard for board elections*

* Of these 3 companies, 2 companies (66%) have a director resignation policy.

Voting standard for director elections under Delaware Law

Under Delaware Law, in the absence of a different specification in the certificate of incorporation or

bylaws of the company, directors are elected by a plurality voting system. Under the plurality voting

system, the nominees for directorships are elected based on who receives the highest number of

affirmative votes cast. Under a majority voting system, a nominee for directorship is elected if he or

she receives the affirmative vote of a majority of the total votes cast for and against such nominee.


9


Plurality94%

Board Elections

Majority6%

Supermajority Vote for Amending the Charter and Bylaws


■ 37 companies (74%) required a supermajority shareholder vote for amending the charter and/or bylaws

■ Of the 37 companies that required a supermajority vote, 12 companies (32%) required a vote of 75% or more

■ 13 companies (26%) did not require a supermajority shareholder vote for amending the charterand/or bylaws


10


Supermajority Threshold of Equal to or Greater than 75%

less than75%(68%)

Equal to orgreater than 75%(32%)

No26%

Supermajority for Amending the Charter and/or the Bylaws

Yes74%


11


Poison Pills and Blank Check Preferred Stock


■ No companies had a shareholders’ rights plan

■ All but one company (98%) were authorized to issue “blank check” preferred stock

Authority to issue “Blank Check” preferred stock

A company may include in its authorized and unissued stock a certain amount of undesignated

preferred shares. The board of the company is authorized to issue preferred shares in one or more

series and to determine and fix the designation, voting power, preference and rights of the shares

of each such series and any of its qualifications, limitations or restrictions. The existence of “blank

check” preferred stock allows the board to issue preferred stock with super voting, special approval,

dividend or other rights or preferences on a discriminatory basis without a shareholder vote.

No100%

Not Authorized2%

Authorized98%

Existence of Shareholders’ Rights Plan

Authorization to Issue Blank Check Preferred Stock


12


Exclusive Forum Provisions


■ 7 companies (14%) had exclusive forum provisions, all of which specified Delaware as theexclusive forum

■ Of these 7 companies with exclusive forum provisions, 6 (86%) adopted them in thecompany’s charter and 1 (14%) adopted them in the company’s bylaws

■ 43 companies (86%) did not have exclusive forum provisions

■ All companies with exclusive forum provisions were from 2010 or 2011 IPOs

Exclusive Forum Provisions

Bylaws14%

Charter86%

Yes14%

No86%


13


Compensation Consultants


■ 31 companies (62%) disclosed the use of compensation consultants

■ Of these 31 companies that disclosed using consultants, 29 (94%) specified the consultantused

■ The specified consultants included:

* Towers Perrin and Watson Wyatt merged to form Towers Watson on January 1, 2010.

Compensation Consultants

The SEC requires a listed company to disclose in its Form S-1 and its proxy statement any role of

compensation consultants in determining or recommending the amount or form of executive and

director compensation, identifying such consultants, stating whether such consultants are engaged

directly by the compensation committee (or persons performing the equivalent functions) or any

other person, describing the nature and scope of their assignment, and the material elements of the

instructions or directions given to the consultants with respect to the performance of their duties

under the engagement.

Compensation Consultants Disclosure

Yes

62%

No

38%

Amalfi Consulting

Compensia, Inc.

Dolmat Connell & Partners, Inc.

Exequity

Frederic W. Cook & Co.

Hewitt Associates

IPAS

McLagan, Inc.

Pearl Meyer & Partners

Mercer, LLC

Radford Surveys & Consulting

Syzygy Consulting Group

Towers Perrin*

Towers Watson*

Watson Wyatt*


14


Shareholder Action by Written Consent


■ 5 companies (10%) permit shareholder action by written consent

■ 45 companies (90%) prohibit shareholder action by written consent

Shareholder Action by Written Consent Permitted

Yes

10%

No

90%


15


Davis Polk’s Capital Markets PracticeDavis Polk & Wardwell LLP has one of the world’s premier capital markets practices. We provide a full

range of services for issuers and underwriters in initial public offerings, follow-on offerings, investment-

grade and high-yield debt issuances, and in the design and execution of sophisticated equity derivative

products. As counsel of choice for many of the world’s leading investment banks and for a broad

spectrum of U.S. and non-U.S. issuers, Davis Polk consistently ranks among the top handful of law firms

engaged globally in capital markets work.

Davis Polk is the premier international IPO advisor. We have extensive experience acting as

counsel to companies, selling shareholders and underwriters in connection with these transactions.

Some recent IPO practice highlights include:

• advising on the five largest IPOs in history, three of which were completed in 2010;

• advising on the largest IPO globally, and the largest in the U.S., Asia and Latin America;

• ranking as the #1 IPO advisor in the U.S. in 2010, 2009 and 2008, having advised on

approximately 30%, approximately 40% and more than 70% of IPOs by volume in 2010, 2009 and

2008, respectively;

• advising the lead managers on the $23.1 billion SEC-registered IPO of common stock and

convertible junior preferred stock of General Motors ― this is the largest IPO in history;

• advising the Agricultural Bank of China on its $22 billion Rule 144A/Regulation S global IPO and

dual listing of H shares and A shares ― this is the second-largest IPO in history and the largest-

ever by an Asian issuer;

• advising the Federal Reserve Bank of New York (FRBNY) on the $20.5 billion Rule 144A/Regulation

S global IPO of common shares of AIA Group. The shares were sold by American International

Group (AIG) and represented the sale of 67.1% of AIG’s formerly 100% stake in AIA ― this is the

largest-ever IPO on the Hong Kong Stock Exchange;

• advising Bankia on its €3.1 billion ($4.4 billion) Rule 144A/Regulation S IPO of ordinary shares ―

this is the first IPO to be conducted by former Spanish savings banks and is the largest IPO

in Spain since December 2007;

• advising Prada on its $2.15 billion Rule 144A/Regulation S IPO and Hong Kong Stock Exchange

listing of ordinary shares ― this is the largest Hong Kong IPO so far in 2011;

• advising PANDORA on its $2 billion Rule 144A/Regulation S IPO of common stock ― this is the

largest Danish IPO since 1994 and the second-largest IPO in Western Europe in 2010;

• advising the joint global coordinators on the €1.3 billion ($1.7 billion) Rule 144A/Regulation S IPO

of common stock of Amadeus IT Holding ― this was Spain’s first public offering on the

Continuous Market of the Spanish Stock Exchanges since 2007;

• advising Arcos Dorados Holdings on its $1.4 billion SEC-registered IPO of Class A shares ― this

is the largest IPO by a Latin American issuer so far in 2011;

• advising the underwriters on the $1.4 billion SEC-registered IPO of Class A shares by Yandex ―

this offering is the biggest technology IPO worldwide in 2011 to date and the largest IPO of

an Internet company since Google’s IPO in 2004;

• advising the lead managers on the $923 million SEC-registered IPO of Class A common stock of

Air Lease Corporation ― this transaction is the jet-leasing industry’s largest-ever IPO;

• advising the underwriters on the $900 million SEC-registered IPO of common stock of BankUnited

― this is the largest U.S. bank IPO in history;

• advising the joint bookrunners on the $681 million Rule 144A/Regulation S IPO of common stock

of Grupo Qualicorp;

• advising Kosmos Energy on its $621 million SEC-registered IPO of common stock;

• advising the lead managers on the $476 million SEC-registered IPO of common stock of NXP

Semiconductors;

• advising the lead managers on the $408 million IPO of common stock of Molycorp;

• advising Pandora Media on its $235 million SEC-registered IPO of common stock; and

• advising the underwriters on the $224 million SEC-registered IPO of ADSs by 21Vianet.


16


Our lawyers

Our global capital markets practice has approximately 235 lawyers, including 46 partners in our offices

around the world.

For more information, please contact:

Phone Email

New York

Sarah E. Beshar 212 450 4131 [email protected]

Maurice Blanco 212 450 4086 [email protected]

Ning Chiu 212 450 4908 [email protected]

John G. Crowley 212 450 4550 [email protected]

Alan Dean 212 450 4126 [email protected]

Richard A. Drucker 212 450 4745 [email protected]

Manuel Garciadiaz 212 450 6095 [email protected]

Joseph A. Hall 212 450 4565 [email protected]

Michael Kaplan 212 450 4111 [email protected]

Deanna L. Kirkpatrick 212 450 4135 [email protected]

Nicholas A. Kronfeld 212 450 4950 [email protected]

Richard J. Sandler 212 450 4224 [email protected]

Richard D. Truesdell, Jr. 212 450 4674 [email protected]

Elizabeth Weinstein 212 450 4803 [email protected]

17



Our lawyers (cont.)

Phone Email

Menlo Park

Julia K. Cowles 650 752 2007 [email protected]

Francis S. Currie 650 752 2002 [email protected]

Bruce K. Dallas 650 752 2022 [email protected]

Alan F. Denenberg 650 752 2004 [email protected]

Daniel G. Kelly, Jr. 650 752 2001 [email protected]

William M. Kelly 650 752 2003 [email protected]

Sarah K. Solum 650 752 2011 [email protected]

Mischa Travers 650 752 2014 [email protected]

Martin A. Wellington 650 752 2018 [email protected]


18


FOR MORE INFORMATION, CONTACT:

Kevin Cavanaugh

Director of Business Development

212 450 6811

[email protected]

davispolk.com

NEW YORK450 lexington Avenue New York, NY 10017212 450 4000 tel 212 450 3800 fax

MENlO PARK 1600 El Camino Real Menlo Park, CA 94025 650 752 2000 tel 650 752 2111 fax

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SÃO PAUlOAv. Brig. Faria lima, 390011° andar – cj 1102São Paulo – SP 04538-13255 11 4871 8400 tel55 11 4871 8500 fax

lONDON 99 Gresham Street london EC2V 7NG 44 20 7418 1300 tel 44 20 7418 1400 fax

PARIS 121, avenue des Champs-Elysées 75008 Paris 33 1 56 59 36 00 tel 33 1 56 59 37 00 fax

MADRID Paseo de la Castellana, 41 28046 Madrid 34 91 768 9600 tel 34 91 768 9700 fax

TOKYO Izumi Garden Tower 33F 1-6-1 Roppongi Minato-ku, Tokyo 106-6033 81 3 5561 4421 tel 81 3 5561 4425 fax

BEIJING 2201 China World Office 21 Jian Guo Men Wai AvenueChao Yang District Beijing 10000486 10 8567 5000 tel86 10 8567 5123 fax

HONG KONG The Hong Kong Club Building 3A Chater Road Hong Kong 852 2533 3300 tel 852 2533 3388 fax

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