Corporate GovernancePractices of U.S. Initial Public Offerings(Controlled Companies Only)
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 ..............................................................................4
Board Size at IPO............................................................................................................................4
Level of Board Independence at IPO ..............................................................................................5
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
OverviewAs 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.*
Of those top 50 IPOs, 28 were “controlled companies,” as defined under the NYSE and NASDAQ listing
standards. Because controlled companies are exempt from certain NYSE and NASDAQ board and
committee independence requirements, we examined the corporate governance provisions at these
companies separately from those of noncontrolled companies. The deal size of the examined IPOs of
controlled companies ranged from $239.95 million to $4.35 billion.
The CompaniesWe examined the following 28 controlled companies, spanning 20 industries:
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Davis Polk & Wardwell llP Corporate Governance Practices of U.S. Initial Public Offerings
Corporate Governance Practices of U.S. Initial Public Offerings
Aeroflex Holding Corp.
Apollo Global Management LLC
Bankrate Inc.
Booz Allen Hamilton Hldg. Corp.
Cobalt Intl Energy, Inc.**
Dole Food Co. Inc.
Dollar General Corp.
Dunkin’ Brands Group, Inc.
Education Management Corp.
Emdeon Inc.**
Express Inc.
The Fresh Market Inc.
FXCM Inc.
Generac Holdings Inc.
GNC Holdings Inc.
HCA Holdings, Inc.
Hyatt Hotels Corp.
KAR Auction Services, Inc.
Kinder Morgan Inc.
LPL Investment Holdings Inc.
Mead Johnson Nutrition Co.**
Metals USA Holdings Corp.
Oasis Petroleum Inc.
RailAmerica, Inc.
Select Medical Holdings Corp.**
Talecris Biotherapeutics Holdings
Vanguard Health Systems, Inc.
Wesco Aircraft Holdings, Inc.**
* Excludes limited partnerships, REITs, trusts and blank check companies.
**Davis Polk & Wardwell participated in the IPO.
Significant FindingsIn comparing the corporate governance provisions at “controlled companies” versus those we surveyed
at noncontrolled companies, we noted some key differences, including:
■ 82% of controlled companies were listed on the NYSE versus 52% of noncontrolled companies.
■ 64% of controlled companies had a classified board as compared to 78% of noncontrolled
companies.
■ The average level of director independence at controlled companies was 39% versus 74% at
noncontrolled companies.
■ 4% of controlled companies had a lead director as compared to 26% of noncontrolled
companies.
■ 50% of controlled companies had fully independent audit committees at the time of their IPO
versus 78% of noncontrolled companies.
■ 26% of controlled companies had an exclusive forum provision as compared to 14% of
noncontrolled companies.
■ 54% of controlled companies permitted shareholder action by written consent versus 10% of
noncontrolled companies.
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Primary listing Exchange
Of the 28 companies examined:
■ 23 companies (82%) are listed on the NYSE
■ 5 companies (18%) are listed on the NASDAQ
NASDAQ18%
NYSE82%
Primary Listing Exchange
Classes of Outstanding Common Stock at IPO
Of the 28 companies examined:
■ 20 companies (72%) had one class of outstanding common stock
■ 6 companies (21%) had two classes of outstanding common stock
■ 2 companies (7%) had four classes of outstanding common stock
Board Size at IPO
Of the 28 companies examined:
■ The average board size was 9
■ The median board size was 9
■ The board sizes ranged from 5 to 15 members
■ There is no distinct correlation between deal size and board size
6
2
20
0
5
10
15
20
25
One Class Two Classes Four Classes
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0 1,000 2,000 3,000 4,000 5,00002468101214161820
Deal Size vs. Board Size
Bo
ard
Siz
e
Classes of Outstanding Common Stock
Deal Size($ millions)
level of Board Independence at IPO
Of the 28 companies examined:
■ The average level of director independence was 39% of the board
■ The median level of director independence was 37% of the board
■ The levels of director independence ranged from a low of 11% to a high of 89%
Controlled�companies�exempt�from�majority�of�independent�directors�requirement
“Controlled companies” are subject to an exemption from the NYSE and NASDAQ standards
requiring that the board of directors of an IPO company consist of a majority of independent directors
within one year of the date of listing.
Classified Board at IPO
Of the 28 companies examined:
■ 18 companies (64%) had classified boards*
■ 10 companies (36%) did not have classified boards
*�Two�of�these�companies�(11%)�have�a�springing�staggered�board.
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Classified Boards
No36%
Yes64%
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Separation of Chairman and CEO
Of the 28 companies examined:
■ 15 companies (54%) had a separate chairman and CEO
■ Of these 15 companies with a separate chairman, 3�(20%) had an independent chairman
lead Director
Of the 28 companies examined:
■ 1�company (4%) had a lead director
■ 27�companies (96%) did not have a lead director
Separation of Chairman & CEO Independent Chairman
Independent20%
Non-Independent80%
SeparateChairman54%
NoSeparation46%
Lead Director
Yes4%
No96%
Audit Committee Financial Experts at IPO
Of the 28 companies examined:
■ 21 companies (75%) had one financial expert
■ 4 companies (14%) had three financial experts
■ 3 companies (11%) 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.
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Audit Committee Financial Experts at IPO
Three14%
Zero11%
One75%
Audit Committee Independence at IPOOf the 28 companies examined:
■ 14 companies (50%) had a fully independent audit committee at the time of its IPO
■ 4 companies (14%) had a ⅔ independent audit committee at the time of its IPO
■ 10 companies (36%) had a ¼ - ½ independent audit committee at the time of its IPO
Audit�Committee�Independence�at�time�of�IPO
Under NYSE and NASDAQ rules, IPO companies (including “controlled companies”) 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.
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FullyIndependent50%
Audit Committee Independence at IPO
⅔Independent
14%
¼ - ½Independent
36%
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Voting in Uncontested Board Elections
Of the 28 companies examined:
■ 25 companies (89%) required a plurality standard for board elections
■ 3 companies (11%) required a majority standard for board elections
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.
Board Elections
Plurality89%
Majority11%
Supermajority Vote for Amending the Charter and Bylaws
Of the 28 companies examined:
■ 22 companies (79%) required a supermajority shareholder vote for amending the charter and/orthe bylaws*
■ Of the 22 companies that required a supermajority vote, 6 companies (27%) required a voteof 75% or more
■ 6 companies (21%) did not require a supermajority shareholder vote for amending the charter and/or the bylaws
* These�22�companies�include�6�(27%)�whose�supermajority�vote�requirements�were�triggered�when�a�controlling�shareholder�ceases�to�hold
a�certain�percentage�of�shares.
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Supermajority for Amending the Charter and/or the Bylaws
Supermajority Threshold of Equal to or Greater than 75%
No21%
Yes79%
less than 75% (73%)
Equal to orGreater than 75% (27%)
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Poison Pills and Blank Check Preferred Stock
Of the 28 companies examined:
■ No companies had a shareholders’ rights plan
■ All companies 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 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%
Authorized100%
Existence of Shareholders’ Rights Plan
Authorization to Issue Blank Check Preferred Stock
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Exclusive Forum Provisions
Of the 28 companies examined:
■ 7 companies (25%) had exclusive forum provisions, all of which specified Delaware as the
exclusive forum
■ Of these 7 companies with exclusive forum provisions, all adopted them in the company’scharter
■ 21 companies (75%) did not have exclusive forum provisions
■ All companies with exclusive forum provisions were from 2010 or 2011 IPOs
Exclusive Forum Provisions
Charter100%
No75%
Yes25%
Compensation Consultants
Of the 28 companies examined:
■ 13 companies (46%) disclosed the use of compensation consultants
■ Of these 13 companies that disclosed using consultants, all specified the consultant used
■ The specified consultants included:
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.
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Frederic W. Cook & Co.
Hewitt Associates
Longnecker & Associates
Mercer, LLC
Semler Brossy Consulting Group LLC
Compensation Consultants Disclosure
Yes46%
No54%
Shareholder Action by Written Consent
Of the 28 companies examined:
■ 15 companies (54%) permit shareholder action by written consent
■ Of these, 8 companies (53%) permit shareholder action by written consent only so long as acontrolling shareholder or group owns a specified percentage of shares
■ 13 companies (46%) prohibit shareholder action by written consent
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Shareholder Action by Written Consent Permitted
Yes54%
No46%
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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�to�date�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�to�date�in�2011;
• advising the underwriters on the $1.4 billion SEC-registered IPO of Class A shares by Yandex ―
the�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.
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Corporate Governance Practices of U.S. Initial Public Offerings
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]
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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]
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