A Look At Governance and Liquidity Arrangements in Sponsor-Backed Initial Public Offerings

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We reviewed and analyzed the material terms of 17 IPOs consummated on United States listing exchanges between June 2015 and December 2016 by companies that had one or more private equity sponsor owner(s) (each, a “Sponsor”). In this survey, we focus on the areas that we believe are of unique interest to Sponsors contemplating an IPO of one of their portfolio companies. Below is a summary of our key findings:

  • Sponsor-backed IPO companies typically avail themselves of at least some “controlled company” exemptions available under applicable listing requirements, which, among other things, exempt such companies from certain board and committee director independence requirements (other than with respect to the audit committee).
  • Sponsors typically adopt a classified board structure for the newly-public company in connection with an IPO.
  • Sponsors almost always (80%) secured contractual rights to nominate or designate directors to serve on the public company’s board of directors (in some cases, including committees thereof) following an IPO. In single-Sponsor deals, however, Sponsors secured such rights in a significant minority (42%) of deals.
  • In a minority of deals, Sponsors secured shareholder consent or veto rights over the public company taking certain post-IPO actions.
  • While share transfer restrictions rarely continue post-IPO in single-Sponsor deals, they remain common in “club” deals in order to provide for a coordinated and orderly exit. These restrictions can include, among others, (a) transfer limitations based on the relative ownership of a shareholder as compared to other shareholders, (b) enhanced lock-up provisions, (c) a right of first offer in favor of the Sponsor or other shareholders on transfers, (d) tag-along rights, (e) drag-along rights and obligations, and (f) agreements requiring coordination among multiple shareholders on sales of shares. In “club” deals, Sponsors with such arrangements should be mindful of the possibility of forming a “group” under Section 13 of the Exchange Act.

View the survey.