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 28 IPOs consummated on U.S. exchanges between June 2013 and May 2015 by companies that had one or more private equity sponsor owner(s) (each, a “Sponsor”). In this survey, we have focused 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 the “controlled company” exemption under applicable listing requirements, which exempts the newly public company from certain 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. A classified board involves dividing directors into a number of classes (typically three) that each serve “staggered” multi-year terms (typically three years), rather than a single class of directors where each director is elected on an annual basis.
  • Sponsors almost always secure rights to nominate or designate directors to serve on the public company’s board following an IPO.
  • Sponsors frequently secure shareholder consent or veto rights over the public company taking certain actions following an IPO.
  • Share transfer restrictions rarely continue post-IPO in single Sponsor-backed deals, but are fairly common post-IPO 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.

View the survey.