Initial Public Offerings

Transcription

1 A Look At Governance and Liquidity Arrangements in Sponsor-Backed Initial Public Offerings 2016 Private Equity SURVEYS

2 Table of Contents Introduction and Research Methodology... 1 Summary of Key Findings...2 Key Findings...3 Governance...3 Registration Rights and Share Transfer Restrictions...5 Access and Information Rights...6 Weil s Global Private Equity and Capital Markets Practices...7

3 Introduction and Research Methodology Welcome to Weil, Gotshal & Manges LLP s survey of governance and liquidity arrangements in sponsor-backed initial public offerings (IPOs) in the United States. In preparing this survey, 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 ). Specifically, the 28 surveyed transactions included the following Sponsor-backed companies: Aramark Holdings Corporation Avolon Holdings Limited Black Knight Financial Services, Inc. Bojangles, Inc. Catalent Inc. Dave & Buster s Entertainment, Inc. El Pollo Loco Holdings, Inc. EP Energy Corporation Extended Stay America, Inc. Fogo de Chào, Inc. GoDaddy Inc. IMS Health Holdings, Inc. La Quinta Holdings Inc. Ladder Capital Corp Markit Ltd. Neff Corporation Noodles & Company Papa Murphy s Holdings, Inc. Party City Holdco Inc. Sabre Corporation Santander Consumer USA Holdings Inc. ServiceMaster Global Holdings, Inc. Shake Shack Inc. Summit Materials, Inc. Surgical Care Affiliates, Inc. The Michaels Companies, Inc. VWR Corporation Zayo Group Holdings, Inc. Prior to the recent volatility and selloff seen in the public markets, IPOs had become increasingly popular as a means of providing liquidity to Sponsors. 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. As professional buyers and sellers of control positions in companies, and given that Sponsors typically retain a majority (or significant minority) of the company s equity following an IPO, Sponsors are focused on maintaining (i) control or influence over the company while the Sponsor holds a meaningful ownership interest in the public company, and (ii) the ability to sell down the Sponsor s remaining stake in the public company at a time (and valuation) of its choosing (and without being front run by other major shareholders). This survey highlights and examines the legal technology recently used by Sponsors to address these concerns. We hope that you will find it useful and informative. We want to offer special thanks to the many attorneys at Weil who contributed to this survey, including Jonathan Calka, Daniel Cohen, Sean Devaney, Kelly Diep, Kevin Kitson, Andrea Ryken, Michelle Sargent, Rachel Shapiro, Ariel Simon, and Kimberly Thibault. We are happy to discuss with clients and friends the detailed findings and analyses underlying this survey. Doug Warner Founding Editor Peter Feist Editor Andrew Arons Editor Vishal Phalgoo Deputy Editor Andrew Silver Deputy Editor Adam Dickson Contributing Editor Jenna McBain Contributing Editor 1

4 Summary of 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. 2

5 Key Findings Governance Sponsor-backed IPO companies typically avail themselves of the controlled company exemption under applicable listing requirements. In 79% of the surveyed IPOs, the company disclosed in its prospectus that it would be treated as a controlled company under applicable listing requirements. This 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. In 79% of the IPOs we surveyed, Sponsors adopted a classified board. 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. Use of Classified Boards 21% Single Class 79% Classified Board A classified board serves a number of useful functions: (i) it helps ensure board continuity generally, including that the Sponsor is represented on the board for at least three years following an IPO since the last class will not be subject to election until the third year (assuming a three-year term), and (ii) it potentially permits the Sponsor to retain board representation following one or more sales of a portion of its stake in the company. However, proxy and institutional shareholder advisors generally take a negative view toward companies that adopt classified boards. 3

6 Key Findings In recent Sponsor-backed IPOs, Sponsors almost always secure rights to nominate or designate directors to serve on the public company s board following an IPO. In addition to the protection on initial board representation that a classified board provides, in 90% of the surveyed IPOs Sponsors also secured a contractual commitment (by entering into a stockholders or voting agreement) from the Company and other pre-ipo shareholders (if applicable) to have a right to nominate or designate on an ongoing basis one or more directors to serve on the board. Generally, but not always, the number of directors a Sponsor was entitled to nominate or designate was proportional to (or otherwise tied to) its ownership position in the company post-ipo and fell away completely once the Sponsor s ownership level fell below a specified percentage of the company s outstanding equity (typically around 10%). Based on the surveyed IPOs, we found that this right is more prevalent in club deals (i.e., a deal that has more than one Sponsor with a material ownership position in the company) than in single Sponsor-backed deals (95% vs. 78%). This is likely because, in single Sponsor-backed deals, a Sponsor may have a greater level of comfort that its preferred nominees will be elected given its large ownership position. In 62% of the surveyed IPOs, in addition to the right to appoint directors to the board itself, Sponsors also expressly secured a contractual commitment to have their designated directors serve on board committees. Board Rights Club Deals 5% 22% Single Sponsor Deals 95% 78% Contractual commitment to designate directors to serve on board No contractual commitment to designate directors to serve on board 4

7 Key Findings Sponsors frequently retain a limited set of shareholder consent or veto rights over the public company taking certain actions following an IPO. In 38% of the surveyed IPOs, the Sponsor had consent or veto rights, in its capacity as a shareholder, with respect to the company taking certain actions. In some cases, these consent and/or veto rights applied to a set of fundamental protections (e.g., amendments to certain sections of the company s certificate of incorporation, altering the size of the board, change of control transactions, or effecting a voluntary liquidation). In other cases, a Sponsor s consent or veto rights were more expansive and extended to operational matters, including with respect to: Consummating acquisitions or dispositions in excess of a specified threshold Sponsor Veto Rights Incurring indebtedness in excess of a specified threshold Entering into new lines of business or fundamentally changing existing lines of business 38% Consent or Veto Rights Appointing, removing or changing the compensation of certain senior executive officers 62% No Veto Rights Initiating or settling litigation in excess of a specified threshold Adopting a new equity incentive plan Shareholder consent and veto rights provide an additional layer of protection for the Sponsor and permit the Sponsor to make decisions directly in its capacity as a shareholder. Sponsors may have the right to assign their governance rights to a third-party transferee following an IPO. In 31% of the surveyed IPOs, the Sponsor negotiated the ability to assign its governance rights in connection with a transfer of its shares to a third party following an IPO. Registration Rights and Share Transfer Restrictions Sponsors almost always secure demand registration rights following an IPO. In 93% of the surveyed IPOs, the Sponsor had the right to demand registration of its company shares on at least one occasion following an IPO (although typically in single Sponsor-backed deals, the Sponsor had a right to demand registration an unlimited number of times). Sponsors also typically had piggyback registration rights on the registration of shares by the company or another major shareholder. Share transfer restrictions rarely continue post-ipo in single Sponsor-backed deals, but are fairly common in club deals. Based on our review of the surveyed IPOs, share transfer restrictions (other than compliance with underwriters lock-ups and compliance with securities laws) rarely continued in single Sponsor-backed deals following an IPO. By contrast, in 68% of the club deals we surveyed, Sponsors included in post-ipo stockholder agreements some of the legal technology typically included in private company stockholder agreements with respect to transfer restrictions, rights and obligations (in order to provide for a coordinated and orderly exit). 5

8 Key Findings Transfer Provisions in Club Deals 50% 40% 30% 47% 37% 20% 21% 21% 10% 0% 11% Pro Rata Sell-Down Limitation Enhanced Lock-Ups ROFOs Tag-Along Rights Drag-Along Rights 5% Express Coordination Committee As illustrated above, of the surveyed IPOs that were club deals: 11% contained a requirement that one or more other shareholders could only sell their shares in the same proportion as the Sponsor sells its shares. 47% contained lock-up periods on transfers that were in excess of the underwriters initial lock-up period. 37% provided one or more Sponsors with a right of first offer over sales outside of a public offering by one or more other shareholders. 21% provided one or more Sponsors with tag-along rights on sales outside of a public offering by one or more other Sponsors (or other pre-ipo shareholders) (i.e., the right to participate in another equity holder s negotiated sale of such other holder s equity). 21% provided one or more Sponsors with the right to drag-along one or more other Sponsors (or other pre-ipo shareholders) in connection with sales outside of a public offering (i.e., the ability to force the remaining equity holders to sell alongside the Sponsor on a pro rata basis and on the same terms). 5% expressly provided for the establishment of a coordination committee with respect to Rule 144 sales.* Access and Information Rights Sponsor Veto Rights Sponsors may be entitled to obtain company information directly from the company or to rights of access to senior management of the company. In 48% of the surveyed IPOs, the Sponsor negotiated a contractual right to receive certain company information (regardless of whether such information was made publicly available) or a right to have access to the senior management team to discuss company information. 52% 48% Contractual right to certain company information No contractual right to certain company information * A coordination committee is designed to prevent front-running or uncoordinated selling by co-investors, each of which may adversely affect the market price of the public company s stock. 6

9 Weil s Global Private Equity and Capital Markets Practices 20 offices worldwide, of which 16 are recognized as top tier for Private Equity by Chambers and Legal 500 Ranked Band 1 for Global Private Equity by Chambers The global private equity team acts for more than 200 private equity clients worldwide, including more than 80% of the world s top 10 funds and 70% of the top 25, as ranked by PEI Ranked Top 5 for Global Private Equity for the last 5 years Bloomberg; mergermarket Ranked 5th (by volume and by deal count) for U.S. Equity IPO: Issuer Advisers in 2015 Bloomberg 33 Chambers-ranked private equity lawyers worldwide, including 10 ranked Band 1 Market Recognition Private Equity Practice Group of the Year Law and 2014 Capital Markets Practice Group of the Year Law and 2015 Band 1 for Private Equity Global-wide, Asia-Pacific-wide, and Across Europe Chambers Global, Chambers Asia- Pacific, Chambers Europe, Chambers UK Tier 1 for Private Equity in the U.S., U.K., China and Hong Kong IFLR Band 1 for Private Equity U.K. The Legal 500 UK 2015 Band 1 for Private Equity Hong Kong Legal 500 Asia Pacific 2015 Shortlisted for Business of Law Category for Developing the Global Private Equity Watch Financial Times North America Innovative Lawyers Report 2015 Recipient of Private Equity Deal of the Year Award China Law & Practice

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