Going Public 467
the rights of stockholders to call special stockholder meetings; limit-
ing the rights of stockholders to amend the company’s bylaws; eliminating
the right to remove directors except for cause; establishing voting mecha-
nisms which do not permit the purchaser of shares immediately to affect
the control of the company; and the adoption of complicated stockholder
protection plans, called “poison pills,” that dilute the equity interest of
any unfriendly future significant stockholder.
- There is discussion concerning the number of shares to be offered, the
percentage of the company to be offered, the general range of share pric-
ing, and whether the company’s shares will be listed for trading over an
exchange or quoted through the facilities of NASDAQ (National Associa-
tion of Securities Dealers’ Automated Quotation System). It is decided
that approximately 10% of the shares to be sold in the IPO will belong to
Vulture Partners and other original investors in the company.
- The under writers ask for the option to purchase from the company, for
resale to the public a short time after the closing of the IPO, an additional
number of shares of common stock. These shares, typically not in excess
of 15% of the shares sold in an IPO, are an “overallotment” to permit the
co-managing under writers to cover short positions in the company’s stock
which they may have created immediately after the IPO closing in an ef-
fort to stabilize the stock price. These shares are sometimes referred to as
“the green shoe,” named after a securities offering which allegedly first
utilized this technique.
- There is a discussion of “lockup agreements.” The under writers will re-
quire that existing stockholders contract that for some period following
the IPO (most typically 180 days), they will not sell any shares; this pro-
hibition permits the under writers to “stabilize” or create an equilibrium
in the price of the shares, and eliminates the perception that the insiders
are “bailing out.” Conversely, the under writers may be asked to include a
reasonable number of shares for sale by prior investors.
- Management asks to set up a “directed share program” by which friends
of the company, such as key suppliers and business partners, will be given
an opportunity to preferentially subscribe for shares; generally under-
writers seek to limit these programs to 5% of the total offering.
- The parties discuss the inclusion of online “e-brokers” as part of the un-
der writer distribution group, in order to address the growing appetite of
online purchasers in technology-related IPOs.
The organizational meeting sets off a time of hectic effort by manage-
ment, accountants, and attorneys. Some staff is delegated to filling the due
diligence checklist. The bulk of the more visible effort is directed, however,
toward the preparation of the registration statement, which includes the
prospectus.
The company and its attorneys are charged with the task of preparing a
first draft of this registration statement. The contents of the registration state-
ment are rigorously specified by the forms and rules promulgated by the SEC.
