1. Stock Structure and Cap Table
Depending on where your company is incorporated, dual or multi-class voting structures may or may not be permitted. Therefore, it is important to determine early in the initial public offering (IPO) planning process whether your “home country” corporate law and applicable listing rules allow for this flexibility. You should also confirm applicable requirements regarding the percentage of shares in public ownership, known as free float. In general, companies listed on European regulated stock exchanges are required to have a free float of at least 25%, although in certain cases it is possible to request exemptions from this requirement.
Ensure that your capitalization records accurately reflect all stock issues, transfers and cancellations, as well as the issuance, exercise and cancellation of options and warrants. Don’t underestimate the cross-functional workload between legal, human resources and finance to manage the cap table and stock platform and transition to registrar in an IPO.
2. Financial reports and accounting issues
You must include audited consolidated financial statements for the past three financial years with your IPO prospectus. Depending on when in the year your IPO occurs, you may also be required to provide preliminary financial information for the current fiscal year (with comparable prior year information). The financial statements included in the prospectus must be prepared in accordance with International Financial Reporting Standards (IFRS), with limited exceptions in some jurisdictions, and the accounting policies to be applied by the company in the future should be consistent throughout the financial statements point – or you must explain any differences.
In addition, where the Company has acquired or divested significant businesses, it may be necessary to incorporate financial statements of the acquired business and prepare pro forma financial information that reflects the effects of the acquisition or divestment. The rules for pro forma financial information differ in the US and in Europe. Therefore, consider performing the significance calculations in accordance with both sets of rules.
Identify any sensitive issues or fine-tuning in your important accounting policies or practices and discuss them with your auditors. Key topics in the financial statements include segmentation, consistency across reporting periods, disclosure in the notes to the financial statements, and disclosure of alternative performance measures (APMs) and adjusted measures.
3. Key Metrics
Public investors will look for operational metrics that go beyond the IFRS financial metrics that management uses to measure and run the business. Investment bankers are very helpful in identifying these metrics, but a company should have its own take on the metrics that work best over time. Make sure you document the metrics consistently and are able to fully support any “add-backs”. Be sure to think about how your business might evolve and how that might affect your key metrics. For at least a few years after going public, you want your key metrics disclosures to be as consistent as possible with your IPO disclosures. Also, consider any non-IFRS financial measures, or APMs, early on — and consider how your regulator might view them during your IPO review process.
4. Marketing Activities
Investor marketing begins very early in the IPO process in Europe, with early meetings with investors occurring shortly after the formal IPO kickoff, requiring the company to present a polished and verifiable equity story to investors at this early stage. These initial meetings are typically followed later in the process by pilot fishing meetings and possibly also deeper dive or “gold card” meetings where a preliminary draft of the disclosure document may be made available on a confidential basis to certain key clients in advance of the formal IPO announcement. Additionally, in some IPO processes, companies grant additional access to management and due diligence materials to a limited number of investors in order to attract one or more “cornerstone investors”, who usually agree at the time of the IPO launch, a significant and disclosed purchase to make part of the company’s stock. These activities require a lot of management time and focus. Therefore, it is important to plan and agree on meaningful timelines and outcomes with your investment banks in advance to minimize the burden on the management team.
5. Pre-IPO research
In the case of a European IPO, the research results are prepared and disseminated by analysts from the underwriting banks. These analysts then use their research to discuss the company with potential investors before setting the price range and beginning the roadshow (the pre-deal investor education process). This is an important part of the IPO process in Europe and will be a key focus for lawyers and bankers given the regulatory requirements and potential legal and practical issues related to the dissemination of research reports leading up to an IPO. The pre-IPO research process — including preparing the syndicate analyst presentation, presenting to analysts, answering follow-up questions, and reviewing the research reports for factual accuracy — can also take a great deal of management time and focus during the process IPO process.
6. Board, Committee and Management Team Requirements
Reassess the composition of your board (executive and non-executive) and board committees to determine any changes needed to ensure an appropriate board for a public company. Beyond legal requirements, look for directors from a variety of backgrounds and skill sets who can help you build a public company and make a meaningful contribution to company culture, as well as support and challenge the management team. We firmly believe that diversity – including gender, ethnic/racial origin, sexual orientation and neurodiversity – creates a stronger board and a healthier company. Familiarize yourself with the independent director requirements that apply after your IPO. Recruiting capable directors and ensuring they are adequately engaged prior to an IPO can take time. So start early.
Also, consider whether you need to grow your executive team to operate as a public company (typical areas of focus are financial reporting and investor relations). Conduct background checks on important hires to avoid surprises during the IPO process. Consider whether newer members of the team, particularly those executives who will be interacting with public investors, have had sufficient tenure with the company to truly understand business trends, convey company history, and provide financial results to investors.
7. Corporate Governance
Start acting like a public company. Focus on corporate governance befitting a public company and develop a culture of compliance. Transitioning a workforce from a private company to a heavily regulated public company takes time and effort, and leadership should lead by example. Work with your attorneys to implement state-of-the-art corporate policies and codes of conduct that not only conform to the rules and best practices, but work for your business. Consider strategies to facilitate the transition, e.g. B. conducting simulated investor presentations on financial results, completing relevant reporting on public company timelines and/or establishing board committees similar to a public company.
If you share important financial or operational information within the company generally, you should consider a strategy to limit that disclosure so that after the IPO you limit the number of potential insiders who need to be included on insider lists. If you take the time during the IPO process to educate management and employees on the important aspects of corporate governance and ongoing obligations — from insider trading to external communications — the post-IPO transition to a public company will be much easier.
8. Financial Reporting Procedures
Discuss with your advisors any material weaknesses or significant deficiencies in your internal financial controls and understand their impact on your IPO process. Be prepared to discuss them openly with your investment bankers and their attorneys and to announce them publicly. Even if there have been resource shortages or other issues in the past, investors want to see that you have a plan to fix them and a way to strengthen your financial controls going forward.
9. Liability insurance for directors and officers
The risk of liability is significantly higher for directors and officers of publicly traded companies than for those of private companies. Once a company is listed on the stock exchange, private D&O (Director & Officer) insurance is no longer appropriate. In connection with European IPOs, there has been an increasing increase in securities claims in recent years, with a number of cases being followed with great attention. Choose an experienced D&O insurance broker and liaise with the broker early on to ensure your directors and officers are adequately protected. We are also seeing companies taking out public securities insurance (POSI) policies for the company and its directors, in addition to traditional D&O policies that provide ring-fenced coverage for IPO-related liabilities.
10. Executive Compensation
Consider hiring a compensation consultant to assist you in analyzing compensation practices, including equity and non-equity incentives, comparison to peer companies, potential investor and shareholder activist reactions, and compliance with institutional investor body guidelines. Start developing an appropriate compensation structure for a public company. Talk to your attorneys about implementing employee stock plans and long-term incentive plans that meet the company’s future needs and investor expectations. Modifying or introducing new employee stock plans and long-term incentive plans after an IPO can be significantly more difficult and may require shareholder approval. Also, focus on personal financial planning for executives – for example, senior management should consult with personal financial advisors about alternative ways to maximize wealth.
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