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IPO Report
2022
Attorney Advertising
2022 IPO Report—What’s Inside
2 US Market Review and Outlook
6 Regional Market Review and Outlook
8 IPO Market by the Numbers
9 Constructing a Public-Ready Board of Directors
Navigating the Thicket of SEC, Stock Exchange and State Law Requirements
12 Board Diversity Planning Now Part of the IPO Process
Public Companies Face a Variety of Diversity Requirements and Expectations
14 Duty of Oversight Is Mission Critical for Boards
Recent Litigation Highlights Importance of Reporting Systems
16 Selected WilmerHale Public Offerings
18 IPOs Find Their New Normal
Pandemic-Era Practices Transform the IPO Process
19 Drafting Sessions in a Nutshell
Best Practices Remain Sound in the New Normal
20 Risky Business—Tips for Crafting Effective Risk Factors
Strategies for Avoiding Stockholder Claims While Satisfying
Disclosure Obligations
22 Why Due Diligence Matters
Process Enhances Disclosure and Helps Protect Against Liability
23 The ABCs of D&O Insurance
Coverage Provides Important Protection Against IPO Liability
24 Don’t Forget Pre-IPO Estate Planning
Wealth Transfer Techniques Can Be Particularly Effective in
Advance of an IPO
27 Flashy Numbers on the Rise
IPO Companies Increasingly Give Investors a Peek at Preliminary
Financial Results
28 We Just Went Public and I Can’t Sell My Stock?
Lockup Basics and Recent Trends
30 Are You an Officer?
You May Need a Scorecard to Keep Track of the Answer
31 Yikes! I Need to Disclose All That?
Disclosures About Directors, Officers and Stockholders in an IPO
2 US Market Review and Outlook
REVIEW US IPOs by Year—2005 to 2021
# of IPOs Dollar volume (in $ billions)
Across the board, despite the continuing
pall cast by the COVID-19 pandemic, 2021
was a year of very strong IPO deal flow, 381 134.9
although aftermarket performance fell well
short in comparison to the prior year and
broad market indices. The surge in IPOs 244
74.4 209 76.3
by special purpose acquisition companies 176 176
193
178 183
(SPACs) continued at a blistering pace, 136
152
142
157
43.3 43.8 45.3
41.3
producing another annual record despite 29.8
36.3 34.7 97 102 35.1 98
30.5
28.7 25.2
wide swings in quarterly tallies. 23.1
54 19.2 18.5
27
Excluding SPAC IPOs and direct 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
listings, the conventional IPO market
produced 381 IPOs in 2021, almost Source: SEC filings
double the 209 IPOs in 2020, and the
highest annual count since 2000. Each
quarter of 2021 accounted for the highest
total for that quarter since 2000.
US IPOs by Quarter—2018 to 2021
Total gross proceeds for the year # of IPOs Dollar volume (in $ billions)
were $134.94 billion, a figure that
surpassed 2020’s $76.32 billion
tally by 77% and eclipsed 2000’s 38.9 114
36.4
$108.13 billion total to become the 99
32.7
90
highest annual figure on record.
27.5
77 27.2 27.0 78
24.3
IPOs by emerging growth companies 60
68
57
(EGCs) accounted for 93% of the 50
15.1
41 13.1
year’s IPOs—up from 90% in 2020. 12.6
11.1 35
38 40 38
10.7
26
7.0
The median offering size for all 2021 19
4.7 5.6 6.5
IPOs was $176.9 million, down 2% from
the $180.0 million median for 2020 but Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2018 2019 2020 2021
72% higher than the $102.9 million for
the five-year period from 2015 to 2019. Source: SEC filings
In 2021, the median offering size for
IPOs by EGCs was $167.7 million,
5% higher than the $160.0 million in
2020. The median non-EGC offering
size in 2021 was $498.8 billion, down
57% from the $1.17 billion in 2020.
Median IPO Offering Size—2005 to 2021
The median annual revenue of all IPO $ millions
companies in 2021 was $67.4 million,
180
more than double the $31.0 million 177
in 2020, and coincidentally equal to
140
the median that prevailed during the 125
135
120
five-year period from 2015 to 2019. 105 108 111 107 108 107
98 94 96 94
92
In 2021, 48% of life sciences IPO
companies had revenue, down from
53% in 2020. Among non–life sciences
IPO companies in 2021, median annual
revenue was $203.2 million, 3% higher
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
than the $197.2 million median in 2020.
Source: SEC filings
3 US Market Review and Outlook
EGC IPO companies in 2021 Distribution of IPO Offering Size—2018 to 2021
had median annual revenue of % 2018 % 2019 % 2020 % 2021
$41.8 million, compared to $1.53 billion
for non-EGC IPO companies.
28
The percentage of profitable IPO
companies increased to 28% in 21
2021, from 22% in 2020. Only 10% 18
19 19
18
19
18
17 17
of life sciences IPO companies were 15
16
15
14
profitable in 2021, compared to 38% 12 12
13 13
11
13
11
13
10 10 10
of non–life sciences companies.
6 6
In 2021, the median IPO produced 4
a first-day gain of 16%, compared to
below $50M $50M to $74.99M $75M to $99.99M $100M to $149.99M $150M to $249.99M $250M to $499.99M $500M and Above
23% in 2020. These figures represent
the two highest median first-day Source: SEC filings
gains since the 24% in 2000.
The median first-day gain for life
sciences IPO companies in 2021 was 9%,
compared to 17% for non–life sciences Median IPO First-Day and Year-End Gain by Year—2005 to 2021
IPO companies. Both of these figures
% First-day gain % Year-end gain
were lower than in 2020, when the
median first-day gain for life sciences
companies was 26%, compared to 20%
54
for non–life sciences IPO companies.
There were 24 “moonshots”
37
(IPOs that double in price on their
opening day) in 2021, one more than
22 23
in 2020. For context, the highest 21 20
17 16
number of moonshots in a single year 13
11
13 14
12 11 12
9 9
between 2001 and 2019 was seven. 4 5
7
5 6 5 6 7
4 5
3
-2
In 2021, 25% of IPOs were “broken” (IPOs 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
-5
whose stock closes below the offering
-11
price on their first trading day), up from
-19
21% in 2020. A higher percentage of -21
life sciences IPOs (28%) than non–life
sciences IPOs (24%) were broken.
-42
The median 2021 IPO company ended
the year 19% below its offering price—the
worst aftermarket performance since 2011.
The year’s best-performing IPOs were Median Annual Revenue of IPO Companies—2005 to 2021
by Huadi International Group (trading $ millions
300% above its offering price at year- 229
end), ZIM Integrated Shipping Services
(292%), Esports Technologies (243%) and
Regencell Bioscience Holdings (235%).
134
126
At the end of 2021, 64% of the year’s 106 111
98 99 101
IPO companies were trading below their 90 85
75
offering price—the second-worst figure 68 66 68 67
for this metric since 2000. Life sciences 38
31
companies fared worse than their non–
life sciences counterparts, with three- 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: SEC filings and IPO Vital Signs4 US Market Review and Outlook
quarters trading below their offering price, Percentage of Profitable IPO Companies—2005 to 2021
compared to 57% of other companies. %
81
Individual components of the IPO
market fared as follows in 2021: 67
64
62
59 58
– VC-Backed IPOs: The number of IPOs 51
55
by venture capital–backed US issuers 43
increased by 65%, growing from 95 in 2020 36 36
34
32
30
to 157 in 2021—the highest annual figure 28 28
22
since the 201 in 2000. The market share of
this segment, however, contracted from
64% to 56%. The median offering size for
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
US VC-backed IPOs declined by 4%, from
$182.7 million in 2020 to $176.0 million in Source: SEC filings and IPO Vital Signs
2021. In comparison, the median offering
size for non–VC-backed companies was
$191.2 million. At year-end, the median
2021 US venture–backed IPO company Median Time to IPO and Median Amount Raised Prior to IPO—2005 to 2021
was trading 27% below its offering price. # of years Median amount raised prior to IPO (in $ millions)
– PE-Backed IPOs: The number of private 7.7
7.4
167
174
equity PE–backed IPOs by US issuers 7.1
6.7
7.0
6.6
7.1
6.4
almost tripled, from 30 in 2020 to 86 6.2
130 6.0
5.6
117
in 2021. Overall, PE-backed issuers 4.8
5.1 5.2 5.3
4.6 4.6
accounted for 31% of all US-issuer IPOs 86 90 87 87
in 2021, compared to 20% in 2020. The 67 68 72
77
62 63
median offering size for PE-backed IPOs 49 48
in 2021 was $335.9 million, down by 28
one-half from the $674.1 million median
in the prior year but still the second-
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
highest annual figure on record. The
Source: Pitchbook
median PE-backed IPO company ended
the year 3% below its offering price.
– Life Sciences IPOs: There were 138 IPOs in 2021 was 21% lower than the thirds, from 60 in 2020 to 100 in 2021.
life sciences company IPOs in 2021, $159.1 million in 2020. At year-end, the Foreign-issuer IPOs accounted for 26%
an increase of 33% from the 104 in median life sciences IPO company was of the market in 2021, down from 29% in
2020. The portion of the IPO market trading 27% below its offering price, 2020. Although this tally represents the
accounted for by life sciences companies compared to a loss of 11% for the median highest annual number of foreign-issuer
decreased to 36% in 2021 from 50% in non–life sciences IPO company. IPOs since the 107 in 2000, foreign issuers
2020, largely due to the increase in tech saw their lowest market share since the
company IPOs. At $125.9 million, the – Tech IPOs: Deal flow in the technology 20% in 2016. Among foreign issuers,
median offering size for life sciences sector more than doubled, jumping from
Chinese companies led the year with 36
69 IPOs in 2020 to 148 IPOs in 2021—
IPOs (China’s highest annual total since
the sixth consecutive year of growth.
the 40 in 2010), followed by companies
The tech sector’s share of the US IPO
DIRECT LISTINGS from Israel and the United Kingdom
market increased to 39% in 2021 from
(each with ten IPOs), Germany (six IPOs)
A “direct listing,” in which a private company 33% in 2020, representing the industry’s
files a registration statement to register the and Switzerland (five IPOs). The median
highest market share since the 44% in
resale of outstanding shares and concurrently foreign-issuer IPO company ended the
lists its shares on a stock exchange, provides
2012. The median offering size for tech
year down 35% from its offering price.
an alternative path to public ownership and IPOs in 2021 was $322.5 million, up 1%
liquidity. There were six direct listings in from the $319.0 million median in 2020. In 2021, 131 companies based in the eastern
2021, up from three in 2020, two in 2019, The median tech IPO company ended United States (east of the Mississippi River)
and one—the first direct listing—in 2018. the year 16% below its offering price. completed IPOs, compared to 150 western
Although the technique remains in its infancy,
more can be expected in the coming year. US–based issuers. California led the state
– Foreign-Issuer IPOs: The number of US rankings with 97 IPOs, followed by New
IPOs by foreign issuers increased by two-5 US Market Review and Outlook
York (33 IPOs), Massachusetts (31 IPOs), Venture Capital–Backed IPOs—2005 to 2021
Texas (16 IPOs) and Florida (15 IPOs). # of VC-backed IPOs Dollar volume (in $ billions)
157 60.1
OUTLOOK
IPO market activity in the coming
year will depend on a number of 102
95
factors, including the following: 75
30.4
72 72 72
25.0
63
– Economic Growth: Following strong 43
48
43 42
51
21.0
50
39
GDP increases in the first and second 9.9 10.7
8.6 8.4
quarters of 2021, economic growth 3.9
7.2
9 4.2
6.7 6.7
3.2
2.7 7
1.2
slowed to a tepid 2.3% in the third 0.7
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
quarter, hampered by pandemic
concerns and persistent bottlenecks Source: SEC filings
in the supply chain. A rebound in the Based on US IPOs by VC-backed US issuers
fourth quarter helped buoy annual GDP
growth, resulting in initial estimates of Private Equity–Backed IPOs—2005 to 2021
5.7% for the year—the highest annual # of PE-backed IPOs Dollar volume (in $ billions)
growth rate since 1984. Although the
86 35.0
fluctuations in quarterly GDP point to
a skittish economy that remains closely
tied to COVID-19 infection levels, the 60
22.0
widespread availability of vaccines and 52
48 19.4 46
the development of new treatments 17.4
14.8
provide hope for a “new normal.” Apart 13.2 32
12.1 30
28 27 26
from the pandemic, the economy also 9.7 23 9.8
8.7 20 8.0 8.0
17 16 7.2 18 16
faces the headwinds of rising interest 5.8 5.2 5.1
rates, inflationary pressures and, 5
1.0
more recently, the economic fallout 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
from Russia’s invasion of Ukraine. Source: Refinitiv and SEC filings
– Capital Market Conditions: Despite Based on US IPOs by PE-backed US issuers
market declines in the third quarter and
apprehension following the emergence
of each new COVID-19 variant, all in positive territory, with the Dow – Private Equity Impact: Restocked with
major US stock indices ended the year Jones Industrial Average up 19%, the $475 billion of new capital in 2021,
Nasdaq Composite Index up 21% and US private equity firms continue to
SPAC IPOS the S&P 500 up 27%. With the median hold large amounts of “dry powder”
US IPO having outperformed the Dow to deploy. The enormous amount of
In 2021, there were 613 SPAC IPOs with gross
and Nasdaq in only one of the last five capital flowing into the PE market and
proceeds of $144.54 billion, more than double
the 2020 tally of 248 SPAC IPOs with gross years, some investor interest could shift the surge in SPAC IPOs has intensified
proceeds of $75.73 billion, and ten times from IPOs to pre-IPO opportunities. competition for attractive deals and
the 2019 tally of 59 SPAC IPOs with gross driven up prices, making it harder
proceeds of $12.07 billion. Deal flow in the – Venture Capital Pipeline: VC-backed for PE firms to allocate investments
SPAC IPO market outpaced the conventional companies enjoyed a record level of
profitably. At the same time, PE firms
IPO market for the second consecutive year, investment in 2021, with more than twice
while SPAC IPO gross proceeds exceeded the face pressure to exit investments—via
as many rounds of at least $100 million
conventional IPO market for the first time. IPOs or sales of portfolio companies—
than in 2020. While the ability to raise
and return capital to investors.
The first quarter of 2021 accounted for almost private “IPO-sized” rounds has become
one-half of the year’s total, with 298 SPAC almost routine, allowing companies to The IPO market enters 2022 with a pipeline
IPOs raising $87.01 billion. Pricing activity
delay their public debuts, the desire of full of well-funded candidates and investors
declined sharply in the second quarter
before rebounding in the third and fourth investors for cash returns—combined with eager to embrace companies with exciting
quarters. At year-end, 574 SPACs were the favorable returns realized on many business models and new technologies.
searching for a business combination and VC-backed IPOs in recent years—is likely Although it will be difficult to top the IPO
another 272 SPACs were in IPO registration. to draw a steady stream of VC-backed deal flow of 2021, robust capital market
companies to the public markets in 2022. activity can be expected in the coming year.6 Regional Market Review and Outlook
CALIFORNIA California IPOs—2005 to 2021
# of IPOs Dollar volume (in $ billions)
The number of California IPOs
increased for the fifth consecutive 97 47.4
year, growing by 87%, from 52 in
2020 to 97 in 2021—the highest yearly
count since the 131 IPOs in 2020.
54 52
24.7
Buoyed by eleven billion-dollar offerings, 43 44 43
48
20.9
19.9
including the largest US IPO since 33
18.2
32
35
2014, gross proceeds increased by 92%, 24
20
24
19
25
from $24.70 billion in 2020 to a record 4.0
5.7 4.7
6.6 6.3
4.7
6.2 7.2
2.9 5 4 0.8
annual total of $47.36 billion in 2021. 1.9 1.7
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
The largest California IPO in 2021 came from
Source: SEC filings
electric vehicle maker Rivian Automotive
($11.93 billion), followed by offerings from
Robinhood Markets ($2.09 billion), Applovin
($2.00 billion) and Olaplex ($1.55 billion). Mid-Atlantic IPOs—2005 to 2021
# of IPOs Dollar volume (in $ billions)
Technology and life sciences companies
accounted for 78% of the state’s IPO total in 16
15 15 6.4
2021—down from their 90% share in 2020.
13 13
The number of venture-backed California 11 4.9
10
IPOs increased from 42 in 2020 to
69 in 2021. The 2021 tally represents 7 7
2.9
44% of all US-issuer VC-backed IPOs, 6 2.6 6
2.4
the same as in 2020 and just over the 1.7
1.4
4 4
1.3 1.2 3 1.2 3
43% that prevailed during the five- 1.1
0.9 0.9
1 0.3 1 0.4
year period from 2015 to 2019. 0.1 0.2
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
The median 2021 California IPO produced
Source: SEC filings
a first-day gain of 16%. Nano-cap cinema
equipment maker Moving iMage was
the state’s top performer with a first-day
gain of 700%, followed by Poshmark (up
142%), DICE Therapeutics (up 117%)
and Design Therapeutics (up 107%). Carolina–based companies—Driven
MID-ATLANTIC
At year-end, 60% of the state’s 2021 Brands ($700 million), AvidXchange ($660
The mid-Atlantic region of Virginia, million) and Krispy Kreme ($500 million).
IPOs were trading below their offering
Maryland, North Carolina, Delaware and
price, with the median California IPO The median 2021 mid-Atlantic IPO
the District of Columbia produced 16 IPOs
down 14% from its offering price. produced a first-day gain of 22%, led
in 2021, up from seven in 2020 and the
The best-performing California IPO highest annual tally since the 24 in 2000. by Xometry (up 99%), Privia Health
of the year was Vera Therapeutics (up (up 51%) and Neximmune (up 49%).
North Carolina produced six of the
143% at year end), followed by Confluent At year-end, in contrast to nationwide results,
region’s IPOs in 2021, with Maryland
(up 112%), Prometheus Biosciences (up 56% of the region’s 2021 IPOs were trading
and Virginia each contributing five.
108%) and Affirm Holdings (up 105%). above their offering price, with the median
Gross proceeds in the mid-Atlantic mid-Atlantic IPO trading up 10%. The region’s
With the largest pool of venture capital–
region more than doubled for the best-performing IPOs at year-end were Driven
backed companies in the United States
second consecutive year, growing Brands Holdings (up 53%), Bowman Consulting
and a wealth of entrepreneurial talent,
from $2.38 billion in 2020 to Group (up 52%) and Fluence Energy (up 27%).
California should remain a major
$4.86 billion in 2021.
source of strong IPO candidates in The region’s traditional strengths in the
the coming year, particularly from the The largest mid-Atlantic IPOs of 2021 life sciences, technology, financial services
technology and life sciences sectors. came from Virginia-based Fluence Energy and defense sectors should continue to
($868 million), followed by a trio of North produce attractive IPO candidates in 2022.7 Regional Market Review and Outlook
NEW ENGLAND New England IPOs—2005 to 2021
# of IPOs Dollar volume (in $ billions)
After nearly doubling between 2019 and
2020, the number of New England IPOs 32
9.7 34
increased at a more measured pace in 2021, 29
climbing 17%, from 29 in 2020 to 34. 24
23 6.5
6.3
Massachusetts accounted for all but three
17
of the region’s IPOs in 2021—the state’s 15
16
15
13
tally of 31 IPOs was the third-highest state 2.7
3.0
12 12 3.4
total in the country—with Connecticut 2.0
6 6
8 2.3
1.7 1.8
1.5
1.2
accounting for the remaining three. 3
0.6
1.1 0.9
0.6
1 0.5
Gross proceeds in the region, which had 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
more than tripled between 2019 and
Source: SEC filings
2020, inched up 3%, from $6.28 billion
in 2020 to $6.47 billion in 2021.
Tri-State IPOs—2005 to 2021
The largest New England IPO in 2021 # of IPOs Dollar volume (in $ billions)
was by Toast ($870 million), provider of 43 15.0
a cloud-based software and payments
platform for the restaurant industry,
followed by Signify Health ($564 million) 29 10.3
27
and Definitive Healthcare ($420 million). 26
8.1
25 8.4
7.5 21
7.0
With 27 life sciences company IPOs in 17 6.2 17 18 17
5.2 14 5.0
2021, the region accounted for 25% of 3.8 11
4.7 13 4.7
9
all US-issuer life sciences IPOs in the 2.3 2.6
1.7 1.5 5 5
country, compared to 30% in 2020. 3
0.2
The number of venture-backed New 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
England IPOs increased from 26 in 2020 Source: SEC filings
to 30 in 2021. The region accounted for
19% of all US-issuer VC-backed IPOs
in 2021, down from 27% in 2020.
The median 2021 New England IPO TRI-STATE The median 2021 tri-state IPO produced
produced a first-day gain of 17%. The a first-day gain of 6%. The region’s
region’s top performers in first-day trading The number of IPOs in the tri-state top performers in first-day trading
were Vor Biopharma (up 108% from region of New York, New Jersey and were Glimpse Group (up 152% from
its offering price), Ikena Oncology (up Pennsylvania more than doubled, its offering price), Stronghold Digital
100%) and Verve Therapeutics (up 68%). from 21 in 2020 to 43 in 2021. Mining (up 52%) and Braze (up 44%).
At year-end, the median New England IPO New York produced 33 of the region’s 2021 At year-end, the median tri-state
was down 21% from its offering price, with IPOs, representing the second-highest state IPO was down 25% from its offering
74% of the region’s IPOs trading below total in the country for the first time since price. The best performing tri-state
their offering price. The best-performing 2013, with Pennsylvania accounting for IPO was by authentication solutions
New England IPOs at year-end were six and New Jersey the remaining four. provider authID.ai (up 100% from its
Verve Therapeutics (up 94%), Flywire (up Gross proceeds from tri-state IPOs offering price at year-end), followed
59%) and SEMrush Holdings (up 49%). increased by 46%, from $10.26 billion by DigitalOcean Holdings (up 71%)
in 2020 to $15.01 billion in 2021, and Hayward Holdings (up 54%).
With the region’s world-renowned
universities and research institutions led by GlobalFoundries ($2.59 billion), With a high level of venture capital activity
continuing to spawn tech and life sciences Oscar Health ($1.44 billion) and UiPath and a sophisticated capital markets
companies, and with strong levels of ($1.34 billion). ecosystem in the region, the coming year
venture capital investment, New England The tri-state region produced 20 should see tri-state IPOs from emerging
should continue to generate compelling VC-backed IPOs in 2021, up from 12 the life sciences and technology companies and
IPO candidates in the coming year. prior year and its highest tally since 1999. larger, private equity–backed companies.8 IPO Market by the Numbers
PROFILE OF SUCCESSFUL HOW DO YOU COMPARE?
IPO CANDIDATES
Set forth below are selected key metrics about the IPO market, based on combined
What does it really take to go public? There data for all US IPOs during the three-year period from 2019 through 2021.
is no single profile of a successful IPO
Percentage of IPO companies qualifying as EGCs
company, but in general the most attractive 92%
under JOBS Act
candidates have the following attributes:
$163.9 million (18% below $50 million
– Outstanding Management: An investment Median offering size
and 17% above $500 million)
truism is that investors invest in people, and
this is even truer for IPO companies. Every Median annual revenue of IPO companies
$59 million (48% below $50 million
company going public needs experienced and and 15% above $500 million)
talented management with high integrity,
Percentage of IPO companies that are profitable 27%
a vision for the future, lots of energy to
withstand the rigors of the IPO process and Delaware—95%
public company life, and a proven ability to State of incorporation of IPO companies
No other state over 3%
execute. An IPO is not the best time for a
fledgling CEO or CFO to cut his or her teeth. Percentage of IPOs including selling
Percentage of IPOs—20%
stockholders, and median percentage of offering
Median percentage of offering—32%
represented by those shares
– Market Differentiation: IPO candidates
need a superior technology, product or Percentage of IPOs including directed share
Percentage of IPOs—44%
service in a large and growing market. programs, and median percentage of offering
Median percentage of offering—5%
represented by those shares
Ideally, they are viewed as market leaders.
Appropriate intellectual property protection Percentage of IPO companies disclosing
69%
is expected of technology companies, and adoption of ESPP
in some sectors, such as life sciences and
Percentage of IPO companies using a “Big 4”
medical devices, patents are de rigueur. 74%
accounting firm
– Substantial Revenue: Substantial revenue Stock exchange on which the company’s Nasdaq—78%
is generally expected—at least $50 million common stock is listed NYSE—22%
to $75 million annually—in order to
provide a platform for attractive levels of Median underwriting discount 7%
profitability and market capitalization.
Median—16
Number of SEC comments contained in initial
25th percentile—12
– Revenue Growth: Consistent and comment letter
75th percentile—21
strong revenue growth—25% or more
Median number of Form S-1 amendments
annually—is usually needed, unless the (excluding exhibits-only amendments) Four
company has other compelling features. filed before effectiveness
The company should have visibility Median—72 calendar days
Time elapsed from initial confidential submission
into sustained expansion to avoid the to initial public filing of Form S-1
25th percentile—56 calendar days
market punishment that accompanies 75th percentile—106 calendar days
revenue and earnings surprises. Time elapsed from initial confidential submission Median—104 calendar days
or initial public filing to effectiveness 25th percentile—83 calendar days
– Profitability: Strong IPO candidates of Form S-1 75th percentile—158 calendar days
generally have track records of earnings Legal—$1,800,000
and a demonstrated ability to enhance Median offering expenses Accounting—$1,032,500
Total—$3,873,750
margins over time, although IPO investors
often appear to value growth more
highly than near-term profitability.
Other factors can vary based on a company’s Beyond these objective measures, IPO
– Market Capitalization: The company’s industry and size. For example, many life candidates need to be ready for public
potential market capitalization should be at sciences companies will have much smaller ownership in a range of other areas,
least $200 million to $250 million, in order revenue and not be profitable. More mature including accounting preparation; corporate
to facilitate development of a liquid trading companies are likely to have greater revenue governance; financial and disclosure controls
market. Substantial post-IPO ownership and market caps, but slower growth rates. and procedures; external communications;
by insiders may mean a larger market High-growth companies are likely to be smaller, legal and regulatory compliance; and a variety
cap is required to provide ample float. and usually have a shorter history of profitability. of corporate housekeeping tasks. <Constructing a Public-Ready Board of Directors
9 Navigating the Thicket of SEC, Stock Exchange and State Law Requirements
S EC and stock exchange rules impose
a variety of independence and other
requirements for boards and board
INDEPENDENCE PHASE-IN RULES
ELEMENT NASDAQ NYSE
committees of public companies, and some
states now impose additional diversity Independent The board must be composed of a majority of independent directors
board within one year of the listing date.
requirements. Few private companies
of directors
satisfy all these requirements. An essential
element of a company’s IPO planning is to Audit The audit committee must have at least one The audit committee must have at least
assess the composition of the company’s Committee independent member by the listing date, at one independent member by the listing
board and board committees and develop least a majority of independent members date, at least a majority of independent
within 90 days of listing, and must be fully members within 90 days of the effective
a plan to come into full compliance
independent within one year of listing.1 date of its Form S-1, and must be fully
with the applicable requirements independent within one year of the
within the prescribed timelines. effective date of the Form S-1.
Although phase-in rules apply to many Compensation The compensation committee must The compensation committee must
of these requirements, a company Committee have at least one independent member have at least one independent member
planning to go public ideally should by the listing date, at least a majority by the earlier of the date the IPO closes
begin discussing potential changes in of independent members within 90 or five business days from the listing
days of listing, and must be fully date, at least a majority of independent
board composition that may be needed independent within one year of listing. members within 90 days of the listing
to satisfy all the requirements at least date, and must be fully independent
six to twelve months before the IPO. within one year of the listing date.
Time will be needed to recruit new
members, particularly diverse directors. Nominating If the company elects to establish a The nominating committee must have
Committee nominating committee, the committee at least one independent member by
Companies are often surprised by how must have at least one independent the earlier of the date the IPO closes
member by the listing date, at least a or five business days from the listing
challenging it can be to recruit new
majority of independent members within date, at least a majority of independent
directors. This task has increased in 90 days of listing, and must be fully members within 90 days of the listing
difficulty due to a variety of factors, independent within one year of listing. date, and must be fully independent
including more stringent independence within one year of the listing date.
requirements, the heavier workloads now
expected of directors, a perception of 1
Nasdaq also has a temporary “exceptional and limited circumstances” exception for one non-independent member. This
increased personal exposure to liability exception allows one director who is independent under Rule 10A-3 but not independent under the general Nasdaq standard,
and, most recently, stricter investor and who is not a current executive officer or employee of the company (or a family member of a current executive officer of
the company), to serve on the audit committee for up to two years if the board determines that such service is required by
policies against director “over-boarding” the best interests of the company and its stockholders. A person serving on the audit committee under this exception may
(several major institutional investors will not chair the audit committee. Similar exceptions apply to the compensation and nominating committees of Nasdaq-listed
companies. Very few companies take advantage of these exceptions.
vote against a director if that director
sits on more than four boards or, in the
case of a director who is an executive considered independent, Nasdaq – Diversity: Nasdaq rules and state law
officer, sits on more than two boards). and the NYSE require that: requirements impose board diversity
The company should also plan for requirements in some circumstances:
• the director not have any
the possibility that existing directors
relationship with the company • Nasdaq: Subject to phase-in rules,
affiliated with venture capital or private
that would be prohibited by that a company listing on Nasdaq in
equity investors may want to leave the
stock exchange’s “bright-line” connection with an IPO must have—
board shortly following the IPO.
independence standards; and or explain why it does not have—at
least two diverse directors (including
BOARD OF DIRECTORS • the board, after taking into
one female and one underrepresented
account all relevant information,
minority or LGBTQ+) by the later of
– Independence: Subject to phase-in rules, affirmatively determine that
two years from the date of listing or
Nasdaq and NYSE require a majority the director is independent.
the date it files a proxy statement for its
of the members of the board, and all
– Impact of Stock Ownership: Stock second annual meeting of stockholders.
members of the audit, compensation, and
corporate governance and nominating ownership, regardless of how high • State Laws: Depending on board size,
committees, to be independent within the level, is generally not viewed as California requires public companies
one year after the company’s IPO. an impediment to independence headquartered in California to have up
(but may preclude service on the to three female directors (requirement
– Determination of Independence: audit committee, as noted below). became effective at the end of 2021)
In order for a director to be and up to three directors fromConstructing a Public-Ready Board of Directors
10 Navigating the Thicket of SEC, Stock Exchange and State Law Requirements
“underrepresented communities” by with at least one member having
the end of 2022. Washington requires experience in finance or accounting. BRIGHT-LINE INDEPENDENCE
public companies incorporated STANDARDS
in Washington (subject to several – Audit Committee Financial Expert:
exceptions, including for emerging Each public company is required to While there are some differences between
disclose annually whether or not its audit the bright-line independence standards of
growth companies, smaller reporting
Nasdaq and the NYSE, as a general matter a
companies and controlled companies) committee has at least one member who
person cannot be considered independent if:
to have boards on which at least 25% is an “audit committee financial expert,”
of the members are women or to as defined in SEC rules, and, if not, to – he or she is, or at any time during
provide a “board diversity discussion explain why it does not. This effectively the past three years was, an
employee of the company;
and analysis” to stockholders. Various requires every public company to have
other states are considering similar an audit committee financial expert. – his or her family member is, or at any time
board quota and/or diversity disclosure during the past three years was, an executive
requirements. (Board diversity is – Size: Nasdaq requires the audit officer of the company, with an exception
committee to have a minimum of three for interim service as an executive officer
discussed further on pages 12–13.)
members at all times. NYSE requires (for a period not exceeding one year under
Nasdaq rules; NYSE rules do not specify
– Size: Neither SEC, Nasdaq nor the audit committee to have at least a maximum period of interim service);
NYSE rules stipulate board size. one member by the listing date, at least
two members within 90 days of the – he or she (or a family member) has, or at
any time during the past three years had, a
AUDIT COMMITTEE listing date, and at least three members
“compensation committee interlock,” which
within one year of the listing date. exists when an executive officer of Company
– General: Subject to phase-in rules, A serves on the compensation committee of
Nasdaq and NYSE require listed Company B at the same time that a director
COMPENSATION COMMITTEE
companies to have an audit committee of Company A (or his or her family member)
composed of at least three members of the – General: Nasdaq and NYSE require serves as an executive officer of Company B;
board of directors, each of whom is (1) listed companies to have a compensation – he or she (or a family member) has, or at
independent within the meaning of the committee composed of members of the any time during the past three years had,
general Nasdaq or NYSE rules described board of directors who are independent certain specified relationships with the
above and (2) independent within the within the meaning of the general company’s auditor, including the company’s
stricter meaning of SEC Rule 10A-3. internal auditor in the case of the NYSE;
Nasdaq or NYSE rules described above.
– “Super Independence”: Rule 10A-3 – he or she (or a family member) has certain
– “Enhanced Independence”: Nasdaq and specified relationships with another entity
precludes a person from serving on the NYSE require that, in determining that, in the past three years, received
the audit committee if the person: the independence of members of the payments from or made payments to the
compensation committee, the board company for property or services in excess of:
• accepts, directly or indirectly,
any consulting, advisory or other must consider all factors relevant to y in the case of Nasdaq, the greater of
compensatory fees from the whether a director has a relationship that $200,000 and 5% of the recipient’s
is material to that director’s ability to be gross revenues for that year; or
company (other than compensation
for board service and certain independent of management, including: y in the case of the NYSE, the greater of
retirement compensation); or $1 million and 2% of the other company’s
• the source of compensation of
gross revenues for that year; or
• is an “affiliate” of the company (a such director, including any
person who, directly or indirectly, consulting, advisory or other – he or she (or a family member) received
compensatory fees paid by the compensation from the company in excess
controls, is controlled by, or is under
company to such director; and of $120,000 during any twelve-month period
common control with, the company). within the past three years, other than
• whether such director is compensation for service on the board or a
– Impact of Stock Ownership: A person board committee, compensation paid to a
can be an “affiliate” due to large stock affiliated with the company.
family member as a non-executive employee,
ownership. Rule 10A-3 contains a and certain other exempted payments.
– Impact of Stock Ownership: Nasdaq
safe harbor for ownership of 10% and the NYSE have indicated that
(post-offering) or less. Ownership ownership of company stock, even if it to disgorge to the company any “profit”
of 20% (post-offering) is generally represents a controlling interest, does not realized through any purchase and sale
viewed as the upper bound, although automatically disqualify a director from (or any sale and purchase) of equity
even higher examples exist. service on the compensation committee. securities of the company within a
– Financial Literacy: Nasdaq and NYSE – Rule 16b-3: Section 16(b) of the Securities period of less than six months. SEC Rule
rules require each member of the audit 16b-3 provides that the grant of a stock
Exchange Act of 1934 requires directors,
committee to be financially literate, option or other equity compensation
executive officers and 10% stockholdersConstructing a Public-Ready Board of Directors
11 Navigating the Thicket of SEC, Stock Exchange and State Law Requirements
award will not be considered a matchable CORPORATE GOVERNANCE AND
purchase if the grant is approved by a NOMINATING COMMITTEE DEFINITIONS
board committee consisting of two or
more directors, each of whom is a “non- – NYSE: NYSE rules require each listed For purposes of various exemptions,
the following definitions apply:
employee director” within the meaning company to have a nominating or
of Rule 16b-3. Although workarounds corporate governance committee – Controlled Company: A company in
exist, it is desirable for each member composed solely of independent which a majority of the voting power for
directors under the NYSE’s general the election of directors is held by an
of the compensation committee to individual, a group, or another company.
qualify as a “non-employee director.” definition of independence.
– Smaller Reporting Company: A company
– Size: Nasdaq requires that the – Nasdaq: Although not mandating that, as of the last business day of its
compensation committee consist that each listed company establish a most recently completed second fiscal
of at least two directors, while nominating or corporate governance quarter, has a public float of less than
committee, Nasdaq rules require $250 million or, if the company has a public
the NYSE does not specify a float of less than $700 million or has no
minimum number of members. director nominees to be selected, or
public float, had less than $100 million in
recommended for selection by the board, revenue in its most recent fiscal year.
by either a nominating committee
composed solely of independent directors – Foreign Private Issuer: A company organized
under the laws of a foreign country and
OTHER STANDING COMMITTEES or by a majority of the independent in which 50% or less of its outstanding
members of the board. Most Nasdaq- voting securities are directly or indirectly
Post-IPO, public company boards—particularly listed companies elect to have a owned of record by US residents, or in
among larger companies—sometimes which a majority of its executive officers or
nominating and corporate governance
voluntarily create other standing committees directors are not US citizens or residents,
to help fulfill board duties. According to committee to satisfy this requirement.
a majority of its assets are not located in
the 2021 U.S. Spencer Stuart Board Index, the United States and its business is not
among S&P 500 companies, the average – Size: Neither NYSE nor Nasdaq prescribe
administered principally in the United States.
number of standing board committees is any minimum size for the nominating
4.2, with the following prevalence: and corporate governance committee. – Emerging Growth Company: A company
that had total annual gross revenues of less
– Executive committee—27% than $1.07 billion (subject to adjustment
(down from 33% in 2016) EXEMPTIONS every five years for inflation, with the next
– Finance committee—27% adjustment due in April 2022) during its
– Controlled Companies: A controlled most recently completed fiscal year. A
(down from 31% in 2016) company is exempt from the company’s EGC status lasts until the last
– Science and technology committee—13% requirements that a majority of day of the fiscal year following the fifth
(up from 9% in 2016) the directors be independent and anniversary of its IPO, subject to earlier
that the board maintain a separate termination in specified circumstances.
– Risk committee—12% (unchanged from 2016)
compensation committee and a separate
– Environment, health and safety corporate governance and nominating requirements for audit committees
committee—11% (up from 7% in 2016)
committee (or, in the case of Nasdaq, and makes public disclosure of the
– Public policy/social and corporate have a majority of the independent home-country practices it follows. A
responsibility committee—7% directors make nominations). A foreign private issuer is also exempt
(down from 10% in 2016) controlled company is not exempt from the requirements that a majority
– Legal/compliance committee—6% from audit committee requirements. of the directors be independent and
(up from 5% in 2016) that the board maintain a separate
– Smaller Reporting Companies: A smaller compensation committee and a separate
– Investment/pension committee—3% reporting company is required to comply
(unchanged from 2016) corporate governance and nominating
with all director independence and
committee (or, in the case of Nasdaq,
– Acquisitions/corporate development board committee requirements, except
have a majority of the independent
committee—2% (unchanged from 2016) that it is exempt from the “enhanced
directors make nominations).
independence” requirements for
– Strategy and planning committee—2%
(unchanged from 2016) compensation committee members An important threshold question for
mandated by the Dodd-Frank Act. an IPO company that qualifies for
The 200 public technology companies covered by
exemptions from corporate governance
the 2021 U.S. Technology Spencer Stuart Board – Foreign Private Issuers: A foreign requirements is whether to take advantage
Index have fewer standing board committees private issuer is permitted to follow its
on average than S&P 500 companies and are of the exemptions, as the absence of these
home-country practices in lieu of some
less likely to have most types of standing investor protections may be perceived
committees covered by both reports. corporate governance requirements
negatively in the market and adversely
as long as it satisfies Exchange Act
affect the marketing of the offering. <Board Diversity Planning Now Part of the IPO Process
12 Public Companies Face a Variety of Diversity Requirements and Expectations
I n recent years a variety of stakeholders
have become increasingly vocal
in advocating for more diversity on
FORMAT OF NASDAQ ANNUAL DISCLOSURE REQUIREMENT
BOARD DIVERSITY MATRIX (AS OF [DATE])
public company boards. The efforts to Total Number of Directors #
increase board diversity—by securities Female Male Non-Binary Did Not
regulators, stock exchanges, proxy Disclose
advisory firms, institutional investors, Gender
state legislatures, and even investment PART I: Gender Identity
bankers, among others—have gained Directors # # # #
traction and now affect both the IPO PART II: Demographic Background
process and life as a public company. African American or Black # # # #
Recruitment of new directors has always Alaskan Native or Native American # # # #
been on the checklist when preparing Asian # # # #
for life as a public company, primarily Hispanic or Latinx # # # #
to satisfy stock exchange independence Native Hawaiian or Pacific Islander # # # #
requirements. The recruitment of
White # # # #
diverse board candidates is now also
an important part of that checklist, Two or More Races or Ethnicities # # # #
and could even impact the company’s LGBTQ+ #
choice of lead IPO underwriter.
Did Not Disclose Demographic #
Background
Recruiting new directors is not a new
challenge in the IPO process—time
is needed to identify and vet suitable
to increase the gender diversity of boards, Less stringent thresholds apply for
candidates. Recruiting new diverse
many public companies now include in foreign issuers, smaller reporting
directors can be especially challenging
their corporate governance guidelines a companies, and boards with five or
due to the large number of public
statement about giving consideration to fewer members. SPACs that have not
companies currently seeking to enhance
diversity in evaluating director candidates completed a business combination
their board diversity. Regardless
and requiring the same of any third parties transaction are exempt from the rules.
of whether a search firm is used to
hired to conduct a director search.
increase the pool of candidates, the A company going public is not required to
process of identifying new directors During 2022, the SEC is expected be in compliance with the rules at the time
typically involves an unexpectedly large to propose several ESG-related rule of its IPO or to include in the Form S-1 any
amount of board time and effort. changes, including enhanced disclosure diversity information pursuant to the
requirements regarding board diversity. rules. Instead, following completion of
Accordingly, companies should begin
the initial phase-in period, a company
thinking about the recruitment of diverse
NASDAQ RULES listing on Nasdaq in connection with
directors as soon as they conclude
an IPO generally must have—or explain
that an IPO is a realistic goal. While In August 2021, the SEC approved why it does not have—at least one
securing new directors is not an absolute new Nasdaq rules that, subject to diverse director by the later of one year
requirement for an IPO, starting the a phase-in period, require every from the date of listing or the date the
recruitment process early enough that Nasdaq-listed company to: company files a proxy statement for its
new directors can be onboarded before
– have—or explain why it does not first annual meeting of stockholders and
the IPO will likely accelerate their
have—at least two board members at least two diverse directors by the later
integration into the fabric of the board.
who are diverse, including one who of two years from the date of listing or
self-identifies as female and one who the date it files a proxy statement for its
SEC RULES second annual meeting of stockholders.
self-identifies as an underrepresented
An SEC rule requires public companies minority or LGBTQ+; and
to disclose in their proxy statement PROXY ADVISOR POLICIES
– publicly disclose, at least once per year, in
whether—and if so, how—diversity a standardized matrix format prescribed The two leading proxy advisory firms,
is considered in identifying director by Nasdaq, aggregated information on ISS and Glass Lewis, have each adopted
nominees. The SEC left it to each company the voluntarily self-identified gender, voting policies relating to board diversity.
to determine how it defines diversity when racial/ethnic and LGBTQ+ status
adopting this requirement. In partial of the company’s directors, to the For Russell 3000 and S&P 1500 companies,
response to this SEC rule and other efforts extent permitted by applicable law. ISS will generally recommend votingBoard Diversity Planning Now Part of the IPO Process
13 Public Companies Face a Variety of Diversity Requirements and Expectations
against the chair of the nominating diversity, while Illinois, Maryland and New While diversity self-identification is
committee where there are no women York mandate disclosure regarding board customary in the employee hiring
on the board or where there are no diversity. Other states are considering process, it has only recently migrated
racially or ethnically diverse members. mandatory board diversity legislation, to the director recruitment process.
That recommendation could extend to or have adopted (or are considering)
Goldman Sachs has formally acknowledged
other directors on a case-by-case basis. non-binding resolutions urging public
the importance of board diversity in its
Beginning in 2023, ISS plans to apply its companies to increase board diversity. This
client engagement policies. In February
gender diversity policy to all companies. is a quickly evolving area; companies need
2020, Goldman announced that it will
to monitor developments in applicable
For Russell 3000 companies, Glass only underwrite IPOs of companies that
states to remain in compliance.
Lewis will generally recommend voting have at least one diverse board member
against the nominating committee chair and, starting in 2021, would “raise
IPO PROCESS AND this target to two diverse candidates
of a board with fewer than two gender
INVESTMENT BANKERS for each of our IPO clients.” While no
diverse directors and against the entire
nominating committee of a board with other bulge-bracket investment banks
Because the operative characteristics
no gender diverse directors. For annual have followed Goldman’s lead, the
of diversity extend beyond visible
momentum created by the various other
meetings held after January 1, 2023, Glass attributes, companies should consider stakeholders discussed above is driving
Lewis will move from a fixed numerical adding self-identification questions to all companies considering an IPO to give
approach and will recommend voting their director recruiting documents more thought to board diversity. <
against the nominating committee chair and IPO director questionnaires.
of a board at a Russell 3000 company
that has less than 30% gender diversity.
In addition, Glass Lewis will recommend INSTITUTIONAL INVESTOR BOARD DIVERSITY POLICIES
voting against the chair of the nominating
and/or governance committee of S&P Blackrock Blackrock assesses a board’s diversity in the context of a company’s domicile,
500 companies that provide insufficient business model and strategy. Blackrock believes boards should aspire to 30%
board diversity disclosure. Glass Lewis diversity of membership and encourages companies to have at least two directors
will also make recommendations who identify as female and at least one who identifies as a member of an
underrepresented group (defined as individuals who identify as Black or African
in accordance with mandatory American, Hispanic or Latinx, Asian, Native American or Alaska Native, or Native
board composition requirements Hawaiian or Pacific Islander; individuals who identify as LGBTQ+; individuals who
set forth in applicable state laws. identify as underrepresented based on national, indigenous, religious or cultural
identity; individuals with disabilities; and veterans).
INSTITUTIONAL Blackrock requests boards to disclose: (a) the aspects of diversity that the company
believes are relevant to its business and how the diversity characteristics of
INVESTOR POLICIES the board, in aggregate, are aligned with the company’s long-term strategy and
business model; (b) the process by which candidates are identified and selected,
The three largest institutional including whether professional firms or other resources outside of incumbent
stockholders—BlackRock, State Street directors’ networks have been engaged to identify and/or assess candidates,
Global Advisors and Vanguard—each and whether a diverse slate of nominees is considered for all available board
include a separate section on board nominations; and (c) the process by which boards evaluate themselves and any
significant outcomes of the evaluation process, without divulging inappropriate and/
diversity in their voting guidelines and or sensitive details.
have increased their engagement with
State Street For Russell 3000 companies, State Street may vote against the nominating
public companies about board diversity
committee chair or the board leader, in the absence of a nominating committee, if a
in recent years. While the views of these company doesn’t have at least one female board member. Additionally, if a company
investors largely overlap with other fails to meet this expectation for three consecutive years, State Street may vote
diversity requirements, their influence against all incumbent members of the nominating committee.
on proxy voting should be considered If a company in the S&P 500 does not disclose the gender, racial and ethnic
by companies building their boards. composition of its board, or does not have at least one director from an
underrepresented racial or ethnic community, State Street will vote against the
nominating committee chair.
STATE LAW REQUIREMENTS
Vanguard Vanguard will generally vote against the nominating and/or governance committee
States are playing an increasingly active chair (or other director if needed) if a company’s board is making “insufficient
progress” in its diversity composition and/or in addressing its board diversity-
role in promoting board diversity among related disclosures. The factors Vanguard will consider include applicable market
companies that are incorporated under regulations and expectations, along with additional company-specific context.
their laws or satisfy other criteria. For Vanguard also believes that board composition should appropriately represent
example, California and Washington the company’s markets and long-term strategic needs, and that boards should
mandate specified levels and types of board demonstrate how they intend to continue making progress.Duty of Oversight Is Mission Critical for Boards
14 Recent Litigation Highlights Importance of Reporting Systems
W hile the fiduciary duties of directors
and officers are the same whether
a company is privately owned or publicly
– the directors utterly fail to implement
any reporting or information
system or controls (“failure to
BOARD ACTIONS TO FULFILL
OVERSIGHT OBLIGATIONS
traded, the risk of claims by dissatisfied implement” claims); or Summarized below are some of the actions
stockholders alleging breaches of these a board of directors can take to help fulfill
fiduciary duties becomes much more – having implemented such a system or and document its oversight obligations
controls, the directors consciously fail to and minimize the risk of liability under
significant once the company is public.
monitor or oversee its operations, thus the Caremark standards of liability.
One particular type of breach of fiduciary disabling themselves from being informed To address its obligation to implement appropriate
duty claims—those based on an alleged of risks or problems requiring their reporting or information systems or controls, the
failure of the board’s duty of oversight— attention (“failure to follow-up” claims). board should:
has become especially common in recent – Ensure management and the board
While Caremark claims have historically
years, and highlights how important it is each has a process for identifying
been described as “possibly the most and regularly reviewing key risks,
for the board of an IPO company to ensure
difficult theory in corporation law and document those processes;
the company has appropriate reporting
upon which a plaintiff might hope
systems and controls and procedures in – Explicitly assign responsibility for
to win a judgment,” since mid-2019 oversight of key risks (either to the full
place from its first day as a public company.
Delaware courts have allowed Caremark board or a board committee) and include
claims to proceed in at least six cases corresponding proxy disclosure once
WHAT IS REQUIRED? public; a separate risk committee is not
in which the court determined that
required and has not become very common
The duty of oversight requires directors the plaintiffs adequately alleged that
outside the financial services industry;
to make a good faith effort to implement directors had abdicated their oversight
an oversight system and then monitor it. responsibility by failing to implement – Not rely solely on the existence of
regulatory requirements—such as
Allegations that directors violated their and/or monitor an oversight system.
SEC or other reporting requirements,
duty of oversight are often referred to or FDA requirements for life sciences
as Caremark claims, after a landmark RECENT CASES ALLOWING companies—as a basis for assuming an
1996 case involving that company. CAREMARK CLAIMS TO PROCEED adequate reporting system exists;
– Avoid being completely dependent on
Oversight liability can arise if either: Most notably, in Marchand v. Barnhill, a management reporting, including by having
case stemming from a listeria outbreak the board (or designated board committee)
involving Blue Bell Creameries that hear directly from chief compliance and
BOARD FIDUCIARY DUTIES risk officers, and ensure there are systems
resulted in three deaths and caused the
in place for employees and corporate
The fiduciary duties of directors and officers
company to recall all of its products, cease
partners to raise concerns; and
under Delaware law consist of: production at all plants and dismiss over
one-third of its employees, the Delaware – Establish an expectation and protocol for
– the duty of care—an obligation to Supreme Court reversed the lower court’s management to promptly report significant
act on an informed basis after due regulatory or compliance developments to
consideration of relevant materials
dismissal of a stockholder’s Caremark the board (or designated board committee).
and appropriate deliberations; and claim. The allegations upon which the
To address its obligation to monitor or oversee
court allowed a “failure to implement”
– the duty of loyalty—an obligation to refrain claim to proceed included that:
the operation of the systems or controls
from deriving a benefit from a transaction the board has implemented, the board (or
designated board committee) should:
not generally available to all stockholders, – food safety was the mission-critical
and to otherwise act in good faith.
compliance issue for Blue Bell; – Be vigilant for warning signs (often referred
to as yellow or red flags) and follow up when
A board’s duties are enhanced in the – the board did not have a committee identified, including giving consideration
acquisition context, especially when the to the engagement of outside advisors;
overseeing food safety;
company is going to be acquired.
– Receive regular reports on key
– there was no board-level process to risk and regulatory issues;
While almost every company going public will address food safety issues or protocol
include in its charter a provision eliminating
for advising the board of food safety
– Ensure that meeting minutes demonstrate
the personal monetary liability of directors that the board (or designated board
(but not officers, as this is not authorized reports and developments; and committee) is regularly exercising oversight
by the Delaware corporation statute) for and following up on potential concerns; and
violations of the duty of care, breaches of – board minutes did not mention discussion
the duty of oversight are considered to be about food safety concerns existing – Exercise care in informal communications
non-exculpable breaches of the duty of loyalty (such as emails and texts), because
prior to the listeria outbreak or generally
and directors who violate the duty of oversight such materials may in some situations
reflect discussion of food safety matters. need to be produced in response to
may therefore face personal liability.
a books and records request.You can also read
