1. Share structure and cap table
Depending on where your company is incorporated, dual- or multi-class voting structures may or may not be permitted. It is therefore important to determine early in the initial public offering (IPO) planning process whether your “home country” corporate law and applicable stock exchange listing rules provide for this flexibility. You should also confirm applicable requirements regarding the percentage of shares in public hands, known as the free float. In general, companies listed on European-regulated stock exchanges must have a free float of at least 25%, although it is possible in certain cases to seek derogations from this requirement.
Make sure that your capitalization records accurately reflect all share issuances, transfers and cancellations, as well as option and warrant issuances, exercises and cancellations. Do not underestimate the work involved on a cross-functional basis between legal, human resources and finance on managing the cap table and equity platform and the transition to the registrar on an IPO.
You will need to include audited consolidated financial statements for the last three financial years in your IPO prospectus. You also may need to include interim financial information for the current financial year (with comparable prior year information), depending on when in the year your IPO takes place. The financial statements included in the prospectus will need to be prepared in accordance with international financial reporting standards (IFRS), with limited exceptions in some jurisdictions, and the accounting policies to be adopted by the company going forward should be consistent throughout the financial track record period – or you will need to explain any differences.
In addition, if the company has acquired or disposed of any material businesses, it may be necessary to include financial statements of the acquired business and to prepare pro forma financial information reflecting the impact of the acquisition or disposition. The rules relating to pro forma financial information differ in the US and Europe, so consider performing the significance calculations in accordance with both sets of rules.
Identify any sensitive issues or any fine-line determinations in your significant accounting policies or practices, and discuss these with your auditors. Key financial statement issues include segmentation, consistency across reporting periods, disclosure in the notes to the financial statements, and disclosure of alternative performance measures (APMs) and adjusted metrics.
Public investors will be looking for operating metrics, beyond the IFRS financials, that management uses to measure and run the business. Investment bankers are very helpful in identifying these, but a company should have its own perspective on the metrics that will work best over time. Ensure that you document the metrics consistently and are able to thoroughly support any “add backs.” Be sure to consider how your business might evolve and how that might affect your key metrics. For at least a few years following the IPO, you want your key metrics disclosure to be as consistent as possible with your IPO disclosures. In addition, consider any non-IFRS financial metrics or APMs early – and consider how your regulator may view these during your IPO review process.
Investor marketing begins very early in the IPO process in Europe, with early-look meetings with investors coming soon after the formal IPO kickoff, which requires the company to have a finessed and verifiable equity story to present to investors at this early stage. These early-look meetings are typically followed by pilot fishing meetings later in the process and, potentially, deeper dive or “gold card” meetings where an advanced draft of the disclosure document may be made available on a confidential basis to certain key accounts before the formal announcement of the IPO. In addition, in some IPO processes, companies give a limited number of investors additional access to management and due diligence material in an attempt to secure one or more “cornerstone investors” who typically agree at the time of IPO launch to purchase a substantial and disclosed portion of the company’s shares. These activities take up a lot of management time and focus, so it is important to plan and agree upfront on sensible timings and deliverables with your investment banks to minimize strain on the management team.
In a European IPO, research is prepared and distributed by analysts employed by the underwriting banks, with such analysts then using their research to discuss the company with potential investors ahead of setting the price range and commencement of the roadshow (the pre-deal investor education process). This is an important part of the IPO process in Europe and will be a key area of focus for lawyers and bankers given the regulatory requirements and potential legal and practical problems associated with distribution of research reports in the lead up to an IPO. The pre-IPO research process – including preparing the presentation to be delivered to the syndicate analysts, presenting to analysts, dealing with follow-up questions and reviewing the research reports for factual accuracy – can also take up a lot of management time and focus during the IPO process.
Reassess the composition of your board of directors (executive and non-executive) and board committees to identify any changes necessary to ensure an appropriate board of directors for a listed company. Beyond the legal requirements, seek out directors with diverse backgrounds and skills who can help you build a listed company and contribute in a meaningful way to the company’s culture, as well as support and challenge the management team. We believe strongly that diversity – including gender, ethnic/racial, sexual orientation and neurodiversity – creates a stronger board and a healthier company. Understand the requirements for independent directors that will apply after your IPO. Recruiting capable directors and ensuring they are sufficiently on-boarded ahead of an IPO can take time, so start early.
Similarly, consider whether you need to build out your senior management team to operate as a listed company (common areas of focus include financial reporting and investor relations). Run background checks on new significant hires to avoid surprises during the IPO process. Consider whether newer members of the team, particular those executives who will be interfacing with public investors, have been with the company for a sufficient amount of time to truly understand business trends, convey the company’s story and deliver financial results to investors.
7. Corporate governance
Begin to act like a listed company. Focus on corporate governance appropriate for a listed company and develop a culture of compliance. Transitioning a workforce from a private company to a heavily regulated listed company takes time and effort, and the example should be set at the top. Work with your lawyers to adopt state-of-the-art corporate policies and codes of conduct that not only comply with the rules and best practices but also work for your organization. Consider strategies to ease the transition, such as mock investor presentations on financial results, closing the relevant reporting on listed company timelines and/or establishing board committees akin to a listed company.
If you share key financial or operating data broadly within the company, consider a strategy to begin limiting this disclosure, so that post-IPO you are limiting the number of potential insiders who will need to be included on insider lists. Taking the time during the IPO process to train management and employees on the important aspects of corporate governance and ongoing obligations – from insider dealing to external communications – will make the transition to a listed company much easier following the IPO.
8. Financial reporting procedures
Discuss with your advisers any material weaknesses or significant deficiencies in your internal financial controls and understand their impact on your IPO process. Be prepared to discuss these forthrightly with your investment bankers and their lawyers, and to disclose them publicly. Even if there have been resource constraints or other problems in the past, investors want to see that you have a plan of remediation and a path to strengthening your financial controls in the future.
9. Director and officer liability insurance
The exposure to liability is significantly greater for directors and officers of listed companies than it is for those of private companies. A private company director and officer (D&O) insurance policy will not be appropriate once a company is listed. There has been increasing growth in securities claims in connection with European IPOs in the past few years, with a number of high-profile cases being pursued. Choose an experienced D&O insurance broker and coordinate with the broker early in the process to ensure that your directors and officers are adequately protected. We are also seeing companies take out public offering of securities insurance (POSI) policies for the company and its directors, alongside traditional D&O policies, which provides ring-fenced coverage for liabilities relating to the IPO.
10. Executive remuneration
Consider engaging a remuneration consultant to assist in analyzing remuneration practices, including equity and non-equity incentives, comparison to peer companies, potential reactions from investors and shareholder activists, and compliance with guidelines issued by institutional investor bodies. Begin to develop a remuneration structure appropriate for a listed company. Talk to your lawyers about adopting employee share schemes and long-term incentive plans that will meet the future needs of the business and investor expectations. Changing or adopting new employee share schemes and long-term incentive plans after an IPO can be decidedly more difficult and may require shareholder approval. Focus also on personal financial planning for executives – for example, senior management should consult with personal financial advisers regarding wealth maximization alternatives.