May 10, 2022

Governance: 2021 Sponsor-Backed IPOs

This Weil survey reviews governance & liquidity arrangements in 2021 sponsor-backed IPOs. The survey reviewed the terms of 15 U.S. IPOs by companies that had one or more private equity sponsors. Of these transactions, 10 were “club” deals involving more than one sponsor, while the remaining five were single-sponsor deals. Here are some of the conclusions on corporate governance arrangements:

– Consistent with previous years, in a significant majority of surveyed deals (87%), Sponsor-backed IPO companies availed themselves of at least some “controlled company” exemptions available under applicable listing requirements, which, among other things, exempt such companies from certain board and committee director independence requirements (other than with respect to the audit committee). Notably, even though companies are availing themselves of the controlled company exemptions, most Sponsor-backed companies are going public with a majority of independent directors.

– Consistent with previous years, Sponsors in the surveyed deals typically (93%) adopted a classified board structure for the newly public company in connection with an IPO. In one of the surveyed deals, the classified board structure established in connection with the IPO is subject to “sunset” (triggered upon the earlier of 5 years following the IPO or when Sponsor’s ownership drops below 50% of the voting power of the common stock necessary to elect directors) to address governance and proxy advisory firm concerns.

– In a significant majority of surveyed deals (80%), Sponsors secured contractual rights to nominate or designate directors to serve on the public company’s board of directors (in some cases, including committees) following an IPO. Such director nomination rights were secured in all “club” deals and in 40% of single-Sponsor deals. In 70% of “club” deals where Sponsors secured contractual rights to nominate or designate directors and in 100% of such single-Sponsor deals, Sponsors secured the right to elect a majority of the directors constituting the board.

The survey says that all of the transactions included provisions secured the ability of shareholders to act by written consent so long as sponsors held a specified ownership percentage. In addition, in 70% of “club” deals and in 20% single-sponsor deals, sponsors had the right to call special meetings of shareholders so long as they held a specified ownership percentage. All of the surveyed deals included a waiver of the corporate opportunity doctrine in favor of the sponsor in their post-IPO charter documents.

John Jenkins