Michael Kaplan, Joseph A. Hall, and Sophia Hudson are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Kaplan, Mr. Hall, Mr. Hudson, Alan Denenberg, Richard Truesdell, and Byron Rooney.
Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here) by Lucian Bebchuk and Kobi Kastiel and Why Firms Adopt Antitakeover Arrangements, by Lucian Bebchuk.
An initial public offering is a key inflection point for a company, not least because it often triggers the opportunity to review and replace the company’s corporate governance structure. In place of complex contractual shareholder arrangements that are subject only to the constraints of corporate law, upon an IPO, a company adopts a more simplified governance structure that is subject to SEC and stock exchange listing standards. As the burden of obtaining shareholder approval to amend governance arrangements in the future is much higher for a public company, companies planning for an IPO often seek to establish a corporate governance structure which is as flexible as possible.
In the last few years, we have witnessed a sea-change in corporate governance among the largest U.S. public companies, e.g., those in the S&P 500, due largely to pressure imposed through shareholder proposals and proxy voting guidelines. Through increased pressure by shareholder activists and proxy advisory firms, these companies have been forced to abandon governance structures that are perceived to entrench control among a small group of holders and/or management, or which create barriers to more direct shareholder engagement. In recent years some of these same players have also put pressure on IPO companies and enacted policies meant to bring the governance of IPO companies in line with that of more mature public companies.
