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Organizing and Managing the Activities for Completion of an Initial Public Offering

One of the most challenging tasks for any securities lawyer is organizing and managing all of the activities that need to be completed in order for a company to achieve its highly desire goal of “going public”.  The first step in this process should be an organizational meeting that brings together all of the necessary participants in the process—representatives of the issuer and the underwriters, counsel for the issuer and the underwriters, the accountants and the financial printer.  A typical agenda for an organizational meeting will address a number of possible items, depending upon the time available and the degree of preparation to date.  Special note will be taken of the following points:

  • The timing of the offering, anticipated size and offering price, and the degree of participation of selling shareholders;
  • The schedule for the remaining drafting and due diligence sessions and the responsibilities of each of the participants for various portions of the registration statement;
  • Pre-filing modifications to the company’s capital structure and other corporate arrangements that may be necessary to properly price the offering and to eliminate potential Blue Sky concerns;
  • Substantive disclosure items to be addressed in the registration statement drafting process, including litigation, insider transactions, potential acquisitions, new products, and any other major developments with respect to the competitive environment of the company that may influence the timing of the offering;
  • The timing of receipt of appropriate financial statements for filing as part of the registration statement, and any accounting issues relating to off-balance sheet financing or recent acquisitions of other businesses for which audited financial statements will need to be prepared; and
  • The desirability of reincorporating in a jurisdiction that provides officers and directors with the greatest amount of personal protection from liability to the shareholders for monetary damages for breaches of their duty of care.

The managing underwriter and its counsel should also prepare a timetable and list of responsibilities for distribution to all of the parties at the organizational meeting. This document sets forth a schedule for the basic steps in the registration process.  It fixes key deadlines, which often turn on the assumptions of the company and the managing underwriter regarding the proper timing for the offering.  A separate document circulated with the timetable will assign responsibility for completion of particular tasks, and facilitate the requisite coordination. Experience has shown that listing each of the important items is far more important than settling upon an exact timetable, since it is often difficult to predict each of the items with absolute certainty.

Among the important milestones which should be established in the initial timetable are the following:

  • The availability of the initial draft of the registration statement, including any required financial information;
  • The scheduling of meetings with officers and key employees of the company;
  • Board and shareholder actions regarding any housekeeping matters and approval of the offering;
  • Filing of the registration statement with the SEC and the other regulators and the anticipated period of review;
  • Scheduling of post-filing marketing activities, including the "roadshow" presentations;
  • Preparation and filing of any anticipated material amendments to the registration statement which may be required in order to address comments from the SEC and the other regulators;
  • Effectiveness of the registration statement, execution of the underwriting agreement and commencement of the sale of the offered securities; and
  • Closing of the sale and purchase of the offered securities.

Traditionally the participants waited until the completion of the organizational meeting to begin drafting the registration statement and did not circulate the first draft of the registration statement until 10 to 14 days after the organizational meeting.  In addition, the “roadshow” presentations were held during the waiting period after the registration was filed and before comments were received from the SEC.  However, a slightly different approach is now often taken that would lead to important changes in the sequence of events in the timetable.  For example, the participants frequently begin serious preparation of the registration statement several weeks before the organizational meeting and wait until the SEC has cleared all of the company’s responses to their comments before launching the “roadshow.”    It should also be recognized that the period required to complete all of the activities described in the timetable will vary depending on a number of factors, some of which are out of the control of the participants.  For example, the participants may decide to proceed at a more leisurely pace in drafting the registration statement if they believe it may be necessary to wait until market conditions are suitable for the offering to proceed and be accepted strongly by investors. Delays may also be caused by regulators who are unable to review the documents due to a high volume of other activities.

The content in this post has been adapted from material that will appear in Business Counsel Update (April 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.


Product Division Structures

In my last post I began discussing various types of product-focused ideas for organizational structures and the first alternative that companies may use is referred to as a “product division” structure.  Companies that follow this approach will create separate divisions for like groups of products that will handle the operational activities (i.e., manufacturing and distribution) associated with those products and will also establish several centralized functional units to provide support services to all of the product divisions.  The move to product divisions is generally triggered at the time that the operational requirements of the company’s product line become too complex to coordinate in a cost-effective manner in one single production group.  The creation of product divisions, each of which will have its own hierarchy overseen and controlled by a dedicated division manager, increases the level of horizontal differentiation within the company’s overall organizational structure.  Each product division manager is responsible for the specific activities undertaken by his or her division and is also the point person in interactions between the division and the centralized support functions to ensure that the division receives the necessary assistance and resources with respect to procurement, marketing and research and development.  Product division managers become another hierarchical level, thus increasing the vertical differentiation in the company’s organizational structure.

A simple organizational chart for a product division structure would have three levels of management personnel organized as follows from top to bottom: the CEO; the central support functions (e.g., sales and marketing, research and development, finance, and procurement), each overseen by a senior executive such as a vice president or chief functional officer (e.g., CFO) reporting to the CEO; and the product-focused divisions organized by grouping similar products, each managed by a product division manager and reporting to the CEO.  The success and efficiency of this type of structure depends heavily on the how effectively services can be provided by the central support functions to the product divisions.  While the central support functions have as their primary mission providing assistance to each of the product divisions it is common for each function to horizontally differentiate its activities by creating sub-groups for each product division that will specialize in serving the needs of that division.  In this way, the sub-groups can become “experts” in the requirements of their division and services can be provided to the division quickly and efficiently.  At the same time, since the sub-groups are also part of a large function-based unit they can smoothly transfer information and knowledge among one another so that all of the product divisions have access to the benefits of any new processes and other ideas that would be of value to each division.  As time goes by the various central support functions will hopefully become core competencies that can be used to the strategic advantage of the entire company.  The provision of services to the product divisions and the development and maintenance of function-based core competencies is the responsibility of the senior executive of each central support function and the CEO must monitor relationships between the support functions and the product divisions.

The product division structure, with its reliance on centralized support functions, make sense in situations where the company’s products and target markets are largely similar and it is not cost-effective to provide each product division with its own functional resources.  A product division structure allows the company to obtain certain advantages of centralization including economies of scale and a greater ability to monitor and control costs and makes overall strategic planning easier because senior management does not have to create separate plans for divisions that are essentially separate companies if they have their own functional resources.  There are, however, disadvantages to a product division structure that must be considered including the possibility that functional talent in areas such as R&D and marketing will seek employment elsewhere due to the relative lack of opportunities to specialize.  In addition, while central support functions can be the foundation of key core competencies there is a risk that having engineers and designers work for all of the product divisions will ultimately reduce product differentiation and lead to a “sameness” within the overall product line that will make it impossible for customers to distinguish between the brands and product features of the various divisions.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.


Three Kinds of Product-Focused Organizational Structures

As the number of the company increases the number and type of its products it becomes necessary for the activities of the company to be organized by product rather than by function.  As such, growing companies will eventually transition from a functional structure to a product structure, which is a divisional structure in which separate divisions are created and maintained for each group of similar products.  There are several different types of product structure that may be selected based on the decisions made regarding how the activities of the product divisions are to be coordinated with those functions that are traditionally categorized as “support” (i.e., research and development, accounting/finance and marketing/sales).  One alternative is the “product division” structure in which the various support functions are centralized at the top of the organizational structure—at “headquarters”—and are expected to provide their supporting functional services to all of the different product divisions, which in turn focus on the operational activities (i.e., manufacturing and distribution) for their specific products.  This method may be viable in cases where the similarity among all the products and each of the product divisions are focusing their activities on essentially the same markets.  The second alternative is “multidivisional” structure in which each product division has its own dedicated set of functional resources which need not be shared with other divisions.  This approach should be considered in situations where the products, and the markets and industries in which the divisions are operating, are very different.  A third alternative, which may be used in cases where the technology underlying the product line is complex and/or rapidly changing, is a “product team” structure.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.


Basic Elements of an Outsourcing Agreement

As companies continue to turn more frequently to outsourcing solutions for back office processing services it is important executives and senior managers to have a basic understanding of the key elements of an outsourcing agreement.  While every deal is different there are some guiding principles that can be applied in most instances.

First, while the parties obviously contemplate a long-term relationship with significant investments on both sides it is wise to provide for a “pilot period” during which the parties can evaluate how the services are being provided and whether they can establish procedures and protocols that will allow them to achieve the goals and objectives for the contract.  One of the key planning tools for the contract is the preparation and acceptance of an implementation plan and schedule that will be appended to the contact as an exhibit.  The plan and schedule should include acceptance tests that would need to be completed before the services can begin.  The pilot period would commence on the “implementation completion date,” which is the date that the acceptance tests are completed.  The parties should schedule a full-scale review of service provision to be completed on or before the end of the pilot period.  Assuming that the arrangement continues beyond the pilot period the agreement should specify the initial term of the contract and procedures for renewal and extension.  In that regard it is very important for the client to insist on “termination assistance” that ensures that the services will continue to be available for a reasonable period following a decision to terminate in order to allow the client to make arrangements for a new vendor or performance of the outsourced services on its own.

Obviously one of the most important parts of the contract is the description of the services to be provided to the client by the vendor and the parties should prepared a detailed schedule of services that includes objective measures of the anticipated “service levels” as well as an overview of possible incidental services that are not specifically described yet are likely to be required in order for the goals and objectives of the contract to be achieved.  The description of services should be accompanied by a schedule of fees and appropriate details regarding the manner in which the vendor intends to provide the personnel necessary to achieve the mutually agreed service levels.  The parties should be prepared to discuss any changes in the level of services due to increased or decreased demand by the client and/or changes in applicable laws and regulations.  The vendor should be prepared to provide the requisite training for its personnel and render reports to the client regarding the level and quality of services provided under the agreement. Among other things the reports should cover employee work hours and absenteeism and the volume and quality of work performed by vendor employees based on mutually agreed performance metrics.  Weekly and quarterly business reviews should also be conducted.  Finally, a procedure should be established for reviewing possible requests by the client to the vendor for new services during the term of the contact including preparation and review of a written proposal for new services that include an analysis of the additional resources that the vendor would need to devote to the relationship.

Other key issues that need to be covered in this type of agreement include communication procedures, including designation of relationship managers by both parties; identification of key vendor personnel who will be dedicated to performance of the activities contemplated under the agreement; allocation of ownership and usage rights with respect to any intellectual property that may be created or exchanged during the relationship; force majeure procedures; billing and payment procedures; representations and warranties; dispute resolution procedures; events of default and termination procedures; notice procedures; and governing law.

The content in this post has been adapted from material that will appear in Going Global: A Guide to Building an International Business (April 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.


Virtual Deal Rooms

A comprehensive due diligence investigation in a transaction involving parties with a broad scope of business activities will inevitably call for delivery of a voluminous amount of documentation.  Companies must learn how to accurately and efficiently track and review all of the contracts and other materials that are exchanged during the course of an investigation.  Typically this process begins by referring to the aforementioned list of documents, commonly referred to as the “due diligence checklist,” and making sure that each document is indexed against the list and assigned an appropriate document number.  All documents would then be packaged into bankers’ boxes and sent to a central location, such as a conference room at a law firm, where they would be available for review and copying by authorized parties.  While this became accepted practice it was an imperfect and expensive solution for several reasons.  First, whoever was responsible for storing and securing the documents had to make sure that it had someone in the room at all times whenever documents were being reviewed in order to be sure that documents were not removed or tampered with by visitors.  Second, even when the review process was being monitored there was a high likelihood that documents could be lost or misplaced while they were being refilled.  Third, parties needing to review documents often needed to incur significant travel expenses (i.e., airfare, hotel and meals) to get to the site where the documents were maintained.  Finally, the need to be physically present to review documents raised privacy concerns since competitors could “stake out” a storage site to see who else might be conducting due diligence.


The drawbacks of the traditional method of collecting and reviewing information during the due diligence investigation have been largely overcome by the creation and growing use of “virtual” deal or data rooms, popularly referred to as a “VDR,” which allow the parties to a transaction to conduct the document-related phase of the investigation safely and securely in a collaborative online workspace.  When using a VDR for due diligence the parties first scan all of the relevant documents and transfer them to a VDR vendor who uploads the documents on to its data room server.  While companies can, and often do, make their documents available online, a VDR vendor provides various value-added services that are specifically useful for the due diligence environment—documents can be arranged in hierarchical order, document indexes can be prepared so that users can immediately see what is available when they log in, levels of permission can be created and enforced to restrict access to certain documents and/or the ability of a user to download or print out copies of documents, and reports can be generated that detail who has looked at which documents and how often.  In addition, it is generally agreed that a qualified and experienced VDR vendor can greatly accelerate the process of getting documents ready for viewing.  For example, vendors usually can provide scanning services directly or through sub-contractors and are typically able to get the VDR up and running within a few business days after all the documents are identified.


A VDR can be established and used on a deal-by-deal basis or companies that are continuously engaged in transactions may purchase a subscription which establishes their VDR and keeps it up and running for all transactions without having to pay separately for each new deal.  Fees are typically based on the number of pages in the VDR and the use of additional services such as scanning, indexing, site management, consulting services, and technical support.  Companies should get demonstrations from several vendors before making a choice and should select a service that fulfills their expectations with respect to navigability of the site, ease of use, availability of support and flexibility.  Before beginning the selection process the company should conduct an internal assessment to determine the volume and type of documents that would be transferred to the VDR.  This allows the company to seek and obtain more accurate estimates of the costs of the VDR and determine which features (i.e., access restrictions) will be most necessary and useful.  As of early 2008 it was estimated that a VDR was being used in about half of the mergers and acquisitions transactions involving public companies in the US and there are a number of major vendors competing for a share of a rapidly growing market including long-time financial printers Bowne & Co. and Merrill Corporation.