In the two years since the JOBS Act was signed into law, the annual number of initial public offerings in the U.S. has reached its highest level since 2007, but few companies are seizing all of the benefits that the JOBS Act offers Emerging Growth Companies, according to a new study.
The study, IPOs in the JOBS Act Era 2014, from the law firm Paul Hastings LLP, found that less than 5 percent of the issuers surveyed embraced all of the disclosure and compliance accommodations of the legislation. Companies are also not leveraging some of the Act’s more attractive options. For instance, 86 percent of the surveyed IPO companies irrevocably elected not to opt for the law’s money-saving “phase in” rules for new or revised financial accounting standards.
Only 46 percent of the surveyed issuers elected to take advantage of the opportunity to provide two years of audited financials, which could decrease an issuer’s risk profile, rather than three years. After a drop in popularity over the past decade following a change in accounting rules, the study found that employee stock purchase plans have re-emerged among IPO issuers.
The study examines the corporate governance practices and disclosures of 100 U.S.-based Emerging Growth Companies in the technology and life sciences industry that completed an IPO between September 2012 and August 2014.
“We’ve worked with issuers and underwriters in technology and life sciences IPOs to help them navigate the JOBS Act and capitalize on critical opportunities provided through the legislation and this report builds on that experience and will help companies structure transactions with an eye toward the demands and preferences of institutional investors,” said Jeff Hartlin, author of the report and a Securities & Capital Markets partner at Paul Hastings. “We were surprised at how quickly companies adopted certain provisions, but how slow they have been to embrace the full benefits of the Act in many cases foregoing provisions that would potentially save these companies significant time and money,” he added.
The study also found that most of the surveyed issuers adopted a classified board of directors, plurality voting in director elections, and supermajority voting requirements to amend or eliminate defense measures in the issuers’ governing documents, demonstrating that even though public companies are under significant attack by a number of institutional investors and proxy advisory groups to eliminate a number of defense measures, IPO companies are still adopting these measures in significant numbers.
In addition, 60 percent of the issuers surveyed chose to separate the roles of CEO and chairperson, reflecting an emerging trend against the traditional format for many U.S. corporations. Evergreen (that is, share replenishment) provisions remain common in equity plans adopted in connection with IPOs despite pressure from proxy advisor firms and certain institutional investors to eliminate these features.
The study also found that 65 percent of the issuers surveyed have adopted a forum selection clause for the resolution of specified disputes such as allegations of breaches of fiduciary duties. These clauses force stockholders to bring certain lawsuits against the company and its insiders in a pre-specified forum, which is designed to save issuers from the time and expense of defending similar actions in multiple jurisdictions.
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