IPO Filings Bring Transparency to Private Company Governance
By Maureen Milford
Any private company board and management team that has ever dreamed of going public — and even those that haven’t — might do themselves a favor by looking at IPO registrations filed by other private businesses with the U.S. Securities and Exchange Commission.
Known as Form S-1, it is the registration filing form for a securities offering under the Securities Act of 1933. An S-1 contain bundles of details about a company’s business, the management team running the business, financial statements certified by independent accountants and risk factors. The documents can also can serve as a window into a private company’s governance practices. Indeed, the act, also known as the Truth in Securities Act, is designed to bring greater transparency to securities, the SEC says.
“There is no question that if a private company is thinking of going public, it can learn a lot by reading the filed S-1 for other companies that are preparing to go public, particularly as it relates to the items that the company should have embraced in its governance structure,” such as independent directors and board committees with assigned duties, says Steven Scolari, co-chair for the closely held and family-owned business practice at Stradley Ronon law firm.
Consider the January filing of Casper Sleep Inc., a mattress, pillow, sheet, duvet, bedroom furniture and sleep products retailer. Casper was incorporated in Delaware, a favored state for corporations, in 2013 as Providence Mattress Company. The company’s name was changed to Casper Sleep Inc. several months later.
While the investing community has been following Casper’s public debut as a test case for unprofitable e-commerce start-ups, the S-1 reveals a lot about the board of directors and other governance matters. The company’s shares started trading on the New York Stock Exchange Feb. 6.
For starters, the business headquartered at Three World Trade Center, added two high-powered and experienced women executives to its eight-member board in 2019.
Other companies, including The We Company, which filed a registration in August that proudly listed the insights of its all-male directors, was hit with an immediate backlash. A month later, a filing with the SEC reported the company would add a woman director.
Casper landed the former president and CEO of Neiman Marcus Group LTD LLC as a board member in April. Karen Katz spent more than 33 years with Neiman Marcus Group in a variety of leadership positions. What’s more, she’s been a director of publicly held Under Armour Inc. since 2014.
“We believe Ms. Katz’s extensive experience at the helm of a leading omni-channel retailer and deep understanding of customer experience and engagement make her well-qualified to serve on our board of directors,” the filing says.
Also, joining the board in July was Diane Irvine, who had served as CEO of Blue Nile, Inc., an online retailer of diamonds and fine jewelry. Irvine is board chair of Yelp Inc., a publicly held company since 2011. She also serves on other boards. The SEC filing says Irvine’s experience on public boards and in leadership positions, as well as her financial expertise, makes her a well-qualified director.
The filing says that the board did a review of the independence of its directors prior to the offering. The board determined that six of the directors are independent as defined under the rule of the NYSE, including Katz and Irvine, according to the document.
Casper also details the names of the directors, who will serve on its various committees, such as audit, nominating and corporate governance and compensation committees. Irvine, for example, will serve as chair of the audit committee.
The company also revealed that under Delaware’s General Corporation Law and Casper’s amended charter and bylaws, a hostile takeover or changes in control or management could be more difficult if the acquisition is “deemed undesirable by our board of directors.
And Casper’s amended charter provides that Delaware’s Court of Chancery “will be the sole and exclusive forum for substantially all disputes between us and our stockholders.” Chancery court is internationally known for its specialization in corporate and commercial matters.
“The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees,” the filing says.
Familiarity with such details as provided by an S-1 can prepare private boards and management with what would be required if they should one day decide to go public, experts say. It can also help companies avoid hasty, last-minute cleanups, such the diversification of an all-male board, for which other companies have been publicly shamed.
“Further, it ensures that the company will not have such a radical change in its governance model when it goes public if it embraced well in advance of the IPO the key governance items in other company’s S-1 filings,” Scolari says.