PwC U.S. recently released two reports on corporate governance considerations relating to public offerings. The first, titled “Going Public? Five Governance Factors to Focus on,” outlines key governance considerations companies should address when pursuing a public offering. Its companion document, “Governance for Companies Going Public: What Works Best™,” guides directors and executives of companies planning an IPO through the many governance decisions necessary; offers insights from interviews with directors, executives, investors and board advisors; reports results of PwC’s proprietary research on pre-and post-IPO governance structures; and assists those involved understand the governance landscape.

The five key governance considerations detailed in the report titled “Going Public? Five Governance Factors to Focus on” include:

…continue reading: Corporate Governance Planning for Companies Going Public

In our recently published book, JOBS Act Quick Start (published by the International Financial Law Review), we provide readers with a context for understanding the significance of the Jumpstart Our Business Startups (JOBS) Act as both a recognition of the changes in capital markets over the last decade and catalyst for a broader dialogue regarding financing alternatives.

…continue reading: JOBS Act Quick Start

Venture capitalists (VCs) play a significant role in the financing of high-risk, technology-based business ventures. VC exits usually take one of three forms: an initial public offering (IPO) of a portfolio company’s shares, followed by the sale of the VC’s shares into the public market; a “trade sale” of the company to another firm; or dissolution and liquidation of the company.

Of these three types of exits, IPOs have received the most scrutiny. This attention is not surprising. IPO exits tend to involve the largest and most visible VC-backed firms. And, perhaps just as importantly, the IPO process triggers public-disclosure requirements under the securities laws, making data on IPO exits easily accessible to researchers.

But trade sales are actually much more common than IPOs and, in aggregate, are more financially important to VCs. Unlike IPOs, however, trade sales do not trigger the intense public-disclosure requirements of the securities laws; they take place in the shadows. Thus, although trade sales play a critical role in the venture capital cycle, relatively little is known about them.

In our paper, Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups recently made public on SSRN, Brian Broughman and I seek to shine more light on intra-firm dynamics around trade sales. In particular, we investigate how VCs induce the “entrepreneurial team” – the founder, other executives, and common shareholders – to go along with a trade sale that they might have an incentive to resist.

…continue reading: Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups

Nine months have passed since the Jumpstart Our Business Startups Act (the JOBS Act), a package of legislative measures intended to ease regulatory burdens on smaller companies and facilitate public and private capital formation, was signed into law. While certain portions of the JOBS Act have yet to be implemented pending SEC rulemaking, the provisions related to IPOs have been effective since enactment. These provisions seek to encourage companies with less than $1 billion in annual revenue to pursue an IPO by codifying a number of changes to the IPO process and establishing a transitional “on-ramp” that provides for scaled-down public disclosures for a new category of issuers termed emerging growth companies (EGCs).

Using nine-month data from the final prospectuses of 53 EGCs that successfully completed underwritten IPOs with gross proceeds of at least $75 million between April 5, 2012, and December 15, 2012, below is a summary of a number of developing market practices for EGC IPOs and certain related interpretative guidance issued by the staff of the U.S. Securities and Exchange Commission (Staff and SEC, respectively).

…continue reading: The JOBS Act: Lessons from the First Nine Months

In the past decades the Brazilian economy has undergone major changes such as macroeconomic stability; achievement of investment grade status for the debt of the government and many individual firms; strong economic growth; and development of pension funds, which became major investors in public company shares. Significant changes were also observed in the stock market. Through the early 2000s, Brazil was seen as having relatively weak corporate governance. Examples of expropriation of minority shareholders by controlling shareholders were common.

In 2000, in response to concern about weak protection for minority shareholders (including extensive use of non-voting shares, few outside directors, and low levels of disclosure), the São Paulo Stock Exchange (BM&FBovespa) created three high-governance markets (Novo Mercado, Level I and Level II). This contributed to a surge in initial public offerings, which had been nearly nonexistent until 2004; a leveling off in the number of listed companies, which had been shrinking; and sharply rising trading volume and liquidity. Most new listings were at one of the premium listing levels; some older companies also migrated their listings to a higher level. In spite of these major changes in the economy and the stock market, little is known about how corporate governance standards have been changing. This article, The Evolution of Corporate Governance in Brazil, aims at filling this gap by providing a picture of the evolution of corporate governance practices in Brazil.

…continue reading: The Evolution of Corporate Governance in Brazil

The Committee on Capital Markets Regulation (CCMR), an independent and nonpartisan research organization dedicated to improving regulation and enhancing the competitiveness of U.S. public equity capital markets, today released data from the third quarter of 2012. According to the new study, U.S. capital markets reversed the second quarter downgrade and showed slightly improved competitiveness, though most measures of competitiveness still fall short of historical averages. Hal S. Scott, Director of the Committee said, “While foreign companies continue to prefer non-U.S. financial markets for raising capital outside their home markets, and regulatory reform is still needed, this quarter’s data offers a promising sign that competitiveness can be restored to U.S. markets.”

Of the global initial equity offerings conducted outside a company’s home market, 18.3% of these IPOs, by value, were listed on a U.S. exchange. While this measure is at its highest level over the past five years, the U.S. share of this volume remains well below its historical average of 28.7% (1996-2006). These percentages include all IPOs by foreign companies listed on either U.S. public markets or issued through private Rule 144A offerings. Excluding global IPOs that use the Rule 144A markets, the percentage of global IPOs listed on a U.S. exchange rises to 55.9%. However, the total value of these IPOs has decreased from $79.8 billion in 2010 and $39.3 billion in 2011 to only $9 billion thus far in 2012.

…continue reading: Some Improvement in U.S. Public Equity Capital Market Competitiveness

In the paper, Financial Globalization and the Rise of IPOs Outside the U.S., which was recently made publicly available on SSRN, my co-authors (Craige Doidge and George Karolyi) and I document dramatic changes in the IPO landscape around the world over the past two decades. U.S. IPOs have become less important and IPOs in other countries have become more important, whether one looks at counts or at proceeds. In fact, U.S. IPO activity has generally not kept pace with the economic importance of the U.S. We show that financial globalization plays a critical role in facilitating the increasing importance of IPOs by non-U.S. Firms.

…continue reading: Financial Globalization and the Rise of IPOs Outside the U.S.

Early corporate law scholarship argued both that anti-takeover devices are inefficient (they reduce the value of the firm) and that firms adopt efficient governance terms before they make their initial public offering. Some of this scholarship asserted that firms go public without anti-takeover devices and adopt them later when agency costs are higher. However, subsequent research revealed that most firms adopt anti-takeover devices before completing their initial public offerings. For example, over eighty-six percent of firms that have gone public in 2012 have a staggered board of directors, and both Google and Facebook chose dual-class capital structures that allow the founders to retain voting control disproportionate to their economic stake.

The literature offers a number of explanations for this apparent puzzle. Capital market imperfections may prevent initial public offering prices from reflecting differences in corporate governance terms. Firms may choose inefficient terms due to bad legal advice or because of frictions in the market for financing prior to the initial public offering. Anti-takeover protections could be efficient after all, at least for some firms, because they correct for myopic investors or some other problem. Finally, managers may choose anti-takeover provisions to signal something about their firms. In an essay forthcoming in the Journal of Corporation Law I offer a very different explanation, one based on the tax code.

My argument begins with a variant of one of the existing explanations for anti-takeover protections. The heart of the argument is that managers are not driven solely by a desire for material gain but derive some happiness or utility from the control they exercise over their firm. To the extent that managers derive happiness from control, they may not choose governance terms that maximize the dollar value of the firm. However, unless there is some contracting failure, they will still choose efficient terms — terms that maximize the total value of the firm (the dollar value plus the control value).

…continue reading: Taxing Control

The role that regulation should play in the development of securities markets is much debated and a persistent lull in initial public offerings helped to prompt some deregulation through the enactment of the 2012 Jumpstart Our Business Startups (JOBS) Act. While the appropriate scope of public regulation of securities markets is a contentious issue and while the market for newly listed firms can be a bellwether for the development of public equity markets, the empirical literature on regulation of IPOs is small and generally inconclusive. In our paper, Regulating IPOs: Evidence from going public in London and Berlin published on SSRN, we use history to offer insights concerning regulation of IPOs and the development of public equity markets. In particular, we draw upon hand-collected Initial Public Offering (IPO) datasets to undertake a comparative study of the London and Berlin stock markets between 1900 and 1913, a period that coincides with the apogee of an era of global financial development unmatched until the end of the 20^th century.

…continue reading: Regulating IPOs: Evidence from Going Public in London and Berlin

In contrast to most other countries, in both Britain and the United States, a hallmark of corporate governance is a separation of ownership and control in major business enterprises. Various theories that have been advanced to account for why patterns of ownership and control differ across borders, with the most influential being that the “law matters” in the sense that ownership dispersion is unlikely to become commonplace in public companies unless company law provides substantial protection to outside investors. As one of us has argued elsewhere, these theories do not explain effectively why a separation of ownership and control became the norm in the UK. In our paper “Ownership Dispersion and the London Stock Exchange’s ‘Two-Thirds Rule’: An Empirical Test”, recently published on SSRN we analyze a different law-related hypothesis concerning the evolution of ownership patterns and show that it similarly lacks substantial explanatory power.

…continue reading: Ownership Dispersion and the London Stock Exchange’s “Two-Thirds Rule”