Online extra: So you want to take your company public?

Since the Sept. 11 terrorist attacks and the country's subsequent emphasis on fighting terrorism and enhancing homeland security, the once sleepy government IT sector has become the darling of Wall Street.

In the last two years alone, seven government contracting companies completed initial public offerings raising more than $1.051 billion in equity capital. Significantly, most of these IPO's traded above their initial offering price on the first day of trading, and most are still trading above the initial offering price.

As a result, a number of government contractors who would have never anticipated doing an IPO are being wooed by investment bankers. Companies considering an IPO must address a number of important issues, such as the costs of being a public company, the composition of their management team, selecting the right advisors, and dealing with the press. But probably the most important factor in today's investing environment is corporate governance.

While the Sarbanes-Oxley Act of 2002 created a whirlwind of emphasis on corporate responsibility in the public arena, it also has affected the way in which private companies are managing their corporate affairs. Though not unique to the industry, government contracting companies contemplating an IPO should, in the corporate governance context, focus on three areas:

  • Making sure the corporate books and records are accurate and complete

  • Adopting the appropriate charters (audit, nominating, compensation and code of ethics)

  • Perhaps most important, making sure they have strong independent directors

Due to the meltdowns at Enron, WorldCom, Tyco, Global Crossings and others, the rules for the composition of public company boards of directors have changed.
The New York Stock Exchange and NASDAQ have always required public companies to have independent directors, but new rules now require that a majority of the board members be independent. Even more significantly, these rules provide greater clarity?and a stricter definition?regarding who qualifies as an independent director.

In effect, the new rules attempt to dismantle the buddy system that was used in the past for appointing directors who were technically independent (no financial ties to the controlling stockholder or the company), but in reality were more than friendly to the views of the controlling stockholders.

The new rules also place increased pressure on the independent directors to fulfill their duties in a more formal manner (i.e. creating a very detailed paper trail), particularly those serving on the audit committee.

As a result, there has been and will continue to be strong public scrutiny of the actions of the independent directors. The bottom line: independent directors will be less likely to act without the appropriate level of inquiry and will not merely rubber stamp the wishes of the controlling stockholders.

One of the biggest hurdles a controlling stockholder or group of stockholders has to confront in the IPO process is loss of control. Many owners are very uncomfortable with the concept of ceding control of their companies.

They expect to be able to continue running their companies after an IPO in the same way they did before; that is, by making decisions in their own best interests without necessarily considering the impact on other equity stakeholders.

The emphasis on independent directors by the NYSE and NASDAQ seeks to protect the interests of the stockholders as a whole by limiting the control an owner (or ownership group) can exert.

So, Mr. Government Contractor, are you ready, willing and able to pay this price? If so, you may be ready to go public.

John M. McDonald is a partner at the law firm of ShawPittman LLP and specializes in mergers and acquisitions and general securities matters. His e-mail address is

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