Preferred Stock Triggers A Stumbling Block For IPOs – Lawyer

  • Lawyer flags ‘clunky’ preferred stock agreements
  • Sponsors sometimes hold preferred stock in prospective IPOs
  • Lawyer sees pre-agreements as a solution

Ilan Nissan, a partner at Goodwin Procter LLP, said he’s noticed a “clunky thing in the structure” of preferred stock agreements covering forced conversions of preferred stock in IPOs. If the proposed price level of the IPO isn’t high enough to satisfy the trigger level, some deals may be delayed or scrapped, he said.

The issue has come up at least three times in the past several weeks with prospective IPOs, he said.

“Different classes of preferred shares have different triggers, with the later investing classes having higher ones than the earlier rounds,” Nissan said in an email. “The issue is that the preferred holders investing in later rounds have valuation hurdles that sometimes aren’t hit.” If the IPO price — set by investment bankers after meeting with prospective investors — isn’t high enough to require the automatic conversion of preferred stock, it “de facto inhibits the company from going public,” he said.

One solution could be in the form of pre-agreement for a cash or stock payment to the holders that have the right to consent if the qualified IPO price isn’t achieved in the deal, he said. The fix could be done as part of the language of preferred stock agreements in advance of the IPO and would not require regulatory approval, he said. “It would be good to pre-agree in advance what the charge is,” Nissan said. “Most documents now don’t do that — it’s just a negotiation at the time of the offering.”

Despite the glitch in preferred stock agreements, the overall market for sponsored-backed IPOs continues to pick up steam, with more deals expected to come to market.

Goodwin Procter handles mergers and acquisitions and many other corporate transactions. The law shop disclosed on June 4 it advised underwriters Citigroup, BofA Merrill Lynch, Credit Suisse and Goldman Sachs in an IPO for PennyMac Financial Services.