USA Law and Practice Contributed by: D. Scott Bennett, Nicholas A. Dorsey, Virginia M. Anderson and Ellen H. Park, Cravath, Swaine & Moore LLP
stockholders are typically granted a right to participate – or “tag along” in the proposed sale pro rata. Drag-Along Rights In the case of “sale of the company” that is approved by a specified set of parties (typically, the holders of a majority of convertible preferred stock, the holders of a majority of common stock held by certain key individuals, and the board of directors), the remaining stockholders are usu - ally obligated to vote in favour of the transaction. “sale of the company” typically includes a sale of at least 50% of the outstanding voting power of the company, a merger, a sale of all or substan - tially all of the company’s assets or another simi - lar transaction resulting in the change of control of the company. Registration Rights Preferred stockholders are also typically granted “registration rights” , which allow stockholders to cause the company to register their shares for public resale pursuant to a registration state - ment. These registration rights take a few dif - ferent forms. “Demand” registration rights give stockholders the right to compel the company to register their securities for public resale. “Shelf” registration rights give stockholders the ability to demand that the company file a registration statement to register their securities for sale on a delayed or continuous basis once the com - pany’s shares are already publicly traded. “Pig- gyback” registration rights give stockholders the right to register their securities alongside either the company or other holders that initiate a reg - istration of securities. 6.2 IPO Exits IPO exits are usually driven by existing inves - tor demand for liquidity or perception of access to capital in the public markets as compared to
the private markets. An IPO is the most com - mon route for companies in the USA to become publicly traded. For growth companies that have no immediate need for capital, a direct listing of existing investors’ securities (with no primary issuance by the company) is also an option. A de-SPAC transaction – whereby a private com - pany becomes public through a merger with an existing publicly traded special purpose acqui - sition company (SPAC) – is a third alternative for exiting into the public markets; however, this path has fallen out of favour in recent years. The Nasdaq and the NYSE are the primary listing venues in the USA. Both exchanges have vari - ous requirements that must be satisfied in order to qualify for trading, including financial, liquidity, reporting and governance related requirements, some of which overlap with SEC requirements. Accommodations are available for foreign pri - vate issuers listing in the USA and often allow such issuers to follow home country governance requirements in lieu of the requirements of the relevant exchange. 6.3 Pre-IPO Liquidity While pre-IPO investors and employees with stock have generally committed their capital and/or equity awards to the company until an eventual liquidity event, there are various path - ways that may be available to liquidate their position prior to such event. Particularly as IPO and M&A activity is constrained, pre-IPO liquid - ity options have become an increasingly vital component of the venture capital ecosystem. Liquidity Options Secondary transactions are often the only via - ble exit strategy for pre-IPO investors and for long-time employees looking to cash out their equity. In addition to privately brokered sales, digital trading platforms are growing in popular -
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