Corporate Governance in the Lifecycle of a Pre-Sales Revenue Biotechnology Venture Destined for IPO Success

Insights Corporate Governance in the Lifecycle of a Pre-Sales Revenue Biotechnology Venture Destined for IPO Success Mark H. Mirkin · August 14, 2014

So how do biotech ventures govern themselves to run efficiently while complying with state corporate law statutes and state and federal securities laws and regulations imposed by stock exchanges? Frugality that is often self-imposed by scientific founders and then endorsed by the angel investors and venture capital company investors that follow sequentially tend to result in a lean leadership structure comprising a small size Board of Directors aided by committees of the Board providing direction to officers and employees, guided further by outside management consultants, legal counsel and accountants.

The vast majority of biotech ventures at the IPO stage are structured as Delaware corporations the stockholders of which have the primary responsibility of electing a Board of Directors. It is common to find a five or seven person Board of Directors comprising a mix of insiders and independents. Their terms are often staggered, which frequently means that one third of the directors stands for reelection each year at the company’s annual meeting of stockholders. Thus directors serve for three-year terms. However in most cases the company’s bylaws provide for removal of a director from the Board for “cause” by the affirmative vote of a supermajority of the company’s voting common stock. Such votes can be cast at a special meeting of stockholders, the annual meeting of stockholders or by written con-sent in lieu of a meeting so long as the bylaws allow for such consents.

A director will qualify as “independent” if, in the opinion of the Board of Directors, he/she does not have a relationship that would interfere with the exercise of independent judgment in fulfilling the responsibilities of a director. A company-paid officer or employee clearly is not independent; neither is someone who owns a large equity stake in the company despite having no involvement in company matters. Many emerging biotech companies have their chief executive plus at least one other insider on their Board at the time of an IPO, with the balance of the Board populated by independents who bring meaningful skillsets to the company in light of its mission and stage of development.

Many companies elect from among their directors a chairman of the board. His/her duties are to chair meetings of the Board, to meet with any director who is not adequately performing his/her duties as a member of the Board or any of its committees (discussed below), to facilitate communication between directors and the chief executive officer (assuming the roles of chairman of the board and chief executive officer are filled by different persons, which is advisable as discussed below), to determine the agenda, frequency and length of board meetings and recommending when special meetings of the Board should be held, and to review and recommend action to be taken arising from stockholder communications submitted to the Board.

Separating the roles of chairman of the board and chief executive officer resulting in a bifurcated leadership structure increases the independent supervision of the company while enhancing the Board’s objective evaluation of the chief executive, freeing the chief executive to focus on business operations instead of administration.

Upon consummation of an IPO, a biotech venture’s Board will establish an audit committee, a compensation committee and a nominating and corporate governance committee, each with its own charter approved by the Board. The committees are often populated by independent directors.

The audit committee appoints, approves compensation for and assesses the independence of the company’s public accounting firm, overseeing the work of such firm and then reviewing with company management the quarterly and annual financial statements and related disclosures prepared by management in collaboration with the firm. It monitors internal controls over financial reporting, disclosure controls and procedures and code of business conduct and ethics. It supervises the company’s internal audit function and its risk assessment and risk management policies. It guides internal accounting staff. It reviews related-person transactions and it prepares the audit committee report required by SEC rules.

The compensation committee reviews and then makes recommendations to the Board with respect to the compensation of the chief and other executive officers, it supervises the evaluation of senior executives, it administers equity incentive plans, it reviews and makes recommendations to the Board with respect to director compensation, it discusses with company management annual compensation disclosure required by SEC rules and it prepares the compensation committee report required by SEC rules.

The nominating and corporate governance committee identifies persons qualified to join the Board, making recommendations to the Board of director nominees and committee members, it reviews and makes recommendations to the Board regarding Board leadership and succession planning, and it supervises periodic evaluations of the Board.

Applicable to all directors, officers and employees is a Board-approved written code of business conduct and ethics, which gets posted on the company’s website.