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NYSE Issues Temporary Waivers of Related-Party and 20% Equity Issuance Rules in Light of COVID-19 Related Liquidity Needs

Client Updates

On Monday, April 6, 2020, the New York Stock Exchange (the “NYSE”) issued temporary waivers to its stockholder approval requirements for certain related party and 20% equity issuances listed in Section 312.03 of the NYSE Listed Company Manual (the “Manual”). The NYSE expects that certain listed companies may experience “urgent liquidity needs” as a result of dramatic declines and volatility in the equity markets, as well as credit market disruptions. These waivers will remain in place through June 30, 2020.

The waivers are available on the NYSE’s website.

The current NYSE rules require shareholder votes in scenarios where a company is raising new common equity from existing related parties or is issuing common equity in excess of 20% of the outstanding shares or voting power.1 Citing the “extraordinary nature of the current circumstances,” the NYSE proposed two partial waivers of the shareholder vote requirements for issuances to related parties and 20% issuances.

Related Party Transactions

Section 312.03(b) of the Manual requires a listed company to obtain prior shareholder approval for any issuance of common stock, or related convertible or exercisable securities, to a director, officer, 5% shareholder or certain of their affiliates (each, a “Related Party”), if the number of shares of common stock to be issued or into which the securities may be convertible or exercisable, exceeds 1% of either the number of outstanding common shares or 1% of the voting power outstanding prior to the issuance, with a limited exception for sales to 5% stockholders for cash at a price greater than or equal to the Minimum Price where the shares to be sold represent no more than 5% of the company’s outstanding common stock.2

The NYSE will temporarily waive the shareholder vote requirements for transactions involving the sale of greater than 1% of either the number of outstanding common shares or 1% of the voting power outstanding prior to the issuance to Related Parties or greater than 5% of the outstanding stock for cash to 5% shareholders at the Minimum Price. However, the waiver is not applicable to (1) a transaction involving the stock or assets of another company where a Related Party has a 5% or greater interest (or Related Parties collectively have a 10% or greater interest) in the company or assets to be acquired or the consideration to be paid and the issuance of stock could result in an increase of 5% or more in the outstanding stock or voting power of the listed company or (2) a sale of securities by a listed company to any Related Party where the proceeds will be used to fund an acquisition of another company where such person has a direct or indirect interest in the company, assets or consideration in respect of such acquisition.

20% Issuances

Section 312.03(c) of the Manual also requires a listed company to obtain shareholder approval prior to the issuance of common stock, or related convertible or exercisable securities, in an amount equal to or in excess of 20% of the voting power or 20% of the number of shares of common stock outstanding before such issuance (a “20% Issuance”), other than any 20% Issuance involving (A) a public offering for cash or (B) any bona fide private financing,3 if such financing involved the sale for cash, at a price greater than or equal to the Minimum Price. In general, in order to qualify as a “bona fide private financing”, there must be multiple purchasers, and no purchaser or group of related purchases can acquire or have the right to acquire more than 5% of the outstanding shares or voting power.

The NYSE will temporarily waive the shareholder vote requirements applicable to 20% Issuances by permitting, without a shareholder vote, all private placements for cash so long as the price in such transaction is greater than or equal to the Minimum Price. The waiver has the effect of permitting an investment by a single investor who may acquire more than 5% of the outstanding shares in a 20% Issuance, as long as the price in such transaction is at or above the Minimum Price.

To qualify for the waiver of the Related Party rule and for any 20% Issuance where a person benefitting from the waiver is a Related Party, a transaction must be reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors. Further, any transaction benefitting from either of the waivers will still be subject to shareholder approval if required under any other applicable rule, including the equity compensation requirements of Section 303A.08 and the change of control requirements of Section 312.03(d).

Implications

The waivers provide issuers with greater flexibility to address potential urgent liquidity needs in the coming months due to the unprecedented disruption as a result of the ongoing spread of COVID-19. When companies undergo such difficulties, existing large investors are often the only willing providers of much-needed capital, thus prompting the need for such waivers. These waivers only apply to issuers listed on the NYSE. In particular, in adopting the waivers with respect to Related Party issuances, the NYSE noted that the rule, as revised, will be consistent with the application of the current NASDAQ Marketplace Rule 5635(a) with respect to such issuances.

1These rules do not apply to limited partnerships.
2Minimum Price is defined in the Manual as the lower of: (i) the official closing price of the issuer’s stock on the Exchange as reported to the Consolidated Tape immediately preceding the signing of a binding agreement to issue the securities; or (ii) the average official closing price for the five trading days immediately preceding the signing of the binding agreement.
3NYSE Rule 312.04(g)

 

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