On May 14, 2020, the New York Stock Exchange LLC issued a new set of temporary exceptions to its shareholder approval requirements for equity issuances in excess of 20 percent of a listed company’s outstanding common stock or voting power and, in limited circumstances, for issuances to related parties. The new exceptions expand on the NYSE’s previously issued temporary exceptions from April 6, 2020. The new exceptions are available through June 30, 20201 and are intended to streamline certain listed companies’ access to capital during the ongoing COVID-19 pandemic.
Exception to Shareholder Approval Requirement for 20% Issuances
Under Section 312.03(c) of the NYSE Listed Company Manual (the “Manual”), shareholder approval is required prior to the issuance of common stock, or securities convertible into or exercisable for common stock, if the common stock to be issued equals 20% or more of the voting power or number of shares of common stock outstanding before such issuance (a “20% Issuance”). The requirement ordinarily provides exceptions for a (i) public offering for cash or (ii) bona fide private financing involving the issuance of common stock at a price greater than or equal to the Minimum Price.2
New Section 312.03T(b) of the Manual provides a new temporary exception from the shareholder approval requirement for 20% Issuances where the delay required to obtain shareholder approval would:
- have a material adverse impact on the company’s ability to maintain operations under its pre-COVID-19 business plan;
- result in workforce reductions;
- adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or
- seriously jeopardize the financial viability of the enterprise.
To qualify for the temporary exception, a company must submit a supplemental listing application and certification to the NYSE that demonstrates with specificity that the transaction satisfies one of the four criteria above, as well as the following requirements:
- the need for the transaction is due to circumstances related to COVID-19;
- the proceeds will not be used to fund any acquisition transaction;
- the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company; and
- the company’s audit committee or a comparable committee comprised solely of independent, disinterested directors expressly approved reliance on the exception and determined that the transaction is in the best interest of shareholders.
Upon approval of the application by the NYSE, a 20% Issuance in a private transaction below the Minimum Price would be permitted without shareholder approval.
This temporary exception shares many characteristics with a current exception in Section 312.05 of the Manual, which remains in effect, for companies in financial distress where a delay in securing shareholder approval would seriously jeopardize the financial viability of the company. The new exception under Section 312.03T(b) is broader than the exception under Section 312.05 in that it contemplates an exception for circumstances not impacting a company’s viability. Further, Section 312.05 requires companies to mail a notice to shareholders no later than 10 days prior to the issuance of the securities. Given some companies’ need for accelerated access to capital in the current environment, the 10-day advance notice requirement may be impractical.
Limited Exception to Shareholder Approval Requirement for Issuances to Affiliates and related to Equity Compensation
From time to time, investors may require a company’s senior management to put their personal capital at risk to participate in a capital raising transaction alongside unaffiliated investors. Given the current uncertainty related to the spread of COVID-19, companies attempting to raise funding may face such requests. Section 312.03(b) of the Manual as well as Sections 312.03(a) and 303A.08 of the Manual could require shareholder approval for such transactions involving senior management.
Section 312.03(b) requires shareholder approval for most issuances of common stock, or securities convertible into or exercisable for common stock, to a director, officer, substantial securityholder or certain parties related to them (each, an “Affiliate”), if the stock to be issued exceeds 1% of either the number of outstanding common shares or voting power prior to the issuance.
Sections 312.03(a) and 303A.08 of the Manual require shareholder approval, with some exceptions, prior to the issuance of securities when equity compensation arrangements are established or materially amended pursuant to which stock may be acquired by officers, directors, employees or consultants. The NYSE has long interpreted these sections to require shareholder approval for sales of securities to officers, directors, employees or consultants when the sale could be considered a form of “equity compensation.”
New Section 312.03T(c) of the Manual provides a temporary exception from the shareholder approval requirements under Sections 312.03(b), 312.03(a) and 303A.08 for Affiliates, including senior management, to participate in a capital raising transaction. The transaction must satisfy the general conditions discussed in the preceding section for the exception to the shareholder approval requirement for 20% Issuances. In addition, the transaction must satisfy the additional requirements described below, which are intended to safeguard against self-dealing and limit Affiliate participation to a de minimis level:
- any Affiliate’s participation must be less than 5% of the transaction;
- all Affiliates’ participation combined must be less than 10% of the transaction;
- Affiliate participation must have been specifically required by the unaffiliated investors; and
- any Affiliate who participates in the transaction must not have participated in negotiating the economic terms of the transaction.
Public Announcement of Reliance on Exception
A company that relies on one of the above exceptions must, under Section 312.03T(d) of the Manual, publicly announce such reliance by filing a Form 8-K or issuing a press release disclosing the following:
- the terms of the transaction;
- that shareholder approval would ordinarily be required by the NYSE’s rules but for the fact that the company is relying on a temporary exception to the shareholder approval requirements; and
- the audit committee or a board committee comprised solely of independent, disinterested directors expressly approved reliance on the exception and determined the transaction is in the best interest of shareholders.
The company’s public announcement is due promptly, but no later than two business days before the issuance of securities.
The NYSE must approve all transactions in advance of any issuance of securities in reliance on the new exceptions. To obtain the NYSE’s approval, the company must submit a supplemental listing application along with a written certification that it complies with all the requirements of Section 312.03T(b) and, if applicable, Section 312.03T(c). Because the NYSE must complete a detailed review of whether a company has established that is complies with the applicable requirements, companies should engage legal counsel and provide the required documentation as far in advance of the proposed transaction as possible.
The NYSE will aggregate issuances in reliance on the temporary exceptions in Section 312.03T of the Manual with any subsequent issuance by the company at a discount to the Minimum Price, other than a public offering for cash, if the binding agreement governing the subsequent issuance is executed within 90 days of the prior issuance. Shareholder approval will be required under Section 312.03(c) of the Manual if, following the subsequent issuance, the aggregate issuance (including shares issued in reliance on the exception) equals or exceeds 20% of the total shares or voting power outstanding before the initial issuance.
The ongoing spread of COVID-19 and actions taken to stop the spread of the virus have severely limited many companies’ ability to operate their business and have greatly reduced their revenues and prospects. As a result, many companies are experiencing urgent needs for capital, which may not be available in public equity or credit markets. Some large investors are reluctant to enter into new private equity transactions without appropriate compensation for their risk through discounts of the trading price of the securities. The NYSE’s new Section 312.03T of the Manual is intended to provide temporary help to listed companies who need to raise capital quickly in response to the current unusual market conditions without the delays attendant to seeking shareholder approval. The NYSE’s temporary exceptions largely mirror the temporary exceptions previously issued by the Nasdaq Stock Market LLC, and are just one of many tools intended to preserve functioning capital markets during the ongoing COVID-19 pandemic.
1To rely on the exception, a company must submit the related supplemental listing application and certification pursuant to Section 312.03T(b)(5)(A) of the Manual, obtain the NYSE’s approval to use the exception pursuant to Section 312.03T(b)(5)(B) and thereafter sign a binding agreement no later than June 30, 2020. The issuance of the securities governed by such agreement may occur after June 30, 2020, but no later than 30 calendar days following the date of the binding agreement.
2There are also temporary exceptions to these rules in effect until June 30, 2020. “Minimum Price” is defined in Section 312.04(i) of the Manual as the lower of: (i) the Official Closing Price immediately preceding the signing of the binding agreement; or (ii) the average Official Closing Price for the five trading days immediately preceding the signing of the binding agreement.
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