On August 19, 2021, the New York Stock Exchange (“NYSE”) proposed an amendment to the related party transaction approval rule under Section 314.00 of the NYSE Listed Company Manual (the “NYSE Manual”). As amended, Rule 314.00 has been clarified to provide that the transaction value and materiality provisions of Item 404 of Regulation S-K (or Item 7.B of Form 20-F for foreign private issuers) continue to apply to related party transactions subject to review under the NYSE Manual.1 This effectively reduces the scope of transactions that are subject to the prior version of the rule.
In its proposal, the NYSE noted that conforming the requirements of Section 314.00 to those of Regulation S-K and Item 7.B of Form 20-F is consistent with the protection of investors. The proposed amendment took effect immediately since the Securities and Exchange Commission (“SEC”) determined that it does not significantly affect the protection of investors or impose any significant burden on competition.
Related Party Transactions
Pursuant to Section 314.00 of the NYSE Manual, a company’s audit committee or other committee of independent directors shall conduct a prior review of all “related party transactions” for potential conflicts of interest, and such committee will prohibit such a transaction if it is found to be inconsistent with the interests of the company and its shareholders. The SEC previously adopted amendments to Section 314.00 on April 2, 2021, which defined “related party transaction” for purposes of the rule as (1) any transaction subject to the disclosure requirements of Item 404 of Regulation S-K without regard to the transaction value threshold of that provision, or (2) for foreign private issuers, any transaction subject to the disclosure requirements of Item 7.B of Form 20-F without regard to the materiality threshold of that provision.
Prior to the adoption of the clarifying amendments in August, companies were potentially required to review and approve large numbers of immaterial transactions.
The rule, as amended, limits the scope of transactions subject to review by striking the language that made the transaction value and materiality thresholds of Regulation S-K and Form 20-F inapplicable.
As a result of the clarification, companies will only be required to review those related party transactions that meet the applicable transaction value and materiality thresholds of Regulation S-K and/or Item 7.B of Form 20-F, as applicable.
The alignment of the transactions subject to the review and approval requirements of Section 314.00 of the NYSE Manual with those that are subject to the disclosure requirements of the applicable SEC rules will limit the burdens on independent directors who, according to the SEC’s proposal, “have many other time-consuming oversight obligations with respect to matters that are higher risk and more material to the company.” It is anticipated that the clarifying changes to Section 314.00 will also save issuers valuable time by making the standards for SEC disclosure and NYSE review effectively the same.
1Item 404 of Regulation S-K requires disclosure of a related party transaction only when the amount involved in such transaction exceeds $120,000. Under Item 7.B of Form 20-F, foreign private issuers are only required to disclose transactions that are material to the company or to the related party, or any transactions that are unusual in nature.
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