On December 28, 2020, the New York Stock Exchange (the “NYSE”) and the Securities and Exchange Commission proposed rules intended to permanently relax the NYSE’s shareholder approval requirements for certain equity issuances. This proposal is substantially similar in effect to the temporary waiver first issued last April (discussed in our client update here) and subsequently extended through December 31, 2020. In proposing the permanent rule changes, the NYSE noted its belief that the current requirements can make raising capital in private placement transactions unnecessarily difficult, and further observed that a significant number of companies benefited from the flexibility provided by the temporary waiver. Finally, the proposed revised rules will more closely align the NYSE with the current Nasdaq and NYSE American shareholder approval requirements. Despite the relaxation of the rules noted below, transactions involving an issuance which would result in a change of control will remain subject to shareholder approval.
Related Party Transactions
The proposed rules would amend Sections 312.03, 312.04 and 314.00 of the NYSE Listed Company Manual (the “Manual”) to permit companies to sell stock to related parties without obtaining shareholder approval in a number of circumstances.
Section 312.03(b) of the Manual currently 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 common shares or 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.1
The proposed rules would eliminate shareholder approval for issuances to related parties that exceed the 1% and 5% limits for cash at a price no less than the Minimum Price. In addition, shareholder approval would no longer be required for such issuances to related parties’ subsidiaries, affiliates or other closely related persons or to entities in which a related party has a substantial interest, unless the related party has a 5% or greater interest in the counterparty, as described in the next sentence. Under the new rules, shareholder approval would be required for any transaction or series of related transactions where any related party has a 5% or greater interest (or such persons collectively have a 10% or greater interest) in the company or assets to be acquired or in the consideration to be paid in the transaction, and the present or potential issuance of common stock or securities convertible into common stock could result in an increase of 5% or more of the outstanding common stock.
The proposed rules would also eliminate certain exemptions from the current rules as they will not be necessary under the new regime.2 The proposal keeps intact the current rules requiring shareholder approval for cash sales of more than 1% of a company’s stock to a related party at a price below the Minimum Price and sales to a related party where the proceeds of the issuance will be used to fund an acquisition where the related party has an interest in the company or assets to be acquired or the consideration to be paid in such transaction.
20% Rule’s Bona Fide Private Financing Exception
Section 312.03(c) of the Manual currently 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 proposed rules expand the exception to the 20% rule by replacing the reference to “bona fide private financing” with “other financing (that is not a public offering for cash) in which the company is selling securities for cash.” This proposed change eliminates the 5% limit for any single purchaser participating in a transaction relying on the exemption.
The proposed rules provide that, if any of the proceeds of such a financing would be paid in an acquisition and the stock generating such proceeds, when combined with any stock issued in connection with such acquisition, exceeds either 20% of the stock or voting power outstanding before the issuance, then shareholder approval would be required. The proposed rules would not change the current NYSE rules as they relate to issuances in cash or non-cash transactions for a price below the Minimum Price.
Review of Related Party Transactions
Section 314.00 of the Manual provides that related party transactions normally include transactions between officers, directors, or principal shareholders and the company and each related party transaction should be reviewed by an appropriate group within the company, although the rule does not formally specify who should review related party transactions. The proposed rules specify that related party transactions under the proposed rules would be required to be reviewed by either the company’s audit committee or another independent body of the board of directors. The term “related party transaction” would be defined as a transaction required to be disclosed pursuant to Item 404 of Reg S-K. For foreign private issuers, the term “related party transactions” would refer to transactions required to be disclosed pursuant to Form 20-F.
As observed during the COVID-19-related market volatility of 2020, institutional and existing large investors are often the only willing providers of much-needed capital to issuers facing urgent liquidity needs. The proposed rules will provide flexibility for NYSE-listed companies to more quickly and efficiently raise capital from these important sources.
1Minimum 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.
2These include the exemptions for early stage companies and for cash sales of 5% or less of the company’s stock at a price no less than the Minimum Price to 5% shareholders.
3NYSE Rule 312.04(g).
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