No, it’s not Groundhog Day. (In fact, it’s election day. Go vote!) But this proposal from the NYSE to amend Sections 312.03 and 312.04 of the Listed Company Manual sounds remarkably similar to the one that the SEC has just approved for Nasdaq—modifications to the price requirements for purposes of determining whether shareholder approval is required for certain issuances. (See this PubCo post.) Just like the new Nasdaq rule, the NYSE proposal would
- change the definition of market value for purposes of the shareholder approval rule and
- eliminate the requirement for shareholder approval of issuances at a price less than book value but greater than market value.
Under the existing rule, shareholder approval is required for the issuance of common stock in a variety of circumstances. Under Section 312.03(b), shareholder approval is required for certain related-party issuances if the issuance exceeds either 1% of the number of shares of common stock or of the voting power outstanding before the issuance. However, if “the Related Party involved in the transaction is classified as such solely because such person is a substantial security holder, and if the issuance relates to a sale of stock for cash at a price at least as great as each of the book and market value of the issuer’s common stock, then shareholder approval will not be required” unless the issuance exceeds 5% of the number of shares or voting power outstanding before the issuance.
Under Section 312.03(c), shareholder approval is required prior to the issuance of common stock if:
“(1) the common stock has, or will have upon issuance, voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock; or
(2) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20 percent of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock.”
However, among other exceptions, shareholder approval is not required for a “bona fide private financing” (as defined) that involves a cash sale of common stock at a price at least as great as each of the book and market value of the common stock or the cash sale of securities convertible into or exercisable for common stock, if the conversion or exercise price is at least as great as each of the book and market value of the common stock. “Market value,” as defined in Section 312.04(i), means “the official closing price on the Exchange as reported to the Consolidated Tape immediately preceding the entering into of a binding agreement to issue the securities.”
Minimum Price. As with the new Nasdaq rule, the NYSE is proposing to replace the term “market value” in the pricing test used for the exceptions in Sections 312.03(b) and (c) with a new term, “Minimum Price,” which will be defined as a price that is 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.” The term “Official Closing Price” will be defined in Section 312.04 as “the official closing price on the Exchange as reported to the Consolidated Tape immediately preceding the entering into of a binding agreement to issue the securities.” Under the proposal, shareholder approval will be required only for transactions that are priced below the Minimum Price. The NYSE recognized that, although in the event of rising or declining markets or a material event, there could be disadvantages to using a trailing average, nevertheless, the NYSE believed, that risk is already accepted by the market. The NYSE also believes that the availability of two alternative measures of value allows issuers the flexibility to use either measure without needing shareholder approval.
Book Value Test Eliminated. Like Nasdaq, the NYSE also proposes to eliminate the “book value” measure from the prior definition because the NYSE believes that it is an accounting measure based on historic asset values and, as such, not an appropriate measure of whether a transaction is dilutive or should otherwise require shareholder approval. The NYSE stated that it has “also observed that when the market price is below the book value, issuers are often extremely surprised when confronted with the effect it has on their proposed transactions. In that regard, the existing book value test can have anomalous effects in transactions that appear to be clearly commercially reasonable for the issuer and have a disproportionate impact on companies in certain industries and at certain times…. Furthermore, the Exchange is not aware of any evidence that shareholders consider book value to be a material factor when they are asked to vote to approve a proposed transaction.”
The NYSE notes that the proposed change in the definition of market value would not affect the exemption for shareholder approval in section 303A.08 for purchases by employees, directors or service providers that are purchases on the open market or from the listed company for their current fair market value.