On March 20, the SEC approved the 2018 NYSE proposal to amend Sections 312.03 and 312.04 of the NYSE Listed Company Manual, modifying the price requirements for purposes of determining whether shareholder approval is required for certain issuances. As previously noted in this PubCo post, this proposal is remarkably similar to the one that the SEC approved for Nasdaq in 2018 (see this PubCo post), so its approval here was not unexpected. Just like the Nasdaq rule, the NYSE modification:
- changes the definition of market value for purposes of the shareholder approval rule to the lower of the closing price and five-day average closing price; and
- eliminates the requirement for shareholder approval of issuances at a price less than book value but at least as great as market value.
Rule prior to new amendments
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, under the prior rule, 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 would not be required” unless the issuance exceeded 5% of the number of shares or voting power outstanding before the issuance.
Also, 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, under the prior rule, shareholder approval was not required for a “bona fide private financing” (as defined) that involved 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), meant “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.” The prior rule also stated that an average price over a period of time was not acceptable as “market value” for purposes of Section 312.03.
Minimum Price. The new rule replaces 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.” Accordingly, as modified, the exceptions to the shareholder approval requirements set forth in Sections 312.03(b) and (c) will be available only for issuances that are priced at or above the Minimum Price, or, put another way, shareholder approval will be required for those transactions only if they are priced below the Minimum Price. “Minimum Price” is defined as a price that is the lower of: “(i) the Official Closing Price immediately preceding the signing of the 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 to issue the securities.” The term “Official Closing Price” is 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.” In connection with these changes, the NYSE is also eliminating the prohibition on the use of an average price over a period of time as a measure of market value for purposes of Section 312.03. 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 that risk has already been accepted by the market as it is a measure often used to structure transactions. For the avoidance of doubt, the SEC noted that the term “Minimum Price” is not applicable to the equity compensation provisions in Section 303A.08 or Section 312.03(a).
Book Value Test Eliminated. The new rule also eliminates the “book value” measure from the prior definitions in Sections 312.03(b) and (c) for certain sales of common stock for cash at a price at least as great as market and book value. As modified, transactions that “otherwise qualify for the exceptions to the shareholder approval requirements in Sections 312.03(b) and (c) and are priced below book value but at or above market value, as defined by the Minimum Price, would no longer require shareholder approval.” The NYSE proposed the change because it believed that “book value” was 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 SEC observed that, even with these changes, the ability of NYSE-listed companies to issue securities without shareholder approval continues to remain limited by other important NYSE rules, such as the rules requiring shareholder approval for change-of-control transactions and discounted issuances to insiders.