After the 2008 financial crisis, many companies sought to raise capital by selling equity in private placements, often to existing major shareholders, but faced limitations resulting from the NYSE’s shareholder approval requirements. To address that concern in the Covid-19 crisis, the NYSE has proposed, and the SEC has approved and declared immediately effective, an NYSE rule change to waive, through June 30, 2020 and subject to compliance with conditions, application of certain of the shareholder approval requirements in Section 312.03 of the NYSE Listed Company Manual. That rule requires listed companies to obtain shareholder approval prior to certain types of equity issuances. The general effect of the waivers, according to the NYSE, is to make these NYSE shareholder approval requirements more comparable to the similar Nasdaq requirements on a temporary basis. The waivers are intended to provide temporary relief to listed companies that may have urgent liquidity needs in the coming months as a result of the impact of COVID-19.
NYSE Manual Section 312.03(b) requires shareholder approval of any issuance to “related parties,” including directors, officers or substantial security holders or to an affiliate of 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 either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance. A limited exception exists for issuances to substantial shareholders that are related parties only because they are substantial shareholders. Under this exception, shareholder approval is not required for cash sales of up to 5% of the outstanding if the sales satisfy a “minimum price” test. “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; or (ii) the average Official Closing Price for the five trading days immediately preceding the signing of the binding agreement.”
In light of the impact of COVID-19, the NYSE will waive, in part, the application of Section 312.03(b) through June 30, 2020, with the waiver specifically limited to transactions that (1) involve the sale of the company’s securities for cash at a price that meets the minimum price test above and (2) have been reviewed and approved by the company’s audit committee or a comparable committee composed solely of independent directors. The effect of the waiver will be “to allow companies to sell their securities to Related Parties and other persons subject to Section 312.03(b) without complying with the numerical limitations of that rule, as long as the sale is in a cash transaction that meets the Minimum Price requirement and also meets the other requirements noted above.”
Consistent with Nasdaq Rule 5635(a), the waiver will not apply to certain transactions involving the stock or assets of another company where a related party has a 5% or greater interest (or related parties collectively have a 10% or greater interest), and the potential issuance of common stock (including securities convertible into or exercisable for common stock) could result in an increase in outstanding common shares or voting power of 5% or more. Specifically, “the waiver will not be applicable to a sale of securities by a listed company to any related person (or affiliate of a related person) in a transaction, or series of transactions, where the proceeds will be used to fund an acquisition of stock or assets of another company where such person has a direct or indirect interest of in the company or assets to be acquired or in the consideration to be paid for such acquisition.”
Section 312.03(c) requires shareholder approval of any transaction involving the issuance of 20% or more of the company’s outstanding common stock or 20% of the voting power outstanding before the issuance, other than a public offering for cash, with an exception for transactions involving a cash sale of the company’s securities that comply with the minimum price requirement and also meet the definition of a “bona fide private financing.” A “bona fide private financing” refers to a sale in which either “a registered broker-dealer purchases the securities from the issuer with a view to the private sale of such securities to one or more purchasers; or the issuer sells the securities to multiple purchasers, and no one such purchaser, or group of related purchasers, acquires, or has the right to acquire upon exercise or conversion of the securities, more than five percent of the shares of the issuer’s common stock or more than five percent of the issuer’s voting power before the sale.”
As with the waiver above, consistent with the application of Nasdaq Rule 5635(c), the NYSE will also waive, through June 30, 2020, for purposes of the bona fide financing exception to the 20% requirement in Section 312.03(c), the 5% limitation for any sale to an individual investor in a bona fide private financing and permit companies to undertake a bona fide private financing during that period in which there is only a single purchaser. The sale of the company’s securities must be for cash at a price that meets the minimum price requirement. As a result, a listed company would be exempt from the shareholder approval requirement of Section 312.03(c) for “a private placement transaction regardless of its size or the number of participating investors or the amount of securities purchased by any single investor, provided that the transaction is a sale of the company’s securities for cash at a price that meets the Minimum Price requirement.” If any purchaser is a “related party,” the transaction must be reviewed and approved by the company’s audit committee or a comparable committee composed solely of independent directors.
Even if either of these waivers applies, shareholder approval will still be required if it is required under any other applicable rule, including the equity compensation requirements of Section 303A.08 and the change of control requirements of Section 312.03(d).