The SEC has declared immediately effective (yet another) proposed change to the rules of an exchange—this one from the NYSE. The NYSE has adopted new Section 312.03T of the NYSE Listed Company Manual, which will provide a temporary exception, through June 30, 2020, from the application of the shareholder approval requirements for specified issuances of 20% or more of the outstanding shares (Section 312.03) and, in certain narrow circumstances, by a limited exception for issuances to related parties or other capital-raising issuances that could be considered equity compensation (Sections 312.03 and 303A.08). Although not entirely congruent, the exception appears to be modeled closely on the comparable Nasdaq exception that was approved just over a week ago. (See this PubCo post.) In light of the unprecedented disruption in the economy as a result of COVID-19, many listed companies “are experiencing urgent liquidity needs during this period of crisis due to lost revenues and maturing debt obligations.” The temporary exception is designed to respond to this unprecedented emergency and to help companies access necessary capital quickly.
Section 312.03(c) of the Manual requires shareholder approval prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if the common stock has or will equal or exceed 20% of the voting power outstanding or if the number of shares of common stock to be issued is or will equal 20% or more of the common stock outstanding, except for public offerings for cash, private financings for cash at a price at least equal to the “Minimum Price,” or securities convertible into or exercisable for common at a price at least equal to the Minimum Price. The “Minimum Price” 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.
To address the potential need for companies to raise capital quickly without the need for shareholder approval, the NYSE has adopted Section 312.03T, Temporary COVID-19 Exception, that will be available upon approval by the NYSE of an application demonstrating that:
“(1) the need for the transaction is due to circumstances related to COVID-19 and the proceeds will not be used to fund any acquisition transaction;
(2) the delay in securing shareholder approval would:
(A) have a material adverse impact on the company’s ability to maintain operations under its pre-COVID-19 business plan;
(B) result in workforce reductions;
(C) adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or
(D) seriously jeopardize the financial viability of the enterprise.”
The company must also show that it “undertook a process designed to ensure that the proposed transaction represents the best terms available to the company” and that the company’s independent, disinterested audit committee (or comparable board committee “expressly approved reliance on this exception; and…determined that the transaction is in the best interest of shareholders.”
Section 312.03(b) of the Manual requires shareholder approval prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions, to a “related party” in an amount that exceeds specified caps. A “related party” is a director, officer or substantial security holder, their subsidiaries, affiliates or other closely related persons or other entities in which a related party has a substantial interest. (Section 312.03(b) includes an exemption for “Early Stage Companies.”)
Section 303A.08 requires shareholder approval for certain issuances under a compensation plan or arrangement (or material amendment of same) under which stock may be acquired by officers, directors, employees or consultants. Section 312.03(a) incorporates the requirements of Section 303A.08 into Section 312.03. The NYSE has long interpreted Section 303A.08 to apply to certain capital-raising transactions, requiring “shareholder approval for certain sales to officers, directors, employees, or consultants when such issuances could be considered a form of ‘equity compensation.’” The example provided by the NYSE is a capital-raising transaction where senior management may be required by investors to participate.
Section 312.03T(c) will provide for an exception from the shareholder approval requirements under Sections 312.03(b) and Sections 312.03(a) and 303A.08 for participation by any “affiliated purchasers” (essentially, persons whose participation would otherwise be subject to shareholder approval under those sections) in a transaction described in Section 312.03T(b), provided the affiliated purchaser’s participation was “specifically required by unaffiliated investors,” that each affiliated purchaser’s participation is less than 5% of the transaction, that all affiliated purchasers’ participation is collectively less than 10% of the transaction and that any affiliated purchaser investing in the transaction “must not have participated in negotiating the economic terms of the transaction.”
In contrast to the comparable Nasdaq temporary exception, the NYSE must approve all transactions in advance of any issuance of securities in reliance on the temporary exception. Approval will be based on a review of the company’s compliance.
To take advantage of the temporary exception under Section 312.03T, the company must submit a supplemental listing application (Section 703.01 (part one)) along with a certification to the NYSE that the transaction complies with all requirements of Section 312.03T(b) (and Section 312.03T(c) if applicable), describing with specificity how it complies. Because of the detailed review required for approval, the NYSE advises companies to “commence discussions with the Exchange and provide the required documentation as far in advance of the proposed transaction as is possible.”
Notice to shareholders
Section 312.03T(d) requires the company to make a public announcement of its reliance on the temporary exception by filing a Form 8-K, where required by SEC rules, or by issuing a press release as promptly as possible, but no later than two business days before the issuance of the securities disclosing:
“(1) the terms of the transaction (including the number of shares of common stock that could be issued and the consideration received);
(2) that shareholder approval would ordinarily be required under Exchange rules but for the fact that the company is relying on this temporary exception to the shareholder approval rules; and
(3) that the audit committee or a comparable committee comprised solely of independent, disinterested directors expressly approved reliance on the exception and determined that the transaction is in the best interest of shareholders.”
If the company executes a binding agreement governing a subsequent issuance of securities within 90 days of a prior issuance that relied on the temporary exception, the NYSE will aggregate any issuances under the temporary exception with the subsequent issuance by the company, other than a public offering, at a discount to the Minimum Price. As a result, “if following the subsequent issuance, the aggregate issuance (including shares issued in reliance on the exception) equals or exceeds 20% of the total shares or the voting power outstanding before the initial issuance, then shareholder approval will be required under Section 312.03(c) before the issuance can occur.”
To rely on the temporary exception, the company must submit the supplemental listing application and certification and obtain the NYSE’s approval and thereafter sign a binding agreement no later than June 30, 2020. However, the company may issue the securities governed by the agreement in reliance on the exception after June 30, 2020, provided the issuance occurs no later than 30 calendar days following the date of the binding agreement. If the company does not issue securities within 30 calendar days, it may no longer rely on the temporary exception in Section 312.03T.
Exception not applicable to other shareholder approval requirements
The release emphasizes that issuances under Section 312.03T must comply with all other applicable NYSE rules, including the shareholder approval requirements in Sections 312.03(b) and (c) for issuances other than for cash, the change of control provision of Section 312.03(d) and the equity compensation requirements of sections 312.03(a) and 303A.08 (subject to the limited exceptions). In addition, the NYSE states that “funds raised from the issuance of securities pursuant to Section 312.03T may not be used to fund acquisition transactions.” The NYSE also notes that the temporary exception will not override any requirements under applicable law or a company’s own governing documents that would otherwise require shareholder approval.