The NYSE is proposing to relax the requirements for shareholder approval of related-party equity issuances and bring them closer into alignment with the comparable Nasdaq rules. The proposal, which would amend Sections 312.03, 312.04 and 314.00 of the NYSE Listed Company Manual, would provide more flexibility to raise capital and includes modifications that are largely identical to the temporary waiver in effect during the COVID-19 crisis. (See this PubCo post and this PubCo post.) In observing the impact of that temporary waiver (which has now been extended through March 31, 2021), the NYSE has seen “that a significant number of companies have benefited from the flexibility provided by the waiver and has not observed any significant problems associated with companies’ completion of transactions permitted by the waiver.”
Section 312.03(b) currently 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.” (There is also a special exception for early stage companies. See this PubCo post.)
The proposal would amend Section 312.03(b) to:
- Narrow scope of requirement. Require shareholder approval for issuances to directors, officers and substantial securityholders (“Related Party”) and eliminate from the class of persons that trigger a shareholder vote Related Parties’ subsidiaries, affiliates or other closely related persons or entities in which a Related Party has a substantial interest (with the exception of a 5% or greater interest as described below). This approach is comparable to the approach used by Nasdaq.
- Less than minimum price. Require shareholder approval of cash sales to Related Parties only if the price is below the minimum price. As a result, shareholder approval would not be required under this section for cash sales to Related Parties that meet the minimum price even if the number of shares exceeds either 5% of the common or voting power outstanding, subject to the limitations under the proposed amended Section 312.03(c). Cash sales of over 1% of the common stock or voting power below the minimum price to a Related Party would continue to be subject to shareholder approval.
- Acquisitions. Require shareholder approval for any transaction or series of related transactions in which any Related Party has a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction, where the present or potential issuance of common (or securities convertible into common), could result in an increase of 5% or more in the outstanding common. This provision is comparable to the Nasdaq rule. Shareholder approval will also continue to be required for any sale of securities to a Related Party in a transaction, or series of transactions, where the proceeds will be used to fund an acquisition of stock or assets of another company and the Related Party has a direct or indirect interest in the company or assets to be acquired or in the consideration to be paid for the acquisition.
- Deletions. Eliminate two provisions that, as a result of the proposal, will no longer be relevant, including the early stage company exemption and the exemption for cash sales of 5% or less that meet the minimum price where the Related Party is classified as Related Party only because the person is a substantial security holder.
Section 312.03(c) currently 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.”
The proposal would amend Section 312.03(c) to:
- “Bona fide private financing.” Replace the reference to “bona fide private financing” in Section 312.03(c) (and delete the definition of the term in Section 312.04(g)) with “other financing (that is not a public offering for cash) in which the company is selling securities for cash,” thus eliminating the 5% limit for any single purchaser in a minimum price cash sale and the separate provision for sales to broker-dealers.
- Acquisitions. Provide that shareholder approval would be required if any of the proceeds will be paid in an acquisition and the securities generating the proceeds combined with any securities issued in connection with the acquisition exceed either 20% of the common stock or voting power outstanding.
As proposed, the new provisions would be comparable to those of Nasdaq. The sale of the company’s securities must be for cash at a price that meets the minimum price requirement. As a result, except for acquisitions as described above, 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, as discussed below.
Section 312.03T, adopted to provide temporary relief during the pandemic, would be eliminated.
Section 314.00 provides that related party transactions must be reviewed and evaluated by an appropriate group within the listed company, with the Audit Committee or another comparable body identified as one appropriate forum.
The proposal would amend Section 314.00 to:
- “Related party transaction.” Define the term “related party transaction” for purposes of Section 314.00 as a transaction required to be disclosed pursuant to Item 404 of Reg S-K. For foreign private issuers, the term “related party transactions” refers to transactions required to be disclosed pursuant to Form 20-F, Item 7.B.
- Audit committee. Require that related party transactions under the proposed rule be reviewed by either the company’s audit committee or another independent body of the board of directors and the audit committee or such other body may prohibit such a transaction if it determines it to be inconsistent with the interests of the company.
Even if shareholder approval is not required under either of these provisions, 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).