Investor Advocate, Rick Fleming, announced last Friday the recommendation to reject the proposed NYSE rule change that would allow certain listed companies to sell additional shares to insiders and related parties without obtaining shareholder approval (see our prior blog post on the proposal). Specifically, the exemption would allow small companies to issue shares representing less than 20% of their total pre-transaction shares outstanding to insiders without obtaining prior approval from shareholders. Anything above 20% would still require shareholder approval.
The recommendation adds that investors have an expectation that listed companies are subject to higher standards and, if the proposed rule were to be approved, the NYSE would be creating a de facto second tier with lower corporate governance standards for smaller companies. Fleming makes clear that the Office of the Investor Advocate supports efforts to promote capital formation by smaller companies; however, this current proposal would certainly weaken the rights of existing shareholders.
Fleming also addressed the fact that although rule changes are published for public comment, due to the hundreds of proposed rule changes sent to the SEC, few individual investors submit comments for the SEC’s consideration.
It is unfortunate that the proposed NYSE change is not viewed more broadly and in context. Both the NYSE and the Nasdaq have similar versions of the so-called “20% rule” that requires listed companies to obtain shareholder approval for various transactions. The 20% rule has not been reviewed recently and is an outmoded rule that often is a significant hindrance to capital formation by listed companies.