In December 2020, the NYSE proposed to relax the requirements for shareholder approval of related-party equity issuances and bring them into closer alignment with the comparable Nasdaq rules by amending Sections 312.03, 312.04 and 314.00 of the NYSE Listed Company Manual. The amendments were intended to provide more flexibility to raise capital and included modifications that were similar 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 at that time, the NYSE indicated that it had 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.” (For a description of the original proposal, see this PubCo post.) The NYSE subsequently amended the proposal, and the SEC has just approved the proposal, as amended, on an accelerated basis.
Section 312.03(b), prior to the amendment, required 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), exceeded either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance. A limited exception existed for issuances to substantial shareholders that were related parties only because they were substantial shareholders. Under this exception, shareholder approval was not required for cash sales of up to 5% of the outstanding if the sales satisfied 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 was also a special exception for early stage companies. See this PubCo post.) The NYSE believes that former requirements in Section 312.03(b) could “make it unnecessarily difficult for listed companies to raise necessary capital in private placement transactions that are in the interests of the company and its shareholders.”
Under the new provisions, Section 312.03(b) was amended to:
- Narrow scope of requirement. Require prior shareholder approval for certain issuances of common stock to directors, officers, and substantial security holders of the company (“Related Party”), but no longer require shareholder approval for issuances to Related Parties’ subsidiaries, affiliates or other closely related persons or entities in which a Related Party has a substantial interest (except where a Related Party has a 5% or greater interest in the counterparty, as described below regarding Section 312.03(b)(ii)).
- Less than minimum price. Require shareholder approval of cash sales to Related Parties only if the price is below the minimum price (except as described below). Non-cash sales and cash sales below the minimum price, in each case, of over 1% of the common stock or voting power to a Related Party will continue to be subject to shareholder approval. Cash sales to Related Parties that meet the minimum price will be subject to the same limitations as cash sales to all other investors under Section 312.03(c), as described below.
- Acquisitions. Under new Section 312.03(b)(ii), require shareholder approval prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, where the securities are issued as consideration in a transaction or series of related transactions in which a 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 or series of related transactions and the present or potential issuance of common stock, or securities convertible into common stock, could result in an issuance that exceeds either 5% of the company’s common stock or 5% of the voting power outstanding before the issuance. This provision would require shareholder approval regardless of whether the transaction is priced at or above the minimum price. Although the NYSE has eliminated the specific requirement for shareholder approval of issuances to a subsidiary or affiliate of a Related Party, in effect, under this provision, shareholder approval could be required where a Related Party has an interest in the company or assets to be acquired.
- Deletions. Eliminate two provisions that, as a result of the rule changes, 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.
In addition, as described below, “related party transactions,” as defined, must be reviewed by the company’s audit committee or a comparable committee composed solely of independent directors.
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, prior to the amendment, for transactions involving a cash sale of the company’s securities that complied with the minimum price requirement and also met the definition of a “bona fide private financing.” A “bona fide private financing” referred 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.”
Under the new provisions, Section 312.03(c) was amended 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 requirement that, for the exception, the company sell the securities to multiple purchasers, and that no one purchaser, or group of related purchasers, acquires more than 5% of the common stock or voting power. The change also eliminates the separate provision for sales to broker-dealers.
- Acquisitions. Change the exception to provide that shareholder approval will not be required for any other financing (that is not a public offering for cash) in which the company is selling securities for cash, if the financing involves a sale of common stock, or securities convertible into or exercisable for common stock, at a price at least equal to the minimum price; however, if the securities in the financing are issued in connection with an acquisition of the stock or assets of another company, shareholder approval will be required if the issuance of the securities alone or when combined with any other present or potential issuance of common stock, or securities convertible into common stock in connection with the acquisition, is equal to or exceeds either 20% of the company’s common stock or 20% of the voting power outstanding before the issuance.
According to the NYSE, the changes will make its rules for cash sales of securities that meet the minimum price test substantially the same as the Nasdaq rules. Section 312.03(c) will continue to require shareholder approval for any non-cash issuances of 20% or more of the common stock or voting power and any financing (that is not a public offering for cash) involving cash sales relating to 20% or more of the common stock or voting power for less than the minimum price. As amended, Section 312.03(c) will also require shareholder approval of all cash sales in connection with an acquisition of the stock or assets of another company relating to 20% or more of the company’s common stock or voting power even if the issuance meets the minimum price. As a result, shareholders will be able to vote on potentially dilutive transactions that may occur due to the acquisition. Except for acquisitions as described above, however, a listed company would be exempt from the shareholder approval requirement of Section 312.03(c) for a private placement transaction of common or common-convertible securities 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, subject, of course, to other potentially applicable requirements, such as those related to change of control.
Section 312.03T, adopted to provide temporary relief during the pandemic, is eliminated.
Section 314.00, prior to the amendment, provided 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.
Under the new provisions, Section 314.00 is amended 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 (but without applying the transaction value threshold under that provision). For foreign private issuers, the term “related party transactions” refers to transactions required to be disclosed pursuant to Form 20-F, Item 7.B (but without regard to the materiality threshold of that provision).
- Audit committee. Require that the audit committee or another independent body of the board conduct a reasonable prior review and oversight of all related party transactions for potential conflicts of interest and prohibit the transaction if it determines it to be inconsistent with the interests of the company and its shareholders.
Importantly, even if shareholder approval is not required under these provisions, shareholder approval will still be mandatory 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)