On Dec. 28, 2020, the New York Stock Exchange (NYSE) proposed amendments to its rules requiring shareholder approval prior to the issuance of securities to Related Parties or in excess of 20% of the issuer’s voting power or outstanding common stock. The proposed amendments would largely cement temporary waivers to these rules implemented as a result of COVID-19 (currently scheduled to last through March 31) designed to make it easier for issuers to raise necessary capital in private placement transactions, and will bring the NYSE’s shareholder approval requirements more closely in line with Nasdaq’s.

Section 312.03(b) of the NYSE Listed Company Manual (the Related Party Rule) requires shareholder approval prior to the issuance of common stock, or securities convertible into or exercisable for common stock, to (i) a director, officer or substantial security holder of the issuer (each a Related Party); (ii) a subsidiary, affiliate or other closely related person of a Related Party; or (iii) any company or entity in which a Related Party has a substantial direct or indirect interest, if the number of such securities exceeds 1% of the voting power or shares of common stock outstanding prior to such issuance. An exception to the Related Party Rule (the 5% Exception) permits cash sales to Related Parties who are substantial security holders (and are not otherwise related to the issuer) for up to 5% of the issuer’s outstanding voting power or common stock, at a price that is no less than the current market price. The amendments proposed by the NYSE would amend the Related Party Rule in several respects, as outlined below.

Amendments to the Related Party Rule

  1. While shareholder approval would still be required for issuances of securities to Related Parties themselves, the amendments to the Related Party Rule would no longer require shareholder approval for issuances to subsidiaries, affiliates or other closely related persons of a Related Party, or to 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).
  2. Issuances of securities to Related Parties for cash where the price equals or exceeds the current market price would no longer require shareholder approval.
  3. Shareholder approval would be required for any 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, where the securities issued could result in an increase in outstanding common shares of 5% or more.
  4. Certain exceptions that would no longer be needed as a result of the amendments to the Related Party Rule would be deleted, including (i) the 5% Exception and (ii) certain exemptions for early stage companies.

20% Rule

Section 312.03(c) of the NYSE Listed Company Manual (the 20% Rule) requires shareholder approval prior to the issuance of common stock, or securities convertible into or exercisable for common stock, in excess of 20% of the issuer’s voting power or shares of common stock outstanding prior to such issuance. In addition, the 20% Rule provides exceptions for (i) any public offering for cash and (ii) any bona fide private financing involving a sale of the company’s securities for cash at a price no less than the current market price. A “bona fide private financing” refers to a sale to a registered broker-dealer or where the issuer sells the securities to multiple purchasers, and no one such purchaser acquires more than 5% of the issuer’s voting power or common stock. The amendments proposed by the NYSE would amend the 20% Rule in several respects, as outlined below.

Amendments to the 20% Rule

  1. The exception for a bona fide private financing would be replaced to say any “other financing (that is not a public offering for cash) in which the company is selling securities for cash,” thereby eliminating the 5% limit for any single purchaser participating in the transaction.
  2. The proposed amendments to the 20% Rule also provide that if any of the proceeds of such a financing will be paid in an acquisition and the securities generating such proceeds when combined with any securities issued in connection with such acquisition exceed 20% of the issuer’s voting power or shares of common stock outstanding prior to such issuance, shareholder approval will be required.

Remaining Shareholder Protections

Despite these amendments, there would continue to be significant protections for shareholders with respect to a company’s sale of securities. For instance, the NYSE is also proposing to strengthen the language in Section 314.00 of the NYSE Listed Company Manual to require that any related party transaction (defined for purposes of Section 314.00 as transactions required to be disclosed pursuant to Item 404 of Regulation S-K under the Securities Exchange Act or, in the case of foreign private issuers, pursuant to Form 20-F, Item 7.B) be approved by the issuer’s audit committee or another body of independent directors. Furthermore, any issuance that gives rise to a change of control would still be subject to shareholder approval under Section 312.03(d). Lastly, any sale of stock to an employee, director or service provider will continue to be subject to the equity compensation rules in Section 303A.08 of the NYSE Listed Company Manual.