The NYSE Listed Company Manual contains a number of rules requiring a listed company to obtain shareholder approval for certain issuances of securities, which rules are often referred to as the “20% rule” or “shareholder approval requirements.” On December 31, 2015, the SEC approved a proposed change by the NYSE to Section 312.03(b) of the NYSE Listed Company Manual to permit “early stage companies” listed on the NYSE to issue shares of common stock (or exchangeable or convertible securities) without shareholder approval to a related party, a subsidiary, affiliate or other closely-related person of a related party or any company or entity in which a related party has a substantial direct or indirect interest. An “early stage company” is defined as a company that has not reported revenues in excess of $20 million in any two consecutive fiscal years since its incorporation; and a “related party” is defined as a director, officer or holder of 5% or more of the company’s common stock. In order to take advantage of the exemption, the audit committee (or a comparable committee comprised solely of independent directors) of the early stage company is required to review and approve the proposed transaction prior to completion. Once a company reports revenues greater than $20 million in each of two consecutive fiscal years, it will lose its designation as an early stage company and become subject to all the shareholder approval requirements of Section 312.03(b), which requires a company to obtain shareholder approval, with certain exceptions, before it issues shares exceeding either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance to related parties, affiliates of related parties or entities in which a related party has a substantial interest. A company’s annual financial statements before listing will be considered when determining if the company should lose its early stage company designation. In addition, the exemption for early stage companies is only available for sales for cash and is not available for issuances in connection with an acquisition. The amendments took effect immediately following the SEC’s approval.
This modest change will be beneficial to shareholders because the shareholder approval requirements often deter companies from raising much-needed capital. The change should also be viewed in the broader context of the securities exchanges’ recent efforts to review the shareholder approval requirements which have been considered outmoded. For example, on November 18, 2015, Nasdaq solicited comments on its 20% rule, specifically (1) whether it is too restrictive, (2) whether the percentage should be higher, (3) whether there are other shareholder provisions that are sufficient and (4) whether the insider interest in acquired assets test is still needed.