NYSE Completes Amendments to Shareholder Approval and Related Party Requirements

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The NYSE has amended the Listed Company Manual regarding shareholder approval requirements for the issuance of securities and certain related party matters. The SEC approved the amendments on an accelerated basis.

Prior to the amendment, Section 312.03(b) of the Manual required shareholder approval prior to certain issuances of common stock, or securities convertible into or exercisable for common stock, to:

  • a director, officer, or substantial security holder of the company (each a “Related Party” for purposes of Section 312.03(b));
  • 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.

In addition, Section 312.03(b) of the Manual required shareholder approval if the number of shares of common stock to be issued, or if the number of shares of common stock into which the securities may be convertible or exercisable, exceeded either one percent of the number of shares of common stock or one percent of the voting power outstanding before the issuance. A limited exception to these shareholder approval requirements permitted cash sales relating to no more than five percent of the number of shares of common stock or voting power outstanding that met a minimum price test set forth in the rule (“Minimum Price”) if the related party in the transaction has related party status solely because it is a substantial security holder of the company.

Changes to the Manual include:

  • Shareholder approval would not be required for issuances to a Related Parties’ subsidiaries, affiliates or other closely related persons or to any companies or entities in which a Related Party has a substantial interest (except where a Related Party has a five percent or greater interest in the counterparty, as described below).
  • Shareholder approval would be required for cash sales to Related Parties only if the price is less than the Minimum Price.
  • Issuances to a Related Party that meet the Minimum Price would be subject to shareholder approval for any transaction or series of related transactions in which any Related Party has a five percent or greater interest (or such persons collectively have a 10 percent or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction and the present or potential issuance of common stock, or securities convertible into common stock, could result in an increase in either the number of shares of common stock or voting power outstanding of five percent or more before the issuance.

In addition, the NYSE amended to Section 312.03(c) of the Manual, which prior to the amendment required shareholder approval of any transaction relating to 20 percent or more of the company’s outstanding common stock or 20 percent of the voting power outstanding before such issuance, but provides the following exceptions: (1) any public offering for cash; and (2) any bona fide private financing involving a cash sale of the company’s securities that comply with the Minimum Price requirement. A “bona fide private financing” was defined as a sale in which either: (1) 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 (2) 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 amendment replaces the reference to “bona fide private financing” in Section 312.03(c) with “other financing (that is not a public offering for cash) in which the company is selling securities for cash.” This change eliminates the requirement that, for the exception, the issuer sell the securities to multiple purchasers, and that no one such purchaser, or group of related purchasers, acquires more than five percent of the issuer’s common stock or voting power. In addition, because any sale to a broker-dealer under the current bona fide private financing exception would also qualify for an exception to shareholder approval under the proposed amended exception, there is no need to retain a separate provision for sales made to broker-dealers.

The NYSE also amended Section 312.03(c) to provide that, if the securities in a financing (that is not a public offering for cash) in which the company is selling securities for cash 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 in connection with such acquisition, is equal to or exceeds either 20 percent of the number of shares of common stock or 20 percent of the voting power outstanding before the issuance.

Finally, the NYSE amended Section 314.00 of the Manual, which prior to the amendment provided that related party transactions normally include transactions between officers, directors, and principal shareholders and the company and that each related party transaction is to be reviewed and evaluated by an appropriate group within the listed company involved. Prior to the amendment the rule also stated that, while the NYSE does not specify who should review related party transactions, the NYSE believes that the audit committee or another comparable body might be considered as an appropriate forum for this task.

The NYSE amended the first paragraph of Section 314.00 by stating that, for purposes of Section 314.00, the term “related party transaction” refers to transactions required to be disclosed pursuant to Item 404 of Regulation S-K under the Exchange Act (but without applying the transaction value threshold under that provision), and, in the case of foreign private issuers, the term “related party transaction” 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).

The amendments to Section 314.00 also provide that the company’s audit committee or another independent body of the board of directors shall conduct a reasonable prior review and oversight of all related party transactions for potential conflicts of interest and will prohibit such a transaction if it determines it to be inconsistent with the interests of the company and its shareholders.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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