The NYSE amended its shareholder approval rules to make it easier for listed companies to sell securities to passive existing shareholders without obtaining shareholder approval. The SEC approved the change on an accelerated basis.
Section 312.03(b)(i) of the NYSE’s Listed Company Manual provides that shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions, to a director, officer or substantial security holder of the company 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, exceeds either one percent of the number of shares of common stock or one percent of the voting power outstanding before the issuance.
Section 312.04(e) of the Manual provides that an interest consisting of less than either five percent of the number of shares of common stock or five percent of the voting power outstanding of a company or entity is not to be considered a substantial interest or cause the holder of such an interest to be regarded as a substantial security holder.
The Manual provides an exception to the shareholder approval requirement if such transaction is a cash sale for a price that is at least the Minimum Price. Section 312.04(h) defines the Minimum Price 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. Section 312.04(i) defines the “Official Closing Price” of an issuer’s common stock as the official closing price on the NYSE as reported to the Consolidated Tape immediately preceding the signing of a binding agreement to issue the securities.
The NYSE believes there are significant benefits from the protection provided to a listed company’s investors by the shareholder approval requirements in Section 312.03(b)(i) when a purchaser of the securities in a transaction is an officer or director or other control person of the company. In such cases, the potential exists for a related party purchaser to use their influence within the company to obtain superior terms from the company to the detriment of the company’s shareholders as a whole. However, the current definition of substantial security holder used in the rule also applies to holders of a company’s common stock who do not participate in the governance or management of the company through board or management representation. The NYSE believes that transactions with these kinds of shareholders who do not participate in the governance or management of the company generally do not give rise to the potential conflicts of interest in the determination of transaction terms that exist where the purchaser has a role in the listed company’s board or management. The NYSE believes that these shareholders that do not participate actively in the company in this way generally do not have the same ability to participate in and influence decision making as is the case with a related party that directly participates in the governance or management of the company.
In light of the foregoing, the NYSE amended Section 312.03(b)(i) to limit its application to related parties whose interest in the company is not passive in nature. As amended, Section 312.03(b)(i) would be limited in application to sales to a director, officer, controlling shareholder or member of a control group or any other substantial security holder of the company that has an affiliated person who is an officer or director of the company (each an “Active Related Party”). For purposes of determining the existence of a group, the NYSE will rely on the filings on Schedule 13D or Schedule 13G disclosing the existence of a group as determined under Section 13(d)(3) or Section 13(g)(3) of the NYSE Act, along with any additional follow-up inquiry that is needed. The NYSE amended Section 312.04 to include new definitions for purposes of Section 312.03, providing that: (i) a “group” means a group as determined under Section 13(d)(3) or Section 13(g)(3) of the NYSE Act; and (ii) “control” has the same meaning as defined in Rule 12b-2 of Regulation 12B under the NYSE Act. The NYSE intends to revise its internal procedures in reviewing proposed transactions to the extent necessary to obtain the necessary information to make determinations with respect to whether shareholders participating in transactions are Active Related Parties.
In addition to the new definition of Active Related Party in the amended version of Section 312.03(b)(i), the NYSE proposes for purposes of Section 312.03(b)(ii) to retain the broader definition of a Related Party included in the current rule (i.e., “a director, officer or substantial security holder of the company”). Consequently, this proposal would not have any substantive effect on the application of Section 312.03(b)(ii) and a listed company selling securities to a Related Party under the circumstances set forth in the rule as amended remains subject to the shareholder approval requirements in that provision.
Under the proposal the NYSE will continue to require shareholder approval for below market sales (i.e., below the Minimum Price) over one percent to Active Related Parties. However, as a consequence of the proposed amendment, below market sales over one percent to substantial securityholders who are not Active Related Parties will be permitted without shareholder approval under 312.03(b)(i), but will continue to be subject to all the other applicable shareholder approval requirements under 312.03.
