On April 6, 2020, the Securities and Exchange Commission (SEC) approved and declared immediately effective a proposed rule change filed by the New York Stock Exchange LLC (NYSE) temporarily waiving through June 30, 2020, certain shareholder approval requirements required by Section 312.03 of the NYSE Listed Company Manual (the "NYSE Manual"), expediting the equity capital raising process for listed companies and facilitating liquidity from individual investors or small groups of investors, including existing shareholders and related parties. No temporary waiver is available for the NYSE shareholder approval requirements for issuances of securities in connection with NYSE Manual Section 303A.08 (equity compensation plans) or NYSE Manual Section 312.03(d) (change of control transactions).

The NYSE noted that, in similar economic conditions after the 2008-2009 financial crisis, many companies sought to employ large private placement transactions to relieve liquidity troubles, but that those companies were limited by requirements that certain kinds of equity issuances be approved by shareholders. The temporary waiver provides relief from Sections 312.03(b) and 312.03(c) of the NYSE Manual subject to the satisfaction of certain criteria, effectively aligning those sections of the NYSE Manual with Nasdaq's corresponding shareholder approval policies.

NYSE Manual Section 312.03(b) – Issuances to a Related Party

Current Rule

Effect of Temporary Waiver

In general, Section 312.03(b) of the NYSE Manual requires shareholder approval of any issuance to a director, officer or substantial security holder of the company (each a "Related Party") 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) exceeds either one percent of the number of shares of common stock or one percent of the voting power outstanding before the issuance.

Under the Section 312.03(b) cash sale exception rule, shareholder approval is not required if:

  • The Related Party only has Related Party status due to their substantial shareholdings.
  • The sale relates to no more than five percent of the company's outstanding common stock.
  • The sale satisfies the " Minimum Price" requirement.

Through June 30, 2020, the temporary waiver significantly expands a listed company's ability to sell securities to Related Parties and their affiliates without seeking shareholder approval if the transaction:

  • Involves the sale of the issuer's securities for cash.
  • Meets the Minimum Price requirement.
  • Is reviewed and approved by the issuer's audit committee or a comparable committee comprised solely of independent directors.
  • Is a transaction that would not require shareholder approval under Nasdaq Marketplace Rule 5635(a).

The Minimum Price requirement dictates that the sale price of securities must be the lower of either "(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."

Nasdaq Marketplace Rule 5635(a) requires shareholder approval for any transaction involving stock or assets of another company if the issuance of common stock (or securities convertible into or exercisable for common stock) could increase outstanding common shares or voting power by five percent or more; and the issuer's Related Parties hold a direct or indirect interest in the company or assets to be acquired or in the consideration to be paid of either:

  • Five percent or greater individually.
  • Ten percent or greater collectively.

NYSE Manual Section 312.03(c) – Transactions of 20 Percent or More

Current Rule

Effect of Temporary Waiver

In general, for transactions other than public offerings for cash, Section 312.03(c) of the NYSE Manual requires shareholder approval of any transaction relating to 20 percent or more of the company's outstanding common stock or of the voting power outstanding before such issuance.

Under the Section 312.03(c) bona fide private financing exception, shareholder approval is not required for cash sales of the company's securities that:

  • Comply with the Minimum Price requirement.
  • Meet the " bona fide private financing" definition.
  • A bona fide private financing is defined as a transaction involving:
  • A registered broker-dealer with a view to the private sale of such securities to one or more purchasers.
  • A group of purchasers, of which no one purchaser (or group of related purchasers) acquires (or may acquire by 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.

Through June 30, 2020, the NYSE will waive the bona fide private financing exception's five percent limitation on sales to an individual investor.

Accordingly, while the temporary waiver is in effect, private placement transactions of NYSE-listed companies for cash are exempt from the shareholder approval requirement of Section 312.03(c), regardless of transaction size or the amount of securities purchased by any single investor, provided that the transaction meets two basic criteria:

  • The securities sell at a price that satisfies the Minimum Price requirement.
  • If any person benefitting from the waiver is a Related Party or other person subject to Section 312.03(b), the transaction must be reviewed and approved by the company's audit committee or a comparable committee comprised solely of independent directors.

The resulting temporary NYSE rule aligns with the application of Nasdaq Marketplace Rule 5635(c) with respect to private placements relating to 20 percent or more of a company's common stock or voting power outstanding before the transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.