On April 2, 2021, the Securities and Exchange Commission (“SEC”) approved changes initially submitted by the New York Stock Exchange (“NYSE”) in December 2020 that amend certain of its shareholder approval rules. The NYSE proposed the changes because the prior requirements made it unnecessarily difficult for listed companies to raise necessary capital in private placement transactions that were in the interests of the company and its shareholders. The changes to the NYSE’s rules are consistent with the temporary relief measures adopted by NYSE last year and approved by the SEC in response to the COVID-19 pandemic, and also bring the NYSE’s shareholder approval requirements into closer alignment with those of Nasdaq and NYSE American.
The amendments modify the class of persons with respect to which an issuance of common stock would require a listed company to seek shareholder approval. Specifically, Rule 312.03(b), as amended, will require prior shareholder approval for certain issuances of common stock to directors, officers, and substantial security holders of the company (“Related Parties”). The amended rule would no longer require such approval for issuances to such 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 5% or greater interest in the counterparty).
In addition, Rule 312.03(b), as amended, will require shareholder approval of cash sales to Related Parties only if the price is less than a specified minimum price. Cash sales to a Related Party relating to more than 1% of the issuer’s common stock or voting power prior to the issuance for prices below the specified minimum price will continue to be subject to shareholder approval. However, cash sales to Related Parties that meet the specified minimum price threshold would be subject to the same limitations as cash sales to all other investors.
With respect to the NYSE’s requirement to obtain shareholder approval in connection with an issuance of 20% or more of an issuer’s securities, the amendments replace the reference to “bona fide private financing” in Rule 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 effectively eliminates the requirement that the issuer sell securities to multiple purchasers, and that no one such purchaser or group acquires more than 5% of the issuer’s common stock. However, shareholder approval will be required if securities are issued in connection with an acquisition and the issuance is equal to or exceeds either 20% of the pre-transaction shares outstanding or 20% of the voting power outstanding before the issuance.
Finally, Rule 314 is amended to require that a listed company’s audit committee conduct reasonable prior review and oversight of all related party transactions for potential conflicts of interest.
The SEC’s release granted the approval on an accelerated basis allowing the rule changes to become effective prior to the 30th day following their publication in the Federal Register. A link to the SEC’s approval is available here.