September 28, 2021

Volume XI, Number 271

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September 28, 2021

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September 27, 2021

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SEC Approves Amendments to NYSE Shareholder Approval Rules for Certain Equity Issuances and Requirements for Related Party Transactions

Earlier this month, the Securities and Exchange Commission approved amendments (the Amendments) to New York Stock Exchange (NYSE) rules that require listed companies to obtain shareholder approval of certain private placements and equity issuances to “related parties,” as well as requirements related to transactions between a listed company and certain related parties. In particular, the Amendments, which were initially proposed in December 2020 and subsequently modified, modified Sections 312.03, 312.04 and 314.00 of the NYSE Listed Company Manual. According to NYSE, the Amendments to Sections 312.03 and 312.04 are intended to more closely align shareholder approval requirements applicable to NYSE listed companies with comparable requirements for companies listed on Nasdaq or NYSE American and, in doing so, provide greater flexibility to NYSE-listed companies seeking to raise capital. The flexibility provided by such Amendments tracks, in various respects, the flexibility provided through temporary rules adopted by NYSE in response to the COVID-19 pandemic, which are being terminated by the Amendments. The amendments to Section 314.00 clarify the role of the audit committee in approving related party transactions, and expand the scope of transactions to which related party transaction rules apply.

The chart below provides a summary of the NYSE’s former shareholder approval requirements applicable to certain related parties and 20 percent equity issuances by NYSE-listed companies, as well as the related changes effectuated by the Amendments. The chart also includes a summary of the former approval requirement for related party transactions and the related changes effectuated by the Amendments.

NYSE Rule Prior to the Amendments Effect of the Amendments

Sale of Equity to Related Parties

Prior to the Amendments, Section 312.03(b) of the NYSE Listed Company Manual provided that shareholder approval was required for any issuance by an NYSE-listed company to (1) company insiders, including directors, officers and holders of 5 percent or more of the company’s common stock (Significant Holders); (2) a subsidiary, affiliate or other closely related party of an insider; or (3) any company or entity in which an insider has a substantial direct or indirect interest (collectively, Related Parties), if the shares of common stock to be issued, including upon the conversion or exercise of the securities, would exceed one percent of either the common stock or the voting power, in either case, that was outstanding immediately prior to the issuance (the one percent Test).

However, no shareholder approval was required for an issuance to one or more Significant Holders (but not to directors or officers) involving no more than 5 percent of the issuer’s common stock or voting power prior to the issuance so long as the securities are sold for cash at a price that satisfied the Minimum Price Condition (the five percent Test).

The “Minimum Price Condition” means that the per share sale price (or the conversion price, as applicable) is at least equal to the lesser of (1) the official closing price of the issuer’s stock on the trading day immediately preceding the signing of the binding agreement; and (2) the average closing price of the issuer’s stock for the five trading days immediately preceding the signing of the binding agreement.

Pursuant to the Amendments, an issuance of common stock (or securities convertible into or exercisable for common stock) to a subsidiary, affiliate or other closely related party of an insider that would have otherwise been subject to the shareholder approval requirements of Section 312.03(b) will only be subject to such requirements (i.e., it will only be treated as an issuance to a Related Party) if the insider’s interest in the counterparty is 5 percent or greater.

The Amendments also provide that Section 312.03(b) (i.e., the one percent Test) will not require shareholder approval of cash sales of equity securities to any Related Parties if the Minimum Price Condition is satisfied (although shareholder approval may still be required under other NYSE rules, such as in connection with an acquisition or change of control).

As amended, Section 312.03(b)(ii) requires shareholder approval of any transaction or series of related transactions in which any Related Party has a five percent or greater interest (or all Related Parties collectively have a 10 percent or greater interest) 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 the number of shares of common stock or voting power outstanding of five percent or more of the number of shares outstanding before the issuance.

The Amendments also eliminated certain exemptions from Section 312.03(b) that NYSE determined were no longer relevant in light of the Amendments, including an exemption that had been available for early stage companies.

 20 Percent Rule

Prior to the Amendments, under Section 312.03(c) shareholder approval was required for any issuance by an NYSE-listed company of 20 percent or more of its common stock or voting power, in either case, that was outstanding immediately prior to the issuance, unless the securities were issued for cash in either (1) a public offering; or (2) a “bona fide private financing” that complies with the Minimum Price Condition (the 20 percent Rule).

For purposes of the 20 percent Rule, a securities offering is not considered a “public offering” merely because it is effected pursuant to a registration statement (e.g., in the case of a “registered direct” transaction). Rather, the status of a particular transaction as a public offering will depend on several factors, including the manner in which the offering is marketed.

Under former Section 312.04, a “bona fide private financing” was defined as an issuance in which either (1) a registered broker-dealer purchased securities from the issuer for the purpose of effectuating a private sale of those securities to one or more purchasers (e.g., in a Rule 144A offering); or (2) the issuer sold the securities to multiple purchasers, and no one purchaser or group of related purchasers acquired or had the right to acquire (upon the exercise or conversion of the securities) more than five percent of the issuer’s common stock or voting power outstanding immediately prior to the issuance.

The Amendments replaced the exclusion from the 20 percent rule for a “bona fide private financing” with an exclusion for any “other financing (that is not a public offering for cash) in which the company is selling securities for cash.” As a result, the five percent limit for sales to any one purchaser or group of related purchasers previously required to constitute a bona fide private financing no longer applies. Additionally, if a private placement is effected other than through a broker-dealer acting as the initial purchaser, the offering may constitute an exempt financing under the 20 percent Rule, even if there is only a single investor rather than multiple investors.

The Amendments also modified 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.

 

Related Party Transactions

Prior to the Amendments, Section 314.00 of the NYSE Listed Company Manual provided that related party transactions included transactions between officers, directors, and principal shareholders and the company, and that each related party transaction was to be reviewed and evaluated by an appropriate group within the listed company involved. Section 314.00 also stated that, while the NYSE did not specify who should review related party transactions, the NYSE believed that the audit committee or another comparable body might be considered as an appropriate forum for this task.

As amended by the Amendments, Section 314.00 expands the scope of transactions covered by the that provision by referring to transactions required to be disclosed under Item 404 of Regulation S-K under the Securities Exchange Act of 1934 (but without applying the transaction value threshold under that provision) and, in the case of foreign private issuers, the term “related party transaction” means transactions required to be disclosed pursuant to Form 20-F, Item 7.B (but without applying the materiality threshold of that provision). As a result, Section 314.00 now covers a broader range of “related parties” than had been the case previously.

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

The Amendments also rescinded Section 312.03T, which temporarily waived certain requirements of Section 312.03 in response to the COVID-19 pandemic.

SEC’s Approval

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume XI, Number 107
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About this Author

Jonathan D. Weiner, securities, transactional lawyer, Katten Muchin Law firm
Associate

Jonathan Weiner concentrates his practice in securities, transactional and general corporate matters. He has represented investors and issuers in public and private financings (including private investments in public equity), tender offers, recapitalizations and going private transactions, as well as targets and acquirers in mergers and acquisitions. He also advises clients on a day-to-day basis regarding corporate governance, securities law compliance, disclosure and other general corporate matters. Jonathan has counseled a wide array of businesses, ranging from...

212-940-6349
Mark Reyes Securities Lawyer Katten Muchin law firm Chicago office
Partner

Mark J. Reyes concentrates his practice in corporate and securities matters, including representing issuers and investors in public offerings and private placements of equity and debt securities and advising clients in complex corporate transactions such as mergers, acquisitions, private investments in public equity (PIPEs), private equity investments and joint ventures. He also counsels public companies on securities law compliance, disclosures and corporate governance matters.

Shown below is a...

312-902-5612
Mark D. Wood, corporate securities lawyer Katten Muchin Chicago Law firm
Partner

Mark D. Wood is head of Katten's Securities practice and concentrates in corporate and securities law. Mark represents public companies, issuers and investment banks in initial public offerings (IPOs) and other public offerings, private investment in public equity (PIPE) transactions, debt securities and other securities matters.

Mark also represents clients in complex corporate transactions, including tender offers, mergers, acquisitions, dispositions, going-private transactions, private equity investments, joint ventures and...

312-902-5493
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