As a result of the COVID-19 pandemic, the NYSE has proposed temporary relief:
- under certain shareholder approval rules to facilitate raising of capital; and
- under market capitalization and minimum stock price rules to permit continued listing.
Relief From Shareholder Approval
As a result of COVID-19, the NYSE believes that it is likely that many listed companies will have urgent liquidity needs in the coming months due to lost revenues and maturing debt obligations. In those circumstances, listed companies will need to access additional capital that may not be available in the public equity or credit markets. When similar conditions existed after the financial crisis of 2008-09, the NYSE observed that many companies sought capital by selling significant amounts of equity in private placement transactions to a single investor or small group of investors, in many cases limited to or including existing major shareholders in the company. The NYSE noted that companies raising capital in that manner at that time were often limited by the NYSE’s shareholder approval requirements with respect to the size and structure of the transactions they were able to undertake.
Section 312.03(b) of the Listed Company Manual requires, among other things, shareholder approval of any issuance to a director, officer or substantial security holder of the company, which are referred to as a related party, or to an affiliate of a related party, 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 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance. A limited exception permits cash sales to related parties and their affiliates that meet a market price test set forth in the rule, which is referred to as the Minimum Price, and that relate to no more than 5% of the company’s outstanding common stock.
Given the extraordinary nature of the current circumstances, the NYSE proposes a partial waiver of the application of Section 312.03(b) through June 30, 2020, with the waiver specifically limited to transactions that involve the sale of the company’s securities for cash at a price that meets the Minimum Price requirement as set forth in Section 312.04, subject to certain limitations. In addition, to qualify for this waiver, a transaction must be reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors.
The effect of the proposed waiver discussed above is to allow companies to sell their securities to related parties and other persons subject to Section 312.03(b) without complying with the numerical limitations of that rule, as long as the sale is in a cash transaction that meets the Minimum Price requirement and also meets certain other requirements.
Section 312.03(c) of the Listed Company Manual also requires shareholder approval of any transaction relating to 20% or more of the company’s outstanding common stock or 20% of the voting power outstanding before such issuance other than a public offering for cash. Section 312.03(c) includes an exception for transactions involving a cash sale of the company’s securities that comply with the Minimum Price requirement and also meet the definition of a “bona fide private financing” as set forth in the rule. A bona fide private financing does not permit the sale of 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 to one purchaser or group of related purchasers.
Many private placement transactions under the current market conditions may also exceed the 20% threshold established by Section 312.03(c). Therefore, given the extraordinary nature of the current circumstances, the NYSE also proposes to waive through and including June 30, 2020, for purposes of the bona fide financing exception to the 20% requirement, the 5% limitation for any sale to an individual investor in a bona fide private financing pursuant to Section 312.03(c) and to permit companies to undertake a bona fide private financing during that period in which there is only a single purchaser. The change of control requirements of Section 312.03(d) are still applicable.
The effect of the foregoing proposed waiver is a listed company would be exempt from the shareholder approval requirement of Section 312.03(c) in relation to a private placement transaction regardless of its size or the number of participating investors or the amount of securities purchased by any single investor, provided that the transaction is a sale of the company’s securities for cash at a price that meets the Minimum Price requirement and complies with the change of control requirements of Section 312.03(d). If any purchaser in a transaction benefiting from this waiver is a related party or other person subject to Section 312.03(b), such transaction must be reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors.
Market Capitalization and Stock Price
The NYSE noted the U.S. and global equities markets have experienced unprecedented market wide declines as a result of the ongoing spread of COVID-19. As a consequence, since the commencement of the current market turbulence in the last week of February 2020, the NYSE has experienced an unusually high number (as compared to historical levels) of listed companies:
- that may soon be designated as below compliance with continued listing standards, as set forth in Section 802.01B of the Listed Company Manual and be subject to a maximum 18-month cure period, as a consequence of having both stockholders’ equity of less than $50 million and an average global market capitalization over a consecutive 30 trading-day period of less than $50 million, which is referred to as the $50 Million Standard; or
- that have stock prices that have fallen below the NYSE’s $1.00 price requirement for capital and common stock set forth in Section 802.01C of the Listed Company Manual (i.e., the average closing price of their stock has fallen below $1.00 over a consecutive 30 trading day period), which is referred to as the Dollar Price Standard, and that are consequently subject to a six month compliance plan period or that may imminently fall below compliance with that listing standard.
In response to the conditions described above, the NYSE proposes to suspend, through and including June 30, 2020, the application of the $50 Million Standard and Dollar Price Standard. The NYSE notes that the waiver it proposes in relation to the Dollar Price Standard is identical to a waiver it implemented at the time of the financial crisis.
The NYSE’s proposed suspension of the continued listing standards is in addition to the ongoing temporary suspension of the $15 million market capitalization standard in Section 802.01B through and including June 30, 2020, for which the NYSE previously submitted an earlier rule filing.