On April 6th, the Securities and Exchange Commission approved the New York Stock Exchange’s request to provide temporary waivers of the shareholder approval requirements applicable to certain kinds of equity issuances under the NYSE’s Listed Company Manual as part of the Exchange’s ongoing efforts to respond to the challenging fund-raising environment for listed companies during the COVID-19 crisis.
Based in part on the NYSE’s observations during the financial crisis of 2008-09, the waivers are intended to ease restrictions on listed companies who will have “urgent liquidity needs in the coming months due to lost revenues and maturing debt obligations” and “who will need to access additional capital that may not be available in the public equity or credit markets.”
In particular, the NYSE’s accommodations temporarily modify the shareholder approval requirements for transactions under Section 312.03 of the NYSE Listed Company Manual through June 30, 2020, including:
- Issuances to related parties (including directors, officers or substantial security holders of the company) if the number of shares of common stock to be issued exceeds 1% of the number of shares of common stock (or voting power) before the issuance; and
- Transactions relating to 20% or more of the company’s outstanding common stock (or voting power) before such issuance.
Issuance to a Related Party
Section 312.03(b) of the NYSE Listed Company 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 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.
Previously, the only exemption to this rule permitted cash sales to substantial security holders and their affiliates that meet the “minimum price” requirements as set forth in Section 312.04.7 of the NYSE Listed Company Manual (i.e., the lower of (i) the official closing price immediately preceding 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) where the sale relates to no more than 5% of the company’s outstanding common stock.
The NYSE’s waiver allows 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 (and the exception thereto), as long as the sale is in a cash transaction that meets minimum price requirements and also meets the other requirements specified in the rule.
In making this change, the NYSE observed that existing large investors are often the only willing providers of necessary capital to companies facing financial challenges and expressed its belief that the modification is appropriate to increase companies’ flexibility to access this source of capital for a limited period of time.
The NYSE’s modified rules implement the partial waiver of the application of Section 312.03(b) through and including 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 applicable minimum price requirements. In addition, to rely on the waiver, any such transaction must be reviewed and approved by the company’s audit committee or a comparable committee of independent directors.
The waiver is not applicable to a sale of securities by a listed company to any person in a transaction, or series of transactions, whose proceeds will be used to fund an acquisition of stock or assets of another company where such person has a direct or indirect interest in the company or assets to be acquired or in the consideration to be paid for such acquisition.
As provided by Section 312.03(a), any transaction benefitting from the waiver will still be subject to shareholder approval if required under any other applicable rule, including the equity compensation requirements of Section 303A.08 and the change of control requirements of Section 312.03(d).
The temporary waiver concerning Section 312.03(a) is intended to mirror the application of NASDAQ Marketplace Rule 5635(a) for sales of a listed company’s securities to related parties.
Transactions of 20% or More
Section 312.03(c) of the NYSE Listed Company Manual 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 specified “minimum price” requirements and meet the definition of a “bona fide private financing,” as set forth in Section 312.04(g) of the NYSE Listed Company Manual, which refers to a sale in which either:
- a registered broker-dealer purchases the securities from the issuer with a view to the private sale of such securities to one or more purchasers; or
- the issuer sells the securities to multiple purchasers, and no one such purchaser acquires, or has the right to acquire upon exercise or conversion of the securities, more than five percent of the shares of the issuer’s common stock or voting power before the sale.”
In view of the current circumstances, the NYSE is waiving, 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, to permit companies to undertake a bona fide private financing. This change has the effect of permitting companies to undertake a bona fide private placement financing without complying with the previously applicable shareholder approval requirements regardless of the offering 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. Pursuant to the waiver, any such transaction must be reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors.
Like the NYSE’s waivers pursuant to Section 312.03(b) discussed above, if a company is raising capital through a transaction, or series of transaction, via the waiver to Section 312.03(c), they cannot use such capital to fund an acquisition. Furthermore, any transaction benefitting from the waiver under Section 312.03(c) will still be subject to shareholder approval if required under any other applicable rule, including the equity compensation requirements of Section 303A.08 and the change of control requirements of Section 312.03(d) of the NYSE Listed Company Manual.
The NYSE’s modification to Section 312.03(c) is intended to be consistent with the application of NASDAQ Marketplace Rule 5635(c) with respect to private placements relating to 20% or more of a company’s common stock or voting power outstanding before such transaction.
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