United States: SEC Approves NYSE Amendments To Shareholder Approval Rules

n March 20, 2019, the SEC granted an order approving amendments to the portions of Sections 312.03 and 312.04 of the NYSE Listed Company Manual (Manual) which set the price thresholds that are conditions to certain exceptions from shareholder approval requirements applicable to certain securities issuances.

Section 312.03(b) of the Manual requires NYSE-listed companies to obtain shareholder approval prior to the issuance of common stock, or securities convertible into or exercisable for common stock (Issuance), to specified related parties (including officers, directors, and substantial security holders), if the number of shares of common stock to be issued, or if the number of shares of common stock into which the securities to be issued may be convertible or exercisable, exceeds either one percent of the common stock or one percent of the voting power outstanding before the Issuance. However, shareholder approval was not required if the related party was classified as such solely because it was a substantial security holder, and the Issuance was for cash at a price at least as great as each of the book and market value of the issuer's common stock (Substantial Securityholder Issuance), unless the Issuance exceeded a specified five percent threshold.

Section 312.03(c) of the Manual requires NYSE-listed companies to obtain shareholder approval prior to an Issuance if: (i) the common stock has, or will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the Issuance or; (ii) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20% of the number of shares of common stock outstanding before the Issuance (20% Issuance). However, shareholder approval was not required for a 20% Issuance in a bona fide private financing involving: (a) a sale of common stock, for cash, at a price at least as great as each of the book and market value of the issuer's common stock; or (b) the sale of securities convertible into or exercisable for common stock, for cash, if the conversion or exercise price was at least as great as each of the book and market value of the issuer's common stock.

The rule amendments revise the definition of market value for purposes of Section 312.03 (which is now referred to as the "Minimum Price") to be the lower of: (i) the Official Closing Price immediately preceding the signing of the binding agreement to issue the securities or (ii) the average Official Closing Price for the five trading days immediately preceding the signing of the binding agreement to issue the securities. "Official Closing Price" is defined as the official closing price on the NYSE as reported to the Consolidated Tape immediately preceding the signing of a binding agreement to issue the securities1. The exceptions to the shareholder approval requirements set forth in Manual Sections 312.03(b) and (c) described above will only be available for issuances that are priced at least as great as the Minimum Price. In addition, the requirement that the price paid in a Substantial Securityholder Issuance or a 20% Issuance must not be less than book value has been eliminated, as it was noted that book value is not a meaningful measure of whether a transaction is dilutive or should otherwise require shareholder approval.

These amendments are similar to recent NASDAQ rule changes approved by the SEC.

Footnote

1. Section 303A.08 of the Manual (governing shareholder approval of equity compensation plans) uses the term "fair market value" for purposes of determining whether an issuance of stock would qualify for a specified exception to the shareholder approval requirements contained therein. The NYSE has represented that it has always interpreted fair market value as identical to the Official Closing Price definition described above, and, to avoid confusion, will submit a proposed rule filing to amend Section 303A.08 to codify this interpretation.

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