In April 2021, the SEC approved an NYSE proposal to relax the requirements for shareholder approval of related-party equity issuances and bring them into closer alignment with the comparable Nasdaq rules. (See this PubCo post.) Among the provisions amended was Section 314, which requires that a "related-party transaction" be reviewed by the board. However, the amendments created something of a hiccup for many companies. Since the adoption of amendments, the NYSE has learned that the new rules had the "unintended effect of disrupting the normal course transactions of listed companies," and "created a significant compliance burden." As a result, the NYSE proposed to rectify the problem by again amending Section 314. The SEC has just approved that amendment.

Section 314 of the NYSE Manual provides that a "company's audit committee or another independent body of the board of directors shall conduct a reasonable prior review and oversight of all related party transactions for potential conflicts of interest and will prohibit such a transaction if it determines it to be inconsistent with the interests of the company and its shareholders." The April amendments to Section 314 provided a new definition of the term "related-party transaction": for purposes of Section 314.00, as amended, a related-party transaction was defined as a transaction required to be disclosed pursuant to Item 404 of Reg S-K (but without applying the transaction value threshold under that provision). For foreign private issuers, the term "related-party transactions" referred to transactions required to be disclosed pursuant to Form 20-F, Item 7.B (but without regard to the materiality threshold of that provision).

It's the italicized language above that created the hiccup. As a result of the amendment, there was no materiality or transaction-value floor, making every related-party transaction-no matter how immaterial-subject to an audit committee review requirement. Subsequent to adoption of the amendment, the NYSE learned that the exclusion of the applicable transaction value and materiality thresholds was "inconsistent with the historical practice of many listed companies, and has had unintended consequences." Historically, the practice of many companies was to require review of only those related-party transactions that exceeded the transaction value disclosure threshold of $120,000 under Item 404 of Reg S-K and the materiality threshold of Item 7B of Form 20-F. That approach was also reflected in many related-party transaction policies, as well as in D&O questionnaires. The amendments also created a compliance burden for many companies that were now required to apply two separate standards for related-party transactions-one for disclosure and another for review and approval of transactions. Not to mention that the NYSE standard required review by the audit committee of small transactions that were generally considered immaterial-not a particularly effective use of the time of independent directors.

Accordingly, the NYSE proposed to amend Section 314.00 to provide that the review and approval requirement of that rule will be applicable only to transactions that are required to be disclosed after taking into account the transaction value and materiality thresholds set forth in Item 404 of Reg S-K or Item 7.B of Form 20-F, as applicable. The SEC has just approved the amendments for immediate effectiveness. So, if you were efficient enough to have changed your related-party transaction policy, you now need to go back and revise it again to reflect this latest amendment.

The approval release notes that the changes do not affect the requirements of Section 303A of the Manual with respect to director independence, including the bright line independence tests set forth in Section 303A.02(b).

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