In April 2021, the Securities and Exchange Commission (“SEC”) approved amendments to the New York Stock Exchange Listed Company Manual (“NYSE Rules”) to make permanent some of the relief given to issuers during the COVID-19 pandemic. The amendments were effective immediately and relaxed stockholder approval requirements for bona fide private financings and related party transactions, while adding an extra wrinkle in the approval process for related party transactions.
Easing 20% Rule for bona fide private financings
The NYSE generally requires stockholder approval of non-public issuances of 20% or more of a company’s listed securities (“20% Rule”). This rule contains an exception for “bona fide private financings” at or above the current market price, as calculated in the NYSE Rules. A bona fide private financing is a sale in which either (1) a registered broker-dealer purchases the securities from the listed company with a view to the private sale of such securities to one or more purchasers or (2) the listed company sells the securities to multiple purchasers and (prior to the recent amendments) no single purchaser acquires more than 5% of the company’s listed securities. The recently approved amendments permanently eliminate this 5% limitation, which was waived during the COVID-19 pandemic, as long as the securities are sold for cash and the price is at or above the current market price.
This change, which more closely aligns the NYSE Rules with Nasdaq rules, allows an issuer to sell securities without following the 20% Rule regardless of the size of the transaction, the number of participating investors, or the amount of securities purchased by any single investor, so long as the sale is at or above the current market price.
Easing stockholder approval for related party transactions
The changes to the stockholder approval requirements for related party transactions expand opportunities for issuers to sell securities to related parties without prior stockholder approval while ensuring that stockholders can vote on potentially dilutive transactions. These changes also bring the NYSE stockholder approval requirements into closer alignment with Nasdaq rules.
The NYSE Rules previously required stockholder approval of any issuance to a related party if the number or voting power of the shares to be issued exceeded 1% before the issuance. The recently approved amendments will eliminate the stockholder approval requirement for:
- cash sales to related parties at or above the current market price, and
- issuances to a related party’s subsidiaries or affiliates unless the related party has a 5% or greater interest in the company or assets being acquired with the share issuance.
These transactions will still require approval if the issuance is priced below the market price or is a non-cash sale. In addition, stockholder approval will be required for a transaction resulting in a 5% increase in outstanding shares or voting power if a related party has a 5% interest (or group of related parties has a 10% interest) in the company or assets being acquired with the share issuance.
Approval process for related party transactions
NYSE Rules previously required audit committee approval of related party transactions but did not define that term. The amendments define related party transactions as those required to be disclosed under Item 404 of Regulation S-K, but do not include the $120,000 value threshold used in Item 404. The amendments now require prior review of related party transactions for potential conflicts of interest and require the audit committee to prohibit approval of transactions deemed to be inconsistent with the interests of the company and its stockholders. NYSE listed companies should review their procedures for reviewing and approving related party transactions to ensure their procedures and governing documents are consistent with the updated NYSE Rules.
While these recent amendments are welcome changes to facilitate capital raising, issuers should keep in mind that other approval requirements can be triggered when raising capital that can add time and expense to a transaction if not considered in advance. In addition, issuers would be wise to take this opportunity to ensure their corporate governance guidelines, committee charters, and internal procedures are consistent with the latest NYSE Rules.
Attorney Advertising. Prior results do not guarantee a similar outcome. This publication is provided as a service to clients and friends of Harter Secrest & Emery LLP. It is intended for general information purposes only and should not be considered as legal advice. The contents are neither an exhaustive discussion nor do they purport to cover all developments in the area. The reader should consult with legal counsel to determine how applicable laws relate to specific situations. ©2021 Harter Secrest & Emery LLP