NYSE Amends Shareholder Approval Requirements In Private Securities Transactions Involving Substantial Shareholders
On December 26, 2023, the SEC approved an NYSE rule change to make it easier for listed companies to raise money from existing substantial shareholders. In particular, the NYSE has amended Section 312.03(b) and 312.04 of the NYSE Listed Company Manual to modify the circumstances under which a listed company must obtain shareholder approval prior to the sale of securities below the Minimum Price to a substantial security holder.
Background
Section 312.03 of the NYSE Listed Company Manual lists the circumstances upon which shareholder approval must be obtained prior to the issuance of securities. Pre-amendment Section 312.03(b)(i) requires shareholder approval prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions, to a director, officer or substantial security holder of the company (each 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 one percent (1%) of the number of shares of common stock or of the voting power outstanding before the issuance. However, shareholder approval will not be required if such a transaction is a cash sale for a price that is at least the Minimum Price.
Although the rule does not define “substantial security holder,” Section 312.04(e) states that the holder of an interest of less than 5% of either outstanding shares or voting power, would not be considered a substantial shareholder.
Even though most of Section 312.03 tracks the shareholder approval requirements in Nasdaq Rule 5635, Nasdaq does not have a provision similar to 312.03(b)(i) for sales to Related Parties. In fact, the NYSE is the only national exchange in the U.S. with this rule. Rather the Nasdaq, and NYSE American, require shareholder approval for private transactions, below the defined Minimum Price, resulting in 20% or more dilution, regardless of whether the purchasers are related parties. The NYSE reasons that the rule protects shareholders as a whole by preventing management and control persons from asserting undue influence when negotiating private security purchases. For more on Nasdaq rule 5635, including the 20% Rule, see HERE and links contained therein.
Section 312.04 provides definitions and further explanations as to the application of Section 312.03. Section 312.04(h) defines “Minimum Price” as a price that is the lower of: (i) the Official Closing Price immediately preceding the 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. “Official Closing Price” is in turn defined as the official closing price on the Exchange as reported to the Consolidated Tape immediately preceding the signing of a binding agreement to issue the securities.
Rule Amendments
Most small cap issuers are significantly dependent on the ability to regularly raise new capital, which often involves private placements at discounts to the market price. Existing shareholders provide a good source for this capital since they are already familiar with the company and its prospects. In that regard, the overarching purpose of the amendment is to improve access to that capital by reducing company burdens associated with obtaining shareholder approval. The NYSE also points out that there is a lesser possibility that a substantial shareholder may exercise influence over the terms of a transaction with the company if they do not have representation on the board or in management, thus satisfying the goals of market integrity and investor protection.
As noted above, Section 312.03(b)(i) requires shareholder approval for certain transactions involving officers, directors and substantial shareholders. The NYSE has amended the rules to narrow those persons that may be considered a “substantial shareholder,” including by adopting a new definition of “Active Related Party” in Section 312.03(b)(i), distinguishing between passive related parties and active related parties. The amendments also add new definitions of “control” and “group” to Section 312.04 to provide clarity as to the meaning of the terms “controlling shareholder” and “control group.”
Amended Section 312.03(b)(i) requires shareholder approval prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions, to a director, officer, controlling shareholder or member of a control group or any other substantial security holder of the company that has an affiliated person who is an officer or director of the company (each an “Active 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 one percent (1%) of the number of shares of common stock or of the voting power outstanding before the issuance. However, shareholder approval will not be required if such a transaction is a cash sale for a price that is at least the Minimum Price.
The NYSE has amended Section 312.04 to define a “group” as determined under Section 13(d)(3) or Section 13(g)(3) of the Exchange Act; and (ii) “control” as defined in Rule 12b-2 of Regulation 12B under the Exchange Act. Rule 12b-2 defines “control” (including the terms “controlling,” “controlled by” and “under common control with”) as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. For purposes of determining a “group” the NYSE will rely on filings on Schedule 13D and 13G. For more on the Exchange Act definition of “control” and affiliation, see HERE.
Section 312.03(b)(ii) provides that shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, where such securities are issued as consideration in a transaction or series of related transactions in which a Related Party has a five percent (5%) or greater interest (or such persons collectively have a ten percent or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction or series of related transactions and the present or potential issuance of common stock, or securities convertible into common stock, could result in an issuance that exceeds either five percent (5%) of the number of shares of common stock or of the voting power outstanding before the issuance. Nasdaq and the NYSE American both have substantially the same rule. The “related party” definition in this Section 312.03(b)(ii) which is not contingent upon a Minimum Price parameter, remains unchanged as does its application.