SEC Approves NYSE Proposed Amendment to Shareholder Approval Rule
Client Updates
On December 26, 2023, the Securities and Exchange Commission (the “SEC”) approved a proposed rule change by the New York Stock Exchange (the “NYSE”) that makes it easier for listed companies to sell securities to substantial security holders without obtaining shareholder approval of such sales when such security holder’s ownership is “passive” in nature. The rule changes will allow listed companies to raise capital more efficiently from existing security holders without a mandated shareholder approval requirement. This could allow immediate access to significant capital from existing investors, however, listed companies should still ensure the board of directors’ approval of the related stock issuance meets applicable state-law fiduciary obligations.
Section 312.03(b)(i) of the NYSE’s Listed Company Manual (the “Manual”) currently 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 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 of the number of shares of common stock or one percent of the voting power outstanding before the issuance” (the “Substantial Security Holder Approval Rule”). A substantial security holder is a holder of more than five percent of the number of shares of common stock or five percent of the voting power outstanding of a listed company. However, the Manual provides an exception for the shareholder approval requirement if the issuance is a cash sale for a price that is at least the Minimum Price, which is defined 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.” The effect of these rules was to require shareholder approval for sales at a price below the Minimum Price to substantial security holders and other related parties in excess of one percent of the number of shares of common stock or the voting power outstanding before the issuance.
The NYSE stated that the shareholder approval requirement provides valuable protections against conflicts of interest when the purchaser of securities is a control person of the company who may use their influence in the company to obtain more favorable terms to the detriment of other shareholders. Nevertheless, the current definition of a “substantial security holder” also applies to passive investors who do not participate in the governance or management of the company and who the NYSE noted do not give rise to concerns around potential conflicts of interest. Therefore, the NYSE proposed to limit the applicability of the Substantial Security Holder Approval Rule to “related parties whose interest in the company is not passive in nature.”
The amended rule adds a new definition of “Active Related Party” for the Substantial Security Holder Rule and requires shareholder approval only for sales to an “Active Related Party,” which is defined as “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.” The NYSE will determine the existence of a control group by relying on filings on Schedules 13D or 13G disclosing the existence of a group, as determined under Sections 13(d)(3) or 13(g)(3) of the Securities Exchange Act of 1934, as amended, which controls the listed company.
Additionally, the NYSE is amending Section 312.03(b)(ii) of the Manual to retain the broader definition of a Related Party in the current rule (i.e., “a director, officer or substantial security holder of the company”). This change will have no substantive effect on the application of Section 312.03(b)(ii) of the Manual.
Listed companies often rely on routine capital raises to fund their operations, which can be in the form of sales of equity securities in private placements or registered direct sales priced at a small discount to the prevailing market price. The NYSE observed that existing shareholders are often willing purchasers, and sales to existing shareholders can be executed quickly and at a lower cost to the issuer if shareholder approval of such sales is not required. Listed companies will benefit from the rule changes by being able to raise capital more easily from passive investors.
If you have questions regarding the matters contained in this publication, please contact one of the lawyers listed below or consult your regular Baker Botts contact.
Section 312.03(b)(i) of the NYSE’s Listed Company Manual (the “Manual”) currently 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 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 of the number of shares of common stock or one percent of the voting power outstanding before the issuance” (the “Substantial Security Holder Approval Rule”). A substantial security holder is a holder of more than five percent of the number of shares of common stock or five percent of the voting power outstanding of a listed company. However, the Manual provides an exception for the shareholder approval requirement if the issuance is a cash sale for a price that is at least the Minimum Price, which is defined 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.” The effect of these rules was to require shareholder approval for sales at a price below the Minimum Price to substantial security holders and other related parties in excess of one percent of the number of shares of common stock or the voting power outstanding before the issuance.
The NYSE stated that the shareholder approval requirement provides valuable protections against conflicts of interest when the purchaser of securities is a control person of the company who may use their influence in the company to obtain more favorable terms to the detriment of other shareholders. Nevertheless, the current definition of a “substantial security holder” also applies to passive investors who do not participate in the governance or management of the company and who the NYSE noted do not give rise to concerns around potential conflicts of interest. Therefore, the NYSE proposed to limit the applicability of the Substantial Security Holder Approval Rule to “related parties whose interest in the company is not passive in nature.”
The amended rule adds a new definition of “Active Related Party” for the Substantial Security Holder Rule and requires shareholder approval only for sales to an “Active Related Party,” which is defined as “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.” The NYSE will determine the existence of a control group by relying on filings on Schedules 13D or 13G disclosing the existence of a group, as determined under Sections 13(d)(3) or 13(g)(3) of the Securities Exchange Act of 1934, as amended, which controls the listed company.
Additionally, the NYSE is amending Section 312.03(b)(ii) of the Manual to retain the broader definition of a Related Party in the current rule (i.e., “a director, officer or substantial security holder of the company”). This change will have no substantive effect on the application of Section 312.03(b)(ii) of the Manual.
Listed companies often rely on routine capital raises to fund their operations, which can be in the form of sales of equity securities in private placements or registered direct sales priced at a small discount to the prevailing market price. The NYSE observed that existing shareholders are often willing purchasers, and sales to existing shareholders can be executed quickly and at a lower cost to the issuer if shareholder approval of such sales is not required. Listed companies will benefit from the rule changes by being able to raise capital more easily from passive investors.
If you have questions regarding the matters contained in this publication, please contact one of the lawyers listed below or consult your regular Baker Botts contact.
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