Capital Markets Alert
April.07.2020
The SEC has approved and declared immediately effective an NYSE proposed rule change to waive, through June 30, 2020, and subject to compliance with conditions, application of certain of the shareholder approval requirements in Section 312.03 of the NYSE Listed Company Manual (the “NYSE Manual”). That rule requires listed companies to obtain shareholder approval prior to certain types of equity issuances. The general effect of the waivers, according to the NYSE, is to make these NYSE shareholder approval requirements more comparable to the similar Nasdaq requirements on a temporary basis. The waivers are intended to provide temporary relief to listed companies that may have urgent liquidity needs in the near term as a result of the impact of COVID-19.
For background, NYSE Manual Section 312.03(b) requires shareholder approval of any issuance to “related parties” (directors, officers or major security holders or to an affiliate thereof), if the number of shares of common stock to be issued (or into which the securities may be convertible or exercisable), exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance. There is a limited exception for issuances to substantial shareholders that are related parties only by virtue of their position as substantial shareholders. Under this exception, shareholder approval is not required for cash sales of up to 5% of the outstanding if the sales satisfy a “minimum price” test. “Minimum price” is “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.”
Due to the impact of COVID-19, the NYSE will waive the application of Section 312.03(b), in part, through June 30, 2020. The waiver is limited to transactions that (1) involve the sale of the company’s securities for cash at a price that meets the minimum price test discussed above and (2) have been reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors. The waiver will “allow companies to sell their securities to Related Parties and other persons subject to Section 312.03(b) without complying with the numerical limitations of that rule, as long as the sale is in a cash transaction that meets the Minimum Price requirement and also meets the other requirements noted above.”
The waiver will not apply to certain transactions involving the stock or assets of another company where a related party has a 5% or greater interest (or related parties collectively have a 10% or greater interest), and the potential issuance of common stock (including securities convertible into or exercisable for common stock) could result in an increase in outstanding common shares or voting power of 5% or more (which is consistent with Nasdaq Rule 5635(a)).
NYSE Manual Section 312.03(c) requires shareholder approval for any transaction involving the issuance of 20% or more of the company’s outstanding common stock or 20% of the voting power outstanding before the issuance, other than a public offering for cash (noting the exception for transactions involving a cash sale of the company’s securities that comply with the minimum price requirement and also meet the definition of a “bona fide private financing”[1]).
As with the waiver described above, the NYSE will also waive, through June 30, 2020, for purposes of the bona fide financing exception to the 20% requirement, the 5% limitation for any sale to an individual investor in a bona fide private financing and permit companies to undertake a bona fide private financing during that period in which there is only a single purchaser (again, consistent with the application of Nasdaq Rule 5635(c)). The sale of securities must be for cash at a price that meets the minimum price requirement, resulting in a listed company being exempt from the shareholder approval requirement of Section 312.03(c) for a private placement transaction (regardless of size, the number of participating investors or the amount of securities purchased by any individual investor). If any purchaser is a “related party,” the transaction must be reviewed and approved by the company’s audit committee or a comparable committee composed solely of independent directors.
Note that if either of these waivers applies, shareholder approval is still required if otherwise required under any other applicable rule, including the equity compensation requirements of NYSE Manual Section 303A.08 and the change of control requirements of NYSE Manual Section 312.03(d).
Please contact any member of Orrick's Capital Markets Group for further assistance regarding coronavirus implications for public companies and other legal impacts of the coronavirus on your company.
[1] A “bona fide private financing” is a sale in which either “a registered broker-dealer purchases the securities from the issuer with a view to the private sale of such securities to one or more purchasers; or the issuer sells the securities to multiple purchasers, and no one such purchaser, or group of related purchasers, acquires, or has the right to acquire upon exercise or conversion of the securities, more than five percent of the shares of the issuer’s common stock or more than five percent of the issuer’s voting power before the sale.”