Capital Markets Alert
The SEC declared, effective immediately as of May 14, 2020, a new NYSE rule proposal which provides a temporary exception through June 30, 2020 from the shareholder approval requirements for specified issuances of 20% or more of the outstanding shares pursuant to Section 312.03 of the NYSE Listed Company Manual (the “NYSE Manual”) and, in certain instances, a limited exception for issuances that could be considered equity compensation pursuant to Section 312.03 and Section 303A.08 of the NYSE Manual. The NYSE stated that “[m]any listed companies are experiencing urgent liquidity needs during this period of crisis due to lost revenues and maturing debt obligations. In these circumstances, listed companies frequently need to access additional capital that may not be available in the public equity or credit markets.” Similar to the relief previously provided by Nasdaq related to relaxing shareholder approval requirements (see our Insight here), the temporary exception is intended to respond to the unprecedented COVID-19 pandemic and to help companies access necessary capital quickly.
Section 312.03(c) of the NYSE Manual 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 if: (i) the common stock has, or will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the issuance of such stock (or of securities convertible into or exercisable for common stock); or (ii) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock. However, shareholder approval will not be required for any such issuance involving any public offering for cash or any private financing (if such private financing is for the cash sale of (1) common stock at a price at least as great as the Minimum Price (as defined below) or (2) securities convertible into or exercisable for common stock if the conversion or exercise price is at least as great as the Minimum Price). The “Minimum Price” means 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.
Section 312.03(b) of the NYSE Manual 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 Related Party (as defined below) in an amount that exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance. A “Related Party” is a director, officer or substantial security holder, their subsidiaries, affiliates or other closely related persons or other entities in which a Related Party has a substantial interest. Note that Section 312.03(b) includes an exemption for “Early Stage Companies” (a company that has not reported revenues greater than $20 million in any two consecutive fiscal years since its incorporation).
Section 303A.08 of the NYSE Manual requires shareholder approval, with certain limited exceptions, prior to the issuance of securities when a stock option plan or other equity compensation arrangement is established (or materially amended), pursuant to which stock may be acquired by officers, directors, employees or consultants. Section 312.03(a) incorporates the requirements of Section 303A.08 into Section 312.03. The NYSE has interpreted Section 303A.08 to apply to certain capital-raising transactions for years and requires shareholder approval for certain sales to officers, directors, employees or consultants when such issuances could be considered a form of equity compensation. Capital-raising transactions where senior management may be required by investors to participate is the example situation provided by the NYSE.
The NYSE has adopted Section 312.03T of the Manual (the “COVID-19 Temporary Exception”) “[i]n light of the difficulties experienced by certain listed companies during the current crisis” and to enable companies to quickly raise capital without shareholder approval. The COVID-19 Temporary Exception is available upon approval by the NYSE of an application demonstrating that (i) the need for the transaction is due to circumstances related to COVID-19 and the proceeds received will not be used to fund any acquisition transaction and (ii) the delay in securing shareholder approval would: (1) have a material adverse impact on the company’s ability to maintain operations under its pre-COVID-19 business plan; (2) result in workforce reductions; (3) adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or (4) seriously jeopardize the financial viability of the company as an enterprise.
A company seeking the COVID-19 Temporary Exception must also show that it undertook a process designed to ensure that the proposed transaction represents the best terms available to the company. The company’s independent, disinterested audit committee (or comparable board committee) also must have expressly approved reliance on the COVID-19 Temporary Exception and determined that the transaction is in the best interest of the company’s shareholders.
Additionally, Section 312.03T(c) of the Manual will provide for an exception from the shareholder approval requirements under Section 312.03(b), Section 312.03(a) and Section 303A.08 for participation in any transaction described in Section 312.03T(b) by any person whose participation would otherwise be subject to shareholder approval under such sections (an “Affiliated Purchaser”) but only if the Affiliated Purchaser’s participation in the transaction was specifically required by unaffiliated investors. The exception provided for by Section 312.03T(c) limits such participation to be less than 5% of the transaction and all Affiliated Purchasers’ participation collectively must be less than 10% of the transaction (to protect against self-dealing). Additionally, any Affiliated Purchaser investing in the transaction must not have participated in negotiating the economic terms of the transaction.
To take advantage of the COVID-19 Temporary Exception, the company must submit a supplemental listing application in accordance with Section 703.01 (part one) of the Manual along with a certification to the NYSE that the transaction complies with all requirements of Section 312.03T(b) (and Section 312.03T(c) if applicable) and specifically describing such compliance. The NYSE must approve all transactions in advance of any issuance of securities in reliance on the COVID-19 Temporary Exception (in contrast to the analogous Nasdaq temporary exception). Approval will be based on a review of the company’s compliance. The NYSE advises companies to commence discussions with the NYSE and provide the required documentation as far in advance of the proposed transaction as is possible due to the detailed review required for approval.
In order to take advantage of the COVID-19 Temporary Exception, Section 312.03T(d) requires the company to make a public announcement of its reliance on the COVID-19 Temporary Exception by filing a Form 8-K (where required by SEC rules) or by issuing a press release as promptly as possible, but no later than two business days before the issuance of the securities. Such disclosure must set forth (i) the terms of the transaction (including the number of shares of common stock that could be issued and the consideration received); (ii) that shareholder approval would ordinarily be required under applicable NYSE rules but for the fact that the company is relying on the COVID-19 Temporary Exception to the shareholder approval rules; and (iii) that the company’s independent, disinterested audit committee (or comparable board committee) expressly approved reliance on the exception and determined that the transaction is in the best interest of shareholders.
To rely on the COVID-19 Temporary Exception, the company must submit the supplemental listing application and certification, obtain the NYSE’s approval and thereafter sign a binding agreement no later than June 30, 2020. However, the company may issue the securities governed by the binding agreement in reliance on the COVID-19 Temporary Exception after June 30, 2020 as long as the issuance occurs no later than 30 calendar days following the date of the binding agreement. If the company does not issue securities within such 30 calendar day window, it may no longer rely on the COVID-19 Temporary Exception.
The NYSE will aggregate any issuances under the COVID-19 Temporary Exception with the subsequent issuance by the company, other than a public offering, at a discount to the Minimum Price if the company executes a binding agreement governing a subsequent issuance of securities within 90 days of a prior issuance that relied on the COVID-19 Temporary Exception. As a result, if following the subsequent issuance the aggregate issuance (including shares issued in reliance on the COVID-19 Temporary Exception) equals or exceeds 20% of the total shares or the voting power outstanding before the initial issuance, then shareholder approval will be required under Section 312.03(c) before the issuance can take place.
The release emphasizes that issuances under the COVID-19 Temporary Exception must comply with all other applicable NYSE rules, including the shareholder approval requirements in Section 312.03(b) and Section 312.03(c) for issuances other than for cash, the change of control provision of Section 312.03(d) and the equity compensation requirements of Section 312.03(a) and Section 303A.08 (subject to the delineated limited exceptions). In addition, proceeds raised from the issuance of securities pursuant to the COVID-19 Temporary Exception may not be used to fund acquisitions. The NYSE also specifies that the COVID-19 Temporary Exception will not override any applicable law or a company’s own governing documents that would otherwise require shareholder approval.
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.