New York Stock Exchange Temporarily Relaxes Certain Shareholder Approval Requirements for Equity Issuances
In response to the liquidity needs of US public companies arising from the COVID-19 pandemic, the New York Stock Exchange has temporarily waived its shareholder approval requirements to make it easier for NYSE-listed companies to raise capital through private placements without requiring advance shareholder approval. In particular, in certain circumstances (1) the NYSE will allow private placements of more than 20% of the company’s common stock without stockholder approval even if made to just one purchaser and whether or not a single purchaser acquires more than 5% of the outstanding common stock and (2) the NYSE will allow sales to related parties without stockholder approval even if the acquiror purchases more than 1% of the outstanding shares. In both cases the sale must be for cash at least at the market price.
For listed companies that cannot raise necessary capital in volatile public equity and credit markets, the NYSE believes these changes will make it easier to raise equity capital privately without the delay and risk inherent in obtaining shareholder approval. The NYSE observed that in connection with the financial crisis of 2008-09 many companies that sought capital by selling significant amounts of equity in private placement transactions to a single investor or small group of investors, in many cases to existing major shareholders, were often limited by the NYSE’s shareholder approval requirements with respect to the size and structure of the transactions they were able to undertake.
These temporary waivers became effective automatically and will continue to be effective through June 30, 2020.
Sales of 20% Or More
The NYSE currently requires shareholder approval of any equity issuance relating to 20% or more of the company’s outstanding shares of common stock or 20% or more of the voting power outstanding before the issuance, other than a public offering for cash. There is an exception for private placements made at the “Minimum Price” (as defined below), so long as either (1) a broker-dealer purchases the securities with a view to the private sale to one or more purchasers or (2) the issuer sells the securities to multiple purchasers and no one purchaser or group of purchasers acquires more than 5% of the shares of the issuer’s common stock or more than 5% of the outstanding voting power. The “Minimum Price” is the lower of the official closing price before the signing of the sale agreement or the average closing price for the five trading days preceding the signing of the sale agreement.
Under the NYSE waiver, the issuer can now sell more than 20% of its equity in a private placement without obtaining shareholder approval (1) to a single purchaser (or multiple purchasers) and (2) whether or not one purchaser or group of purchasers acquires more than 5% of the outstanding shares or voting power.
Sales to Related Parties
The NYSE currently requires shareholder approval for an equity issuance to a director, officer or 5% shareholder or an affiliate thereof if the number of shares of common stock to be issued, or the number of shares of common stock into which the securities are 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 an exception for cash sales of up to 5% of the outstanding shares to 5% holders at a price equal to or above the Minimum Price.
Under the NYSE waiver, a company can now sell equity to a related party without obtaining shareholder approval whether or not the amount of securities issued exceeds the 1% or 5% thresholds.
The general conditions to the waivers include (1) the sale must be made by June 30, 2020, (2) the sale must be for cash at or above the Minimum Price, (3) if the purchaser is a related party, the transaction must be reviewed and approved by the company’s audit committee or another comparable committee of solely independent directors, (4) if the purchaser is a related party, the proceeds of the equity issuance cannot be used to acquire another company in which the related party has a 5% or greater direct or indirect interest and (5) shareholder approval is still required if the transaction results in a change of control or otherwise involves equity compensation which requires shareholder approval.
Comparison to Nasdaq
The NYSE observed that the waiver will make the NYSE shareholder approval requirement equivalent to the Nasdaq requirements with respect to sales to related parties and private placements of 20% or more of the company’s equity securities. The limitations in the NYSE rules which the NYSE is waiving do not exist in Nasdaq’s shareholder approval rules.
NYSE Proposal Regarding Waiver of Continued Listing Standards
In addition to the changes to the shareholder approval requirements, which became effective automatically, the NYSE has also proposed waivers of certain of its continued listing requirements. In particular, the NYSE has proposed waiving the delisting procedures triggered if either (1) the average closing price of the company’s common stock has fallen below $1.00 over a consecutive 30-trading day period or (2) a company has both stockholders equity of less than $50 million and an average global market capitalization over a 30 consecutive trading-day period of less than $50 million.
By comparison, in connection with the 2008-09 financial crisis, the NYSE (1) temporarily waived the continued listing requirement that the average closing price of a listed company’s common stock must be at least $1.00 over a consecutive 30 trading day period, and (2) temporarily reduced the continued listing requirement that companies maintain an average global market capitalization over 30 consecutive trading days from $25 million to $15 million. Similarly, in connection with the 2008-09 financial crisis, Nasdaq (1) temporarily waived its requirement that the closing bid price of common stock must be at least $1 over a period of at least 30 consecutive business days and (2) temporarily waived its continued listing requirement related to a minimum market value of publicly-traded shares.