Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval to a Proposed Rule Change, as Modified by Amendment No. 1, To Amend the NYSE Listed Company Manual To Revise the Shareholder Approval Requirements in Sections 312.03 and 312.04 and the Requirements for Related Party Transactions in Section 314.00, 18362-18368 [2021-07198]
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Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices
received will be posted without change.
Persons submitting comments are
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comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–EMERALD–2021–11 and
should be submitted on or before April
29, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.56
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–07194 Filed 4–7–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91471; File No. SR–NYSE–
2020–85]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing of Amendment No. 1 and Order
Granting Accelerated Approval to a
Proposed Rule Change, as Modified by
Amendment No. 1, To Amend the
NYSE Listed Company Manual To
Revise the Shareholder Approval
Requirements in Sections 312.03 and
312.04 and the Requirements for
Related Party Transactions in Section
314.00
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April 2, 2021.
On December 16, 2020, New York
Stock Exchange LLC (‘‘NYSE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend the NYSE Listed
Company Manual (‘‘Manual’’) to revise
the shareholder approval requirements
in Sections 312.03 and 312.04 and the
requirements for related party
transactions in Section 314.00. The
Commission published notice of the
proposed rule change in the Federal
Register on January 4, 2021.3 On
February 12, 2021, pursuant to Section
19(b)(2) of the Exchange Act,4 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
56 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 90803
(December 28, 2020), 86 FR 0148.
4 15 U.S.C. 78s(b)(2).
1 15
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determine whether to disapprove the
proposed rule change.5 The Commission
has received no comment letters on the
proposal. On March 30, 2021, the
Exchange filed Amendment No. 1 to the
proposed rule change.6 The Commission
is publishing notice of the filing of
Amendment No. 1 to solicit comment
from interested persons and is
approving the proposed rule change, as
modified by Amendment No. 1, on an
accelerated basis.
I. Description of the Proposal, as
Modified by Amendment No. 1
The Exchange is proposing to amend
its shareholder approval rules for
issuances of securities to certain related
parties, as set forth in Section 312.03(b)
of the Manual. Section 312.03(b) of the
Manual currently requires shareholder
approval prior to certain issuances of
common stock, or securities convertible
into or exercisable for common stock, to:
5 See Securities Exchange Act Release No. 91126,
86 FR 10362 (February 19, 2021).
6 In Amendment No. 1, the Exchange: (1) Revised
the proposed rule text in Section 312.03(b)(3) of the
Manual to state that shareholder approval would be
required for issuances of stock to Related Parties
that exceed one percent of the common stock or the
voting power outstanding before the issuance, other
than cash sales for a price that is at least the
Minimum Price (defined herein); (2) revised the
proposed rule text in Section 312.03(c)(2) of the
Manual to state that shareholder approval is
required for securities issued in connection with an
acquisition of the stock or assets of another
company if the issuance of securities, when alone
or combined with any other present or potential
issuance of common stock or securities convertible
into common stock in connection with such
acquisition, is equal to or exceeds either 20 percent
of the number of shares of common stock or 20
percent of the voting power before the issuance; (3)
revised the proposed rule text in Section 314.00 of
the Manual to state that a company’s audit
committee or another independent body of the
board of directors shall conduct a reasonable prior
review of related party transactions, and will
prohibit a transaction if it determines it to be
inconsistent with the interests of the company and
its shareholders; (4) revised the proposed rule text
in Section 314.00 of the Manual to state that, for
the purposes of Section 314.00, the term ‘‘related
party transactions’’ will not apply the transaction
value threshold under Item 404 of Regulation S–K
or the materiality threshold under Form 20–F, Item
7.B, as applicable; (5) clarified the discussion
regarding the applicability of Section 312.03(b); (6)
clarified that, under Nasdaq and NYSE American
rules, stock sales may be subject to shareholder
approval under equity compensation rules; (7)
deleted a description of certain requirements of
Section 312.03(b) that the Exchange has proposed
to delete because they relate to the early stage
company exemption that would no longer be
applicable; (8) clarified that the Exchange believes
that Section 312.03(c) would cause any significantly
economically dilutive transaction to be subject to
shareholder approval; (9) clarified that the
amendments to Section 312.03(c) would remove a
limitation that participation in a financing under
the exception is available only to multiple
purchasers; and (10) made other clarifying,
conforming, and technical changes. Amendment
No. 1 is available at https://www.sec.gov/rules/sro/
nyse/nysearchive/nysearchive2020.htm.
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(1) A director, officer, or substantial
security holder 7 of the company (each
a ‘‘related party’’ for purposes of current
Section 312.03(b)); (2) a subsidiary,
affiliate, or other closely related person
of a related party; or (3) any company
or entity in which a related party has a
substantial direct or indirect interest.
Such shareholder approval is subject to
an exemption for early stage companies
set forth in Section 312.03(b) of the
Manual.
Under Section 312.03(b) of the
Manual, prior shareholder approval is
currently required 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. A limited exception to
these shareholder approval
requirements permits cash sales relating
to no more than five percent of the
number of shares of common stock or
voting power outstanding that meet a
minimum price test set forth in the rule
(‘‘Minimum Price’’) 8 if the related party
in the transaction has related party
status solely because it is a substantial
security holder of the company.
The Exchange is proposing several
changes to Section 312.03(b) of the
Manual. The Exchange states that these
changes would bring its shareholder
approval requirements into closer
alignment with those of Nasdaq and
NYSE American.9 First, the Exchange
proposes to modify the class of persons
with respect to which an issuance of
common stock would require a listed
7 For purposes of Section 312.03, Section
312.04(e) provides that: ‘‘[a]n interest consisting of
less than either five percent of the number of shares
of common stock or five percent of the voting power
outstanding of a company or entity shall not be
considered a substantial interest or cause the holder
of such an interest to be regarded as a substantial
security holder.’’
8 Section 312.04(i) defines the ‘‘Minimum Price’’
as follows: ‘‘Minimum Price’’ means 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. As proposed,
Section 312.04(j) defines ‘‘Official Closing Price’’ as
follows: ‘‘Official Closing Price’’ of the issuer’s
common stock means 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. For example, if
the transaction is signed after the close of the
regular session at 4:00 p.m. Eastern Standard Time
on a Tuesday, then Tuesday’s official closing price
is used. If the transaction is signed at any time
between the close of the regular session on Monday
and the close of the regular session on Tuesday,
then Monday’s official closing price is used. The
Exchange is proposing to correct a typographical
error in the definition of ‘‘Official Closing Price.’’
9 See Amendment No. 1, supra note 6, at 4.
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company to seek shareholder approval.
Specifically, Section 312.03(b) as
amended would require prior
shareholder approval for certain
issuances of common stock to directors,
officers, and substantial security holders
of the company (each a ‘‘Related Party’’)
and would no longer require such
approval for issuances to such Related
Parties’ subsidiaries, affiliates or other
closely related persons or to any
companies or entities in which a
Related Party has a substantial interest
(except where a Related Party has a five
percent or greater interest in the
counterparty, as described below).
In addition, the Exchange has
proposed to amend Section 312.03(b) to
require shareholder approval of cash
sales to Related Parties only if the price
is less than the Minimum Price.
Issuances to Related Parties in non-cash
transactions relating to more than one
percent of the issuer’s common stock or
voting power outstanding before the
issuance would continue to be subject to
shareholder approval.10 Cash sales to a
Related Party relating to more than one
percent of the issuer’s common stock or
voting power prior to the issuance for
prices below the Minimum Price would
continue to be subject to shareholder
approval under Section 312.03(b). Cash
sales to Related Parties that meet the
Minimum Price requirement would be
subject to the same limitations as cash
sales to all other investors under the
proposed amended Section 312.03(c), as
described below. In addition, certain
issuances to a Related Party that meet
the Minimum Price could also be
subject to shareholder approval under
proposed Section 312.03(b)(ii). The
Exchange proposes Section 312.03(b)(ii)
to require shareholder approval of any
transaction or series of related
transactions in which any Related Party
has a five percent or greater interest (or
such persons collectively have a 10
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 and the present
or potential issuance of common stock,
or securities convertible into common
stock, could result in an increase in
either the number of shares of common
stock or voting power outstanding of
five percent or more before the issuance.
Finally, the Exchange proposes to
delete from Section 312.03(b) two
provisions that it states will no longer
be relevant as they relate to transactions
that benefit from exemptions from
shareholder approval under current
Section 312.03(b), but would be exempt
from shareholder approval under the
10 See
id. at 4.
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general application of Section 312.03(b)
as proposed to be amended. These
provisions relate to: (1) Cash sales
meeting the Minimum Price test and
relating to no more than five percent of
the number of shares of common stock
or five percent of the voting power
outstanding before the issuance to a
Related Party where the Related Party
involved in the transaction is classified
as such solely because such person is a
substantial security holder; and (2) the
early stage company exemption, to
which the Exchange proposes to remove
the reference from Section 312.04. The
Exchange states that, for the same
reason, the Exchange proposes to delete
from Section 312.03(b) a sentence that
provides that the early stage company
exemption is not applicable to a sale of
securities by the listed company to any
person subject to the provisions of
Section 312.03(b) in a transaction, or
series of transactions, whose proceeds
will be used to fund an acquisition of
stock or assets of another company
where such person has a direct or
indirect interest in the company or
assets to be acquired or in the
consideration to be paid for such
acquisition.
The Exchange states that Section
312.03(b) would continue to require that
any sale of stock to an employee,
director, or service provider is also
subject to the equity compensation rules
in Section 303A.08 of the Manual and
that shareholder approval would be
required if any of the subparagraphs of
Section 312.03 require such approval,
notwithstanding that the transaction
does not require approval under Section
312.03(b) or one or more of the other
subparagraphs.
In addition, the Exchange is
proposing changes to Section 312.03(c)
of the Manual, which currently requires
shareholder approval of any transaction
relating to 20 percent or more of the
company’s outstanding common stock
or 20 percent of the voting power
outstanding before such issuance, but
provides the following exceptions: (1)
Any public offering for cash; and (2) any
bona fide private financing involving a
cash sale of the company’s securities
that comply with the Minimum Price
requirement. As set forth in Section
312.04(g), a ‘‘bona fide private
financing’’ refers to a sale in which
either: (1) 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
(2) 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
PO 00000
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18363
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.
The Exchange proposes to replace the
reference to ‘‘bona fide private
financing’’ in Section 312.03(c) with
‘‘other financing (that is not a public
offering for cash) in which the company
is selling securities for cash.’’ 11 This
change would eliminate the requirement
that, for the exception, the issuer sell
the securities to multiple purchasers,
and that no one such purchaser, or
group of related purchasers, acquires
more than five percent of the issuer’s
common stock or voting power.12 In
addition, the Exchange states that,
because any sale to a broker-dealer
under the current bona fide private
financing exception would also qualify
for an exception to shareholder approval
under the proposed amended exception,
there is no need to retain a separate
provision for sales made to brokerdealers.13 The Exchange also proposes
to amend Section 312.03(c) to provide
that, if the securities in a financing (that
is not a public offering for cash) in
which the company is selling securities
for cash are issued in connection with
an acquisition of the stock or assets of
another company, shareholder approval
will be required if the issuance of the
securities alone or when combined with
any other present or potential issuance
of common stock in connection with
such acquisition, is equal to or exceeds
either 20 percent of the number of
shares of common stock or 20 percent of
the voting power outstanding before the
issuance. Additionally, as the ‘‘bona
fide private financing’’ term will no
longer be used in Section 312.03(c), the
Exchange proposes to delete the
definition of that term in Section
312.04(g). The Exchange states that
these changes would bring its
shareholder requirements into closer
alignment with those of Nasdaq and
NYSE American.14
The Exchange is also proposing to
delete Section 312.03T, which was
adopted to provide temporary relief
from certain of the requirements of
Section 312.03 during the COVID–19
pandemic, and which was applicable by
11 As described above, Section 312.03(c) of the
Manual also provides an exception from the
shareholder approval requirements of Section
312.03(c) for any public offering for cash.
12 NYSE stated in its proposal that while the
proposed amended exemption would not limit the
size of any transaction that meets the Minimum
Price test, any such transaction giving rise to a
change of control will be subject to shareholder
approval under Section 312.03(d). See Amendment
No. 1, supra note 6, at n. 9.
13 See id. at 9.
14 See Amendment No. 1, supra note 6, at 4.
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its terms through June 30, 2020. As that
date has passed, the Exchange has
proposed to delete Section 312.03T in
its entirety, as it is no longer applicable.
Finally, the Exchange is proposing to
amend Section 314.00 of the Manual,
which currently provides that related
party transactions normally include
transactions between officers, directors,
and principal shareholders and the
company and that each related party
transaction is to be reviewed and
evaluated by an appropriate group
within the listed company involved.
The current rule further states that,
while the Exchange does not specify
who should review related party
transactions, the Exchange believes that
the audit committee or another
comparable body might be considered
as an appropriate forum for this task.
The Exchange proposes to amend the
first paragraph of Section 314.00 15 by
stating that, for purposes of Section
314.00, the term ‘‘related party
transaction’’ refers to transactions
required to be disclosed pursuant to
Item 404 of Regulation S–K under the
Exchange Act (but without applying the
transaction value threshold under that
provision), and, in the case of foreign
private issuers, the term ‘‘related party
transaction’’ refers to transactions
required to be disclosed pursuant to
Form 20–F, Item 7.B (but without regard
to the materiality threshold of that
provision).16
In addition, the Exchange proposes to
amend Section 314 to state that the
company’s audit committee 17 or
another independent body of the board
of directors shall conduct a reasonable
prior review and oversight of all related
party transactions for potential conflicts
of interest and will prohibit such a
transaction if it determines it to be
inconsistent with the interests of the
company and its shareholders.18
15 The second paragraph of Section 314.00 will be
retained in its entirety. It reads as follows: ‘‘The
Exchange will continue to review proxy statements
and other SEC filings disclosing related party
transactions and where such situations continue
year after year, the Exchange will remind the listed
company of its obligation, on a continuing basis, to
evaluate each related party transaction and
determine whether or not it should be permitted to
continue.’’
16 See Item 404 of Regulation S–K (Transactions
with related persons, promoters and certain control
persons) [17 CFR 229.404] and Item 7.B of Form 20–
F (Related party transactions) [referenced in 17 CFR
249.220f].
17 Section 303A.07 of the Manual requires that all
members of an audit committee must satisfy
independence requirements set out in Section
303A.02 of the Manual and, in the absence of an
applicable exemption, Rule 10A–3(b)(1) of the
Exchange Act.
18 The Exchange proposes to delete from Section
314.00 a sentence that reads as follows: ‘‘Following
the review, the company should determine whether
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II. Discussion and Commission
Findings
The Commission has carefully
reviewed the proposed rule change, as
modified by Amendment No. 1, and
finds that it is consistent with the
requirements of the Exchange Act and
the rules and regulations thereunder
applicable to a national securities
exchange.19 In particular, the
Commission finds that the proposed
rule change, as modified by Amendment
No 1, is consistent with Section 6(b)(5)
of the Exchange Act,20 which requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest, and are not designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.
The development and enforcement of
meaningful corporate governance listing
standards for a national securities
exchange is of substantial importance to
financial markets and the investing
public, especially given investor
expectations regarding the nature of
companies that have achieved an
exchange listing for their securities. The
corporate governance standards
embodied in the listing standards of
national securities exchanges, in
particular, play an important role in
assuring that exchange-listed companies
observe good governance practices
including safeguarding the interests of
shareholders with respect to certain
potentially dilutive transactions.21
or not a particular relationship serves the best
interests of the company and its shareholders and
whether the relationship should be continued or
eliminated.’’ The Exchange states that this sentence
is no longer necessary; the proposed amended rule
requires the audit committee or other independent
body of the board to prohibit any related party
transaction it reviews if it determines it to be
inconsistent with the interests of the company and
its shareholders. See Amendment No. 1, supra note
6, at n. 11.
19 15 U.S.C. 78f. In approving this proposed rule
change, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
20 15 U.S.C. 78f(b)(4) and (5).
21 See, e.g., Securities Exchange Act Release No.
84287 (September 26, 2018), 83 FR 49599 (October
2, 2018) (NASDAQ–2018–008) (approving a Nasdaq
proposal to change to the definition of market value
for purposes of the shareholder approval rule and
eliminate the requirement for shareholder approval
of issuances at less than book value but greater than
market value); Securities Exchange Act Release No.
76814 (December 31, 2015), 81 FR 0820 (January 7,
2016) (NYSE–2015–02) (approving amendments to
the Manual to exempt early stage companies from
requirements to obtain shareholder approval in
certain circumstances) (‘‘2015 Approval Order’’).
See also Securities Exchange Act Release No. 48108
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As discussed above, the Exchange has
proposed to limit the shareholder
approval requirements of Section
312.03(b) to a Related Party that is a
director, officer, or substantial security
holder,22 and no longer require
shareholder approval under this
provision for issuances to subsidiaries,
affiliates, or other closely-related
persons of the Related Party or any
company or entity in which a Related
Party has a substantial interest except
where the Related Party has a five
percent or greater interest in the
company or assets to be acquired or in
the consideration to be paid and the
issuance falls within the scope of
proposed Section 312.03(b)(ii). Section
312.03(b) would also no longer require
shareholder approval for cash sales to
Related Parties at or above the
Minimum Price.23 Under proposed
Section 312.03(b)(ii), shareholder
approval would be required for an
issuance of common stock or 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
any Related Party has a five percent or
greater interest (or such persons
collectively have a 10 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 and the present or potential
issuance of common stock, or securities
convertible into common stock, could
result in an increase in outstanding
common shares of five percent or more,
or where otherwise required under the
(June 30, 2003), 68 FR 39995 (July 3, 2003)
(approving equity compensation shareholder
approval rules of both the NYSE and the National
Association of Securities Dealers, Inc. n/k/a
NASDAQ); and Securities Exchange Act Release
No. 58375 (August 18, 2008), 73 FR 49498 (August
21, 2008) (approving registration of BATS
Exchange, Inc. noting that qualitative listing
requirements including shareholder approval rules
are designed to ensure that companies trading on
a national securities exchange will adequately
protect the interest of public shareholders).
22 See supra note 7 (defining ‘‘substantial security
holder’’).
23 Specifically, Section 312.03(b) would no longer
require shareholder approval of cash sales at or
above Minimum Price where the number of shares
of common stock into which the securities may be
convertible or exercisable, exceeds: (i) One percent
of the number of shares of common stock or one
percent of the voting power outstanding before the
issuance; or (ii) in the case of a cash sale to a
Related Party that has that status solely because
such person is a substantial security holder, five
percent of the number of shares of common stock
or five percent of the voting power outstanding
before the issuance. The Exchange would continue
to require shareholder approval for all non-cash
sales to Related Parties that exceed one percent of
the number of shares of common stock or one
percent of the voting power outstanding before the
issuance.
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Exchange’s rules.24 The Exchange states
that it believes that current
requirements in Section 312.03(b) can
make it unnecessarily difficult for listed
companies to raise necessary capital in
private placement transactions that are
in the interests of the company and its
shareholders.25
The Exchange states that the proposed
changes would bring its shareholder
approval requirements into closer
alignment with other exchanges, namely
Nasdaq and NYSE American.26 The
Exchange notes that Nasdaq and NYSE
American rules contain substantively
identical requirements to those the
Exchange is proposing for transactions
in which a Related Party has an interest
in the company or assets to be acquired
or the consideration to be paid in the
transaction.27 The Exchange also states
that, unlike NYSE, Nasdaq and NYSE
American rules do not have a separate
shareholder approval requirement for
cash sales to a Related Party that do not
meet the Minimum Price requirement
and that relate to more than one percent
of the issuer’s common stock or voting
power, although such sales may also be
subject to shareholder approval
requirements under the exchanges’
equity compensation rules.28 In
addition, Nasdaq and NYSE American
rules do not include shareholder
approval requirements specifically for
issuances to subsidiaries, affiliates, or
closely related persons of Related
Parties or to companies or entities in
24 The Exchange temporarily waived certain
requirements under Section 312.03 to provide listed
companies with greater flexibility to raise capital
during the COVID–19 crisis from April 6, 2020
through March 31, 2021. Particularly, pursuant to
the waiver, the Exchange allowed companies to sell
their securities for cash to related parties and other
persons subject to Section 312.03(b) under certain
conditions without complying with the numerical
limitations of that rule, as long as the sale in the
cash transaction met the Minimum Price
requirements, and other applicable requirements of
the Exchange’s rules. See Securities Exchange Act
Release No. 88572 (April 6, 2020), 85 FR 20323
(April 10, 2020) (SR–NYSE–2020–30) (waiving
certain requirements of Section 312.03 through June
30, 2020). See also Securities Exchange Act Release
No. 89219 (July 2, 2020), 85 FR 41640 (July 10,
2020) (SR–NYSE–2020–58) (extending the waiver
through September 30, 2020). See also Securities
Exchange Act Release No. 90020 (September 28,
2020), 85 FR 62357 (October 2, 2020) (SR–NYSE–
2020–79) (extending the waiver through December
31, 2020). See also Securities Exchange Act Release
No. 2712 (January 7, 2021), 86 FR 2712 (January 13,
2021) (SR–NYSE–2020–108) (extending the waiver
through March 31, 2021) (‘‘Waiver’’). The Exchange
also temporarily waived certain requirements for
meeting the bona fide financing exception under
Section 312.03(c). See infra note 44.
25 See Amendment No. 1, supra note 6, at 4.
26 See id. See also Nasdaq Marketplace Rule 5635
and NYSE American Company Guide Sections 712
and 713.
27 See Amendment No. 1, supra note 6, at 8. See
proposed Section 312.03(b)(ii).
28 See Amendment No. 1, supra note 6, at 6.
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which a Related Party has a substantial
interest unless the Related Party has a
five percent or greater interest in the
company or assets to be acquired or
consideration to be paid in the
transaction.29 Accordingly, the
Exchange states that it believes that its
proposal to limit the Related Party
requirements to directors, officers, and
substantial security holders would
harmonize its rules with Nasdaq and
NYSE American requirements.30
The Commission believes that the
proposed amendments to Section
312.03(b) to change the circumstances
under which shareholder approval is
required for issuances to Related Parties,
and where shareholder approval is
required for issuances based on certain
relationships with a Related Party, are
consistent with Section 6(b)(5) of the
Exchange Act. Although the
circumstances of when shareholder
approval is required under Section
312.03(b) of the Manual will be
modified by the proposal, there will
continue to be other protections for
shareholders. The Exchange’s rules
provide that, notwithstanding that the
transaction does not require approval
under Section 312.03(b), shareholder
approval is required if any of the
subparagraphs of Section 312.03 require
such approval.31 As described above,
regardless of the Minimum Price, the
Exchange is proposing to require
shareholder approval of any transaction
or series of related transactions in which
any Related Party has a five percent or
greater interest (or such persons
collectively have a 10 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 and the present or potential
issuance of common stock, or securities
convertible into common stock, could
result in an increase in outstanding
common shares of five percent or
more.32 This provision therefore would
require shareholder approval under the
conditions described above in
circumstances where the transaction is
priced at or above the Minimum Price
as well as below the Minimum Price.33
29 See
Nasdaq Marketplace Rule 5635 and NYSE
American Company Guide Sections 712 and 713.
30 See Amendment No. 1, supra note 6, at 6.
31 See proposed Section 312.03(b)(iii). See also
Section 312.04(a).
32 See proposed Section 312.03(b)(ii). The
Exchange notes that this limitation is substantively
identical to a limitation placed specifically on
issuances to related parties in the Nasdaq and NYSE
American rules. See Amendment No. 1, supra note
6, at 7
33 Although NYSE is deleting its specific
requirement for shareholder approval issuances to
a subsidiary, affiliate, or other closely-related
person of a Related Party, and any company or
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Section 312.03(c) would also continue
to require shareholder approval for any
non-cash issuances of 20 percent or
more of the issuer’s common stock or
voting power and any financing (that is
not a public offering for cash) involving
cash sales relating to 20 percent or more
of the issuer’s common stock or voting
power for less than the Minimum
Price.34 Under the proposal, Section
312.03(c) will also require shareholder
approval of all cash sales in connection
with an acquisition of the stock or assets
of another company relating to 20
percent of the issuer’s common stock or
voting power even if the issuance meets
the Minimum Price.35 The Exchange
also states that Section 312.03(c) applies
to any transaction or series of related
transactions, which provides
shareholders with further protection by
ensuring that a company cannot avoid
the shareholder approval requirement
by separating an overall transaction into
smaller separate transactions that would
not individually require shareholder
approval. In addition, any sale that gives
rise to a change of control will be
subject to shareholder approval under
Section 312.03(d), a sale of stock to an
employee, director, or service provider
would continue to be subject to the
equity compensation shareholder
approval rules in Section 303A.08 of the
Manual, and shareholder approval will
be required if a vote is required under
any other applicable provision of the
Exchange’s rules. As to cash sales of
more than one percent of common stock
or voting power to directors, officers,
and substantial security holders below
Minimum Price, Section 312.03(b) will
continue to require shareholder
approval for such issuances to these
Related Parties.36 Section 312.03(b) will
also continue to require shareholder
approval for non-cash issuances of more
than one percent of the number of
shares of common stock or the voting
power outstanding before the issuance
to such Related Parties.37
Furthermore, Section 314.00 of the
Manual, concerning review of related
party transactions, as proposed to be
entity in which a Related Party has a substantial
direct or indirect interest, shareholder approval for
issuances to such entities could still be required if
they meet the requirements of this new provision.
34 See infra note 36 and accompanying text
(discussing when shareholder approval is required
for cash sales to Related Parties for below Minimum
Price).
35 See proposed Section 312.03(c). In determining
whether the issuance is equal to or exceeds 20
percent, the rule provides that the issuance is
combined with any other present or potential
issuance of common stock or securities convertible
into common stock in connection with the
acquisition.
36 See Section 312.03(b)(i).
37 See supra note 10 and accompanying text.
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amended, states that a company’s audit
committee or another independent body
of the board of directors shall conduct
a reasonable prior review and oversight
of all related party transactions required
to be reviewed 38 for potential conflicts
of interest and will prohibit a related
party transaction if it determines it to be
inconsistent with the interests of the
company and its shareholders.39 The
Commission has long acknowledged the
important role an independent board
committee has in protecting
shareholders from potential conflicts of
interest.40 The Commission believes
that prior independent committee
review and oversight of certain related
party transactions for conflicts of
interest, with the requirement to
prohibit transactions that are
determined to be inconsistent with the
interests of the company and its
shareholders, is an additional safeguard
to protect shareholder interests.
Additionally, the Exchange has
proposed to expand the types of related
parties whose transactions will be
subject to review under Section 314.00
of the Manual, as discussed in more
detail below. This should help to ensure
that related party transactions that can
present conflicts of interest are within
the scope of the Exchange’s rule and
will be reviewed by the audit committee
or another independent body of the
board.41
The Commission believes that the
continued requirements for shareholder
approval described above, including,
among others, the new provision in
Section 312.02(b)(ii), and the changes to
the review of related party transactions
in Section 314.00 of the Manual
including, among others, expanding the
scope of related parties whose
transactions are covered by the rule,42
on balance, should help to ensure
continued shareholder protections. The
Commission also notes that the changes
to Section 312.03(b) of the Manual
described above are consistent with the
rules of two other national securities
exchanges, Nasdaq and NYSE
American.43
38 See infra note 49 and accompanying text
(describing proposed revisions to the related party
transactions that must be reviewed under Section
314.00).
39 See supra note 16.
40 See 2015 Approval Order, supra note 21, 81 FR
at n. 88.
41 As discussed above, under Section 314.00 of
the Manual, issuers have an obligation on a
continuing basis to evaluate each related party
transaction and determine whether or not it should
be permitted to continue. See supra note 15.
42 See supra notes 15–18 and accompanying text.
See also infra note 49 and accompanying text.
43 See Nasdaq Marketplace Rule 5635 and NYSE
American Company Guide Sections 712 and 713.
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The Commission believes that the
proposed amendments to Section
312.03(c) are consistent with Section
6(b)(5) of the Exchange Act. The
proposed amendments to Section
312.03(c) do not change the rule as it
relates to shareholder approval for
issuances of 20 percent or more of the
number of shares of the voting power or
common stock outstanding before the
issuance in non-cash transactions or to
cash transactions for a price below the
Minimum Price. The amendments
would remove the requirements, under
the bona fide private placement
exception to Section 312.03(c), that cash
sales at a price at least as great as
Minimum Price must be to multiple
purchasers and that a single purchaser
may not acquire, or have the right to
acquire more than five percent of the
shares of the issuer’s common stock or
voting power.44 The Exchange states
that it believes that current Section
312.03(c) of the Manual can make it
unnecessarily difficult for listed
companies to raise necessary capital in
private placement transactions that are
in the interests of the company and its
shareholders,45 and that the proposed
requirements would allow companies
additional flexibility. The Exchange
states that it believes that this change is
consistent with the protection of
investors because the Minimum Price
requirement provides protection against
economic dilution, while the separately
applicable requirements of Section
312.03(d) provide that shareholders will
have a vote on any transaction that
would result in a change of control. The
proposal also adds a new condition to
the financing exception to the
shareholder vote requirements under
Section 312.03(c) by requiring
shareholder approval if the securities
being issued are in connection with an
acquisition of the stock or assets of
another company and the issuance
either alone or in combination with any
other present or potential issuance of
common stock or securities convertible
into common stock is equal to or
exceeds 20 percent of the common stock
or voting power outstanding before the
44 The Exchange had temporarily waived these
requirements of Section 312.03(c) due to the
COVID–19 crisis under certain conditions. See
Waiver, supra note 24 (providing that a listed
company would be exempt from the shareholder
approval requirement of Section 312.03(c) in
relation to a private placement transaction
regardless of its size or the number of participating
investors or the amount of securities purchased by
any single investor, provided that the transaction is
a sale of the company’s securities for cash at a price
that meets the Minimum Price requirement). The
waiver did not apply to any sales of a listed
company’s securities where the use of the proceeds
was to fund an acquisition. See id.
45 See Amendment No. 1, supra note 6 at 4.
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issuance. Under the current bona fide
private financing exception under the
Exchange’s existing rules, there was no
such requirement. The new requirement
will ensure that if a financing, other
than a public offering for cash,
involving a 20 percent issuance is for an
acquisition, even if at the Minimum
Price, there will be a shareholder vote
on the matter. This new requirement
can help to ensure that shareholders
will get to vote on potentially dilutive
transactions, whether voting dilution or
otherwise, that may occur due to the
acquisition.
The Exchange further states that the
proposed amendments would make the
Exchange’s rules for cash sales of
securities that meet the Minimum Price
test substantively identical to those of
Nasdaq and NYSE American.46 The
Commission is cognizant of the fact that
the exchanges operate in a highly
competitive environment, including
with respect to the listing of issuers. In
addition, shareholder approval will still
be required if any issuance under the
new financing provision results in a
change of control or if a vote is required
under any other applicable provisions,
such as the equity compensation rules
or the new Related Party provisions of
Section 312.03(b)(ii).47 The proposal
will allow listed companies more
flexibility to raise capital at market
related prices without shareholder
approval under Section 312.03(c) while
still preserving protections for
shareholders through the other
shareholder approval requirements as
well as promoting fair competition
among exchanges given that NASDAQ
and NYSE American have substantially
identical provisions.
Additionally, the proposed
amendments to Section 314.00 are
consistent with investor protection
pursuant to Section 6(b)(5) of the
Exchange Act. By defining the term
‘‘related party transaction’’ by reference
to the Commission’s disclosure rules, as
discussed below, the amendment would
provide greater clarity and transparency
to when the review of a related party
transaction would be required. The
related party transactions required to be
reviewed also would be expanded when
compared to the current rule
requirement which states ‘‘related party
transactions normally include
transactions between officers, directors
and principal shareholders and the
46 See
Amendment No. 1, supra note 6, at 9.
Section 312.04(a) (providing that. for the
purpose of Section 312.03, shareholder approval is
required if any of the subparagraphs of Section
312.03 require such approval, notwithstanding the
fact that the transaction does not require approval
under one or more of the other subparagraphs).
47 See
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company.’’ 48 Under the revised
provisions, related party transactions
refer to transactions required to be
disclosed pursuant to Item 404 of
Regulation S–K (but without applying
the transaction value threshold of that
provision) or for a foreign private issuer
transactions required to be disclosed
pursuant to Form 20–F, Item 7.B (but
without regard to the materiality
threshold of that provision) and these
provisions include a broader group of
persons than that listed in the current
Exchange rule.49 By proposing to
require that transactions under the rule
must be subject to prior review by either
the audit committee or another body of
independent directors, and that such
body shall prohibit such a transaction if
it determines it to be inconsistent with
the interests of the company and its
shareholders, the Exchange is adding
more clarity to the rule’s requirements.
By removing the ambiguous language in
the current rule that allowed a listed
company flexibility in the kind of
committee that it could choose to
review related party transactions, as the
Exchange stated in its proposal, this
change will prevent a listed issuer from
giving the role of reviewing transactions
to any group that is not entirely made
up of independent directors.50
Finally, it is consistent with the
Exchange Act for the Exchange to
remove Rule 312.03T, which is now
obsolete, from the Exchange’s rule text
in order to provide greater transparency
to the Exchange’s rules and to avoid
confusion.
III. Solicitation of Comments on
Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment No. 1 to the proposed rule
48 See
current Section 314.00 of the Manual.
other disclosures, Item 404 of
Regulation S–K generally requires a description of
any transaction in which the issuer was or is to be
a participant that meets certain transaction value
thresholds and in which any related party
(including, for example, directors, executive
officers, beneficial owners of more than five percent
of any class of the issuer’s voting securities, and
their immediate family members) had or will have
a direct or indirect material interest. Item 7.B of
Form 20–F generally requires disclosure of
transactions and loans between a foreign private
issuer and certain categories of related parties
(including, for example, directors, senior
management, individuals with significant voting
influence over the issuer, close family members of
those categories of persons, and enterprises under
common control). Required disclosure under Item
7.B includes the nature and extent of any
transactions that are material to the company or the
related party or that are unusual in their nature or
conditions.
50 See Amendment No. 1, supra note 6, at 12.
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49 Among
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change is consistent with the Exchange
Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSE–2020–85 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSE–2020–85. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSE–2020–85, and
should be submitted on or before April
29, 2021.
IV. Accelerated Approval of the
Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 1, prior to
the thirtieth day after the date of
publication of notice of the filing of
Amendment No. 1 in the Federal
Register. The Commission notes that
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18367
Amendment No. 1 clarifies the proposed
rule change. Among other things,
Amendment No. 1 amends the proposal
to state or to clarify in the rule text: (1)
That shareholder approval would be
required for issuances of stock to
Related Parties that exceed one percent
of the common stock or the voting
power outstanding before the issuance,
except that shareholder approval will
not be required if such transaction is a
cash sale for a price that is at least the
Minimum Price; (2) that shareholder
approval is required for securities
issued in connection with an
acquisition of the stock or assets of
another company if the issuance of
securities, alone or when combined
with any other present or potential
issuance of common stock or securities
convertible into common stock in
connection with such acquisition, is
equal to or exceeds either 20 percent of
the number of shares of common stock
or 20 percent of the voting power before
the issuance; (3) that a company’s audit
committee or another independent body
of the board of directors shall conduct
a reasonable prior review of related
party transactions, and will prohibit a
transaction if it determines it to be
inconsistent with the interests of the
company and its shareholders; and (4)
that, for the purposes of Section 314.00,
the term ‘‘related party transactions’’
will not apply the transaction value
threshold under Item 404 of Regulation
S–K or the materiality threshold under
Form 20–F, Item 7.B, as applicable.51
The Exchange also made clarifying,
conforming, and technical changes in
the filing of the proposed rule change.52
The Commission believes that the
changes in Amendment No. 1 provide
greater clarity to the proposal and
should help to avoid any confusion as
to the scope or application of the rule
changes being adopted herein.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Exchange Act,53 to approve the
proposed rule change, as modified by
Amendment No. 1, on an accelerated
basis.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,54
that the proposed rule change (SR–
NYSE–2020–85), as modified by
Amendment No. 1, be, and it hereby is,
approved on an accelerated basis.
51 See
supra note 6.
id.
53 15 U.S.C. 78s(b)(2).
54 15 U.S.C. 78s(b)(2).
52 See
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Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.55
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–07198 Filed 4–7–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91466; File No. SR–
NYSEAMER–2021–16]
Self-Regulatory Organizations; NYSE
American LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Rule 985NY
April 2, 2021.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on March 29,
2021, NYSE American LLC (‘‘NYSE
American’’ or the ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 985NY (Qualified Contingent Cross
Trade) to clarify the permissible trading
differentials for such orders. The
proposed rule change is available on the
Exchange’s website at www.nyse.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
55 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this rule change is to
amend Rule 985NY(Qualified
Contingent Cross Trade) to clarify the
permissible trading differentials for
such orders.
Rule 900.3NY(y) provides that a
Qualified Contingent Cross or QCC
Order must be comprised of an
originating order to buy or sell at least
1,000 contracts that is identified as
being part of a qualified contingent
trade, coupled with a contra-side order
or orders to buy or sell an equal number
of contracts.4 As Qualified Contingent
Crosses, QCC Orders are automatically
executed upon entry provided that the
execution (i) is not at the same price as
a Customer Order in the Consolidated
Book and (ii) is at or between the
NBBO.5 In addition, QCC Orders may
only be entered in the regular trading
increments applicable to the options
class under Rule 960NY (Trading
Differentials).6 Rule 960NY subsection
(a) sets forth the minimum quoting
increments for all options traded on the
Exchange and subsection (b) sets forth
the minimum trading increments of one
cent ($0.01) for all series of option
contracts traded on the Exchange.7
The Exchange proposes to modify
Rule 985NY(2) to add reference to
paragraph (b) of Rule 960NY in the text
of the rule, which would make clear that
QCCs may be entered in minimum
4 A ‘‘qualified contingent trade’’ is a transaction
consisting of two or more component orders,
executed as agent or principal, where: (i) At least
one component must be an NMS Stock; (ii) all the
components must be effected with a product price
contingency that either has been agreed to by all the
respective counterparties or arranged for by a
broker-dealer as principal or agent; (iii) the
execution of one component must be contingent
upon the execution of all other components at or
near the same time; (iv) the specific relationship
between the component orders (e.g., the spread
between the prices of the component orders) must
be determined by the time the contingent order is
placed; (v) the component orders must bear a
derivative relationship to one another, represent
different classes of shares of the same issuer, or
involve the securities of participants in mergers or
with intentions to merge that have been announced
or cancelled; and (vi) the transaction must be fully
hedged (without regard to any prior existing
position) as a result of other components of the
contingent trade. See Commentary .01 to Rule
900.3NY.
5 See Rule 985NY. QCC Orders that cannot be
executed when entered will automatically cancel.
See Rule 985NY(1).
6 See Rule 985NY(2).
7 See Rule 960NY(a) and (b), respectively.
Paragraph (2) to Rule 985NY provides that QCCs
‘‘may only be entered in the regular trading
increments applicable to the options class under
Rule 960NY.’’
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trading increments of one cent ($0.01).8
The Exchange believes this proposed
change, which aligns with current
functionality, would add clarity,
transparency and internal consistency to
Exchange rules.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Securities Exchange Act of 1934
(the ‘‘Act’’),9 in general, and furthers the
objectives of Section 6(b)(5) of the Act,10
in particular, in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
The Exchange believes that the
proposed modification—to make clear
that QCC Orders may be entered and
traded in minimum trading increments
of a penny would promote just and
equitable principles of trade, as well as
serve to remove impediments to and
perfect the mechanism of a free and
open market because the proposed
change clarifies existing functionality.
In addition, the Exchange believes that
the proposed rule change is consistent
with other options order types and
functionalities that are not displayed in
OPRA’s quote feed. For example,
electronic paired auctions, which are
not displayed in OPRA’s quote feed
before they are executed, provide for
penny trading increments, regardless of
the quoting increment of the options
class.11 As a result, the proposed change
would not impact the protection of
investors and the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Specifically,
as discussed above, the Exchange
believes that the proposed change
would align the rule text with current
functionality. Thus, the Exchange does
not believe the proposal creates any
significant impact on competition.
8 See proposed Rule 985NY(2) (‘‘Qualified
Contingent Cross Orders may only be entered in the
regular trading increments applicable to the options
class under Rule 960NY(b)’’).
9 15 U.S.C. 78f(b).
10 15 U.S.C. 78f(b)(5).
11 See, e.g., Rule 971.1NY(b)(7) (regarding the
Customer Best Execution—or CUBE—auction and
providing that ‘‘CUBE Orders may be entered in
$.01 increments regardless of the MPV of the series
involved’’).
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]]>Agencies
[Federal Register Volume 86, Number 66 (Thursday, April 8, 2021)]
[Notices]
[Pages 18362-18368]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-07198]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91471; File No. SR-NYSE-2020-85]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Amendment No. 1 and Order Granting Accelerated
Approval to a Proposed Rule Change, as Modified by Amendment No. 1, To
Amend the NYSE Listed Company Manual To Revise the Shareholder Approval
Requirements in Sections 312.03 and 312.04 and the Requirements for
Related Party Transactions in Section 314.00
April 2, 2021.
On December 16, 2020, New York Stock Exchange LLC (``NYSE'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend the NYSE Listed Company
Manual (``Manual'') to revise the shareholder approval requirements in
Sections 312.03 and 312.04 and the requirements for related party
transactions in Section 314.00. The Commission published notice of the
proposed rule change in the Federal Register on January 4, 2021.\3\ On
February 12, 2021, pursuant to Section 19(b)(2) of the Exchange Act,\4\
the Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ The Commission has received no comment letters on the
proposal. On March 30, 2021, the Exchange filed Amendment No. 1 to the
proposed rule change.\6\ The Commission is publishing notice of the
filing of Amendment No. 1 to solicit comment from interested persons
and is approving the proposed rule change, as modified by Amendment No.
1, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 90803 (December 28,
2020), 86 FR 0148.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 91126, 86 FR 10362
(February 19, 2021).
\6\ In Amendment No. 1, the Exchange: (1) Revised the proposed
rule text in Section 312.03(b)(3) of the Manual to state that
shareholder approval would be required for issuances of stock to
Related Parties that exceed one percent of the common stock or the
voting power outstanding before the issuance, other than cash sales
for a price that is at least the Minimum Price (defined herein); (2)
revised the proposed rule text in Section 312.03(c)(2) of the Manual
to state that shareholder approval is required for securities issued
in connection with an acquisition of the stock or assets of another
company if the issuance of securities, when alone or combined with
any other present or potential issuance of common stock or
securities convertible into common stock in connection with such
acquisition, is equal to or exceeds either 20 percent of the number
of shares of common stock or 20 percent of the voting power before
the issuance; (3) revised the proposed rule text in Section 314.00
of the Manual to state that a company's audit committee or another
independent body of the board of directors shall conduct a
reasonable prior review of related party transactions, and will
prohibit a transaction if it determines it to be inconsistent with
the interests of the company and its shareholders; (4) revised the
proposed rule text in Section 314.00 of the Manual to state that,
for the purposes of Section 314.00, the term ``related party
transactions'' will not apply the transaction value threshold under
Item 404 of Regulation S-K or the materiality threshold under Form
20-F, Item 7.B, as applicable; (5) clarified the discussion
regarding the applicability of Section 312.03(b); (6) clarified
that, under Nasdaq and NYSE American rules, stock sales may be
subject to shareholder approval under equity compensation rules; (7)
deleted a description of certain requirements of Section 312.03(b)
that the Exchange has proposed to delete because they relate to the
early stage company exemption that would no longer be applicable;
(8) clarified that the Exchange believes that Section 312.03(c)
would cause any significantly economically dilutive transaction to
be subject to shareholder approval; (9) clarified that the
amendments to Section 312.03(c) would remove a limitation that
participation in a financing under the exception is available only
to multiple purchasers; and (10) made other clarifying, conforming,
and technical changes. Amendment No. 1 is available at https://www.sec.gov/rules/sro/nyse/nysearchive/nysearchive2020.htm.
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I. Description of the Proposal, as Modified by Amendment No. 1
The Exchange is proposing to amend its shareholder approval rules
for issuances of securities to certain related parties, as set forth in
Section 312.03(b) of the Manual. Section 312.03(b) of the Manual
currently requires shareholder approval prior to certain issuances of
common stock, or securities convertible into or exercisable for common
stock, to: (1) A director, officer, or substantial security holder \7\
of the company (each a ``related party'' for purposes of current
Section 312.03(b)); (2) a subsidiary, affiliate, or other closely
related person of a related party; or (3) any company or entity in
which a related party has a substantial direct or indirect interest.
Such shareholder approval is subject to an exemption for early stage
companies set forth in Section 312.03(b) of the Manual.
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\7\ For purposes of Section 312.03, Section 312.04(e) provides
that: ``[a]n interest consisting of less than either five percent of
the number of shares of common stock or five percent of the voting
power outstanding of a company or entity shall not be considered a
substantial interest or cause the holder of such an interest to be
regarded as a substantial security holder.''
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Under Section 312.03(b) of the Manual, prior shareholder approval
is currently required 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. A limited exception to
these shareholder approval requirements permits cash sales relating to
no more than five percent of the number of shares of common stock or
voting power outstanding that meet a minimum price test set forth in
the rule (``Minimum Price'') \8\ if the related party in the
transaction has related party status solely because it is a substantial
security holder of the company.
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\8\ Section 312.04(i) defines the ``Minimum Price'' as follows:
``Minimum Price'' means 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. As proposed, Section 312.04(j) defines ``Official
Closing Price'' as follows: ``Official Closing Price'' of the
issuer's common stock means 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. For
example, if the transaction is signed after the close of the regular
session at 4:00 p.m. Eastern Standard Time on a Tuesday, then
Tuesday's official closing price is used. If the transaction is
signed at any time between the close of the regular session on
Monday and the close of the regular session on Tuesday, then
Monday's official closing price is used. The Exchange is proposing
to correct a typographical error in the definition of ``Official
Closing Price.''
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The Exchange is proposing several changes to Section 312.03(b) of
the Manual. The Exchange states that these changes would bring its
shareholder approval requirements into closer alignment with those of
Nasdaq and NYSE American.\9\ First, the Exchange proposes to modify the
class of persons with respect to which an issuance of common stock
would require a listed
[[Page 18363]]
company to seek shareholder approval. Specifically, Section 312.03(b)
as amended would require prior shareholder approval for certain
issuances of common stock to directors, officers, and substantial
security holders of the company (each a ``Related Party'') and would no
longer require such approval for issuances to such Related Parties'
subsidiaries, affiliates or other closely related persons or to any
companies or entities in which a Related Party has a substantial
interest (except where a Related Party has a five percent or greater
interest in the counterparty, as described below).
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\9\ See Amendment No. 1, supra note 6, at 4.
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In addition, the Exchange has proposed to amend Section 312.03(b)
to require shareholder approval of cash sales to Related Parties only
if the price is less than the Minimum Price. Issuances to Related
Parties in non-cash transactions relating to more than one percent of
the issuer's common stock or voting power outstanding before the
issuance would continue to be subject to shareholder approval.\10\ Cash
sales to a Related Party relating to more than one percent of the
issuer's common stock or voting power prior to the issuance for prices
below the Minimum Price would continue to be subject to shareholder
approval under Section 312.03(b). Cash sales to Related Parties that
meet the Minimum Price requirement would be subject to the same
limitations as cash sales to all other investors under the proposed
amended Section 312.03(c), as described below. In addition, certain
issuances to a Related Party that meet the Minimum Price could also be
subject to shareholder approval under proposed Section 312.03(b)(ii).
The Exchange proposes Section 312.03(b)(ii) to require shareholder
approval of any transaction or series of related transactions in which
any Related Party has a five percent or greater interest (or such
persons collectively have a 10 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 and the present or
potential issuance of common stock, or securities convertible into
common stock, could result in an increase in either the number of
shares of common stock or voting power outstanding of five percent or
more before the issuance.
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\10\ See id. at 4.
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Finally, the Exchange proposes to delete from Section 312.03(b) two
provisions that it states will no longer be relevant as they relate to
transactions that benefit from exemptions from shareholder approval
under current Section 312.03(b), but would be exempt from shareholder
approval under the general application of Section 312.03(b) as proposed
to be amended. These provisions relate to: (1) Cash sales meeting the
Minimum Price test and relating to no more than five percent of the
number of shares of common stock or five percent of the voting power
outstanding before the issuance to a Related Party where the Related
Party involved in the transaction is classified as such solely because
such person is a substantial security holder; and (2) the early stage
company exemption, to which the Exchange proposes to remove the
reference from Section 312.04. The Exchange states that, for the same
reason, the Exchange proposes to delete from Section 312.03(b) a
sentence that provides that the early stage company exemption is not
applicable to a sale of securities by the listed company to any person
subject to the provisions of Section 312.03(b) in a transaction, or
series of transactions, whose proceeds will be used to fund an
acquisition of stock or assets of another company where such person has
a direct or indirect interest in the company or assets to be acquired
or in the consideration to be paid for such acquisition.
The Exchange states that Section 312.03(b) would continue to
require that any sale of stock to an employee, director, or service
provider is also subject to the equity compensation rules in Section
303A.08 of the Manual and that shareholder approval would be required
if any of the subparagraphs of Section 312.03 require such approval,
notwithstanding that the transaction does not require approval under
Section 312.03(b) or one or more of the other subparagraphs.
In addition, the Exchange is proposing changes to Section 312.03(c)
of the Manual, which currently requires shareholder approval of any
transaction relating to 20 percent or more of the company's outstanding
common stock or 20 percent of the voting power outstanding before such
issuance, but provides the following exceptions: (1) Any public
offering for cash; and (2) any bona fide private financing involving a
cash sale of the company's securities that comply with the Minimum
Price requirement. As set forth in Section 312.04(g), a ``bona fide
private financing'' refers to a sale in which either: (1) 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 (2)
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.
The Exchange proposes to replace the reference to ``bona fide
private financing'' in Section 312.03(c) with ``other financing (that
is not a public offering for cash) in which the company is selling
securities for cash.'' \11\ This change would eliminate the requirement
that, for the exception, the issuer sell the securities to multiple
purchasers, and that no one such purchaser, or group of related
purchasers, acquires more than five percent of the issuer's common
stock or voting power.\12\ In addition, the Exchange states that,
because any sale to a broker-dealer under the current bona fide private
financing exception would also qualify for an exception to shareholder
approval under the proposed amended exception, there is no need to
retain a separate provision for sales made to broker-dealers.\13\ The
Exchange also proposes to amend Section 312.03(c) to provide that, if
the securities in a financing (that is not a public offering for cash)
in which the company is selling securities for cash are issued in
connection with an acquisition of the stock or assets of another
company, shareholder approval will be required if the issuance of the
securities alone or when combined with any other present or potential
issuance of common stock in connection with such acquisition, is equal
to or exceeds either 20 percent of the number of shares of common stock
or 20 percent of the voting power outstanding before the issuance.
Additionally, as the ``bona fide private financing'' term will no
longer be used in Section 312.03(c), the Exchange proposes to delete
the definition of that term in Section 312.04(g). The Exchange states
that these changes would bring its shareholder requirements into closer
alignment with those of Nasdaq and NYSE American.\14\
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\11\ As described above, Section 312.03(c) of the Manual also
provides an exception from the shareholder approval requirements of
Section 312.03(c) for any public offering for cash.
\12\ NYSE stated in its proposal that while the proposed amended
exemption would not limit the size of any transaction that meets the
Minimum Price test, any such transaction giving rise to a change of
control will be subject to shareholder approval under Section
312.03(d). See Amendment No. 1, supra note 6, at n. 9.
\13\ See id. at 9.
\14\ See Amendment No. 1, supra note 6, at 4.
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The Exchange is also proposing to delete Section 312.03T, which was
adopted to provide temporary relief from certain of the requirements of
Section 312.03 during the COVID-19 pandemic, and which was applicable
by
[[Page 18364]]
its terms through June 30, 2020. As that date has passed, the Exchange
has proposed to delete Section 312.03T in its entirety, as it is no
longer applicable.
Finally, the Exchange is proposing to amend Section 314.00 of the
Manual, which currently provides that related party transactions
normally include transactions between officers, directors, and
principal shareholders and the company and that each related party
transaction is to be reviewed and evaluated by an appropriate group
within the listed company involved. The current rule further states
that, while the Exchange does not specify who should review related
party transactions, the Exchange believes that the audit committee or
another comparable body might be considered as an appropriate forum for
this task.
The Exchange proposes to amend the first paragraph of Section
314.00 \15\ by stating that, for purposes of Section 314.00, the term
``related party transaction'' refers to transactions required to be
disclosed pursuant to Item 404 of Regulation S-K under the Exchange Act
(but without applying the transaction value threshold under that
provision), and, in the case of foreign private issuers, the term
``related party transaction'' refers to transactions required to be
disclosed pursuant to Form 20-F, Item 7.B (but without regard to the
materiality threshold of that provision).\16\
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\15\ The second paragraph of Section 314.00 will be retained in
its entirety. It reads as follows: ``The Exchange will continue to
review proxy statements and other SEC filings disclosing related
party transactions and where such situations continue year after
year, the Exchange will remind the listed company of its obligation,
on a continuing basis, to evaluate each related party transaction
and determine whether or not it should be permitted to continue.''
\16\ See Item 404 of Regulation S-K (Transactions with related
persons, promoters and certain control persons) [17 CFR 229.404] and
Item 7.B of Form 20-F (Related party transactions) [referenced in 17
CFR 249.220f].
---------------------------------------------------------------------------
In addition, the Exchange proposes to amend Section 314 to state
that the company's audit committee \17\ or another independent body of
the board of directors shall conduct a reasonable prior review and
oversight of all related party transactions for potential conflicts of
interest and will prohibit such a transaction if it determines it to be
inconsistent with the interests of the company and its
shareholders.\18\
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\17\ Section 303A.07 of the Manual requires that all members of
an audit committee must satisfy independence requirements set out in
Section 303A.02 of the Manual and, in the absence of an applicable
exemption, Rule 10A-3(b)(1) of the Exchange Act.
\18\ The Exchange proposes to delete from Section 314.00 a
sentence that reads as follows: ``Following the review, the company
should determine whether or not a particular relationship serves the
best interests of the company and its shareholders and whether the
relationship should be continued or eliminated.'' The Exchange
states that this sentence is no longer necessary; the proposed
amended rule requires the audit committee or other independent body
of the board to prohibit any related party transaction it reviews if
it determines it to be inconsistent with the interests of the
company and its shareholders. See Amendment No. 1, supra note 6, at
n. 11.
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II. Discussion and Commission Findings
The Commission has carefully reviewed the proposed rule change, as
modified by Amendment No. 1, and finds that it is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to a national securities exchange.\19\ In
particular, the Commission finds that the proposed rule change, as
modified by Amendment No 1, is consistent with Section 6(b)(5) of the
Exchange Act,\20\ which requires, among other things, that the rules of
a national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, to protect investors and the public interest, and are
not designed to permit unfair discrimination between customers,
issuers, brokers, or dealers.
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\19\ 15 U.S.C. 78f. In approving this proposed rule change, the
Commission has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\20\ 15 U.S.C. 78f(b)(4) and (5).
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The development and enforcement of meaningful corporate governance
listing standards for a national securities exchange is of substantial
importance to financial markets and the investing public, especially
given investor expectations regarding the nature of companies that have
achieved an exchange listing for their securities. The corporate
governance standards embodied in the listing standards of national
securities exchanges, in particular, play an important role in assuring
that exchange-listed companies observe good governance practices
including safeguarding the interests of shareholders with respect to
certain potentially dilutive transactions.\21\
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\21\ See, e.g., Securities Exchange Act Release No. 84287
(September 26, 2018), 83 FR 49599 (October 2, 2018) (NASDAQ-2018-
008) (approving a Nasdaq proposal to change to the definition of
market value for purposes of the shareholder approval rule and
eliminate the requirement for shareholder approval of issuances at
less than book value but greater than market value); Securities
Exchange Act Release No. 76814 (December 31, 2015), 81 FR 0820
(January 7, 2016) (NYSE-2015-02) (approving amendments to the Manual
to exempt early stage companies from requirements to obtain
shareholder approval in certain circumstances) (``2015 Approval
Order''). See also Securities Exchange Act Release No. 48108 (June
30, 2003), 68 FR 39995 (July 3, 2003) (approving equity compensation
shareholder approval rules of both the NYSE and the National
Association of Securities Dealers, Inc. n/k/a NASDAQ); and
Securities Exchange Act Release No. 58375 (August 18, 2008), 73 FR
49498 (August 21, 2008) (approving registration of BATS Exchange,
Inc. noting that qualitative listing requirements including
shareholder approval rules are designed to ensure that companies
trading on a national securities exchange will adequately protect
the interest of public shareholders).
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As discussed above, the Exchange has proposed to limit the
shareholder approval requirements of Section 312.03(b) to a Related
Party that is a director, officer, or substantial security holder,\22\
and no longer require shareholder approval under this provision for
issuances to subsidiaries, affiliates, or other closely-related persons
of the Related Party or any company or entity in which a Related Party
has a substantial interest except where the Related Party has a five
percent or greater interest in the company or assets to be acquired or
in the consideration to be paid and the issuance falls within the scope
of proposed Section 312.03(b)(ii). Section 312.03(b) would also no
longer require shareholder approval for cash sales to Related Parties
at or above the Minimum Price.\23\ Under proposed Section
312.03(b)(ii), shareholder approval would be required for an issuance
of common stock or 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 any Related
Party has a five percent or greater interest (or such persons
collectively have a 10 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 and the present or
potential issuance of common stock, or securities convertible into
common stock, could result in an increase in outstanding common shares
of five percent or more, or where otherwise required under the
[[Page 18365]]
Exchange's rules.\24\ The Exchange states that it believes that current
requirements in Section 312.03(b) can make it unnecessarily difficult
for listed companies to raise necessary capital in private placement
transactions that are in the interests of the company and its
shareholders.\25\
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\22\ See supra note 7 (defining ``substantial security
holder'').
\23\ Specifically, Section 312.03(b) would no longer require
shareholder approval of cash sales at or above Minimum Price where
the number of shares of common stock into which the securities may
be convertible or exercisable, exceeds: (i) One percent of the
number of shares of common stock or one percent of the voting power
outstanding before the issuance; or (ii) in the case of a cash sale
to a Related Party that has that status solely because such person
is a substantial security holder, five percent of the number of
shares of common stock or five percent of the voting power
outstanding before the issuance. The Exchange would continue to
require shareholder approval for all non-cash sales to Related
Parties that exceed one percent of the number of shares of common
stock or one percent of the voting power outstanding before the
issuance.
\24\ The Exchange temporarily waived certain requirements under
Section 312.03 to provide listed companies with greater flexibility
to raise capital during the COVID-19 crisis from April 6, 2020
through March 31, 2021. Particularly, pursuant to the waiver, the
Exchange allowed companies to sell their securities for cash to
related parties and other persons subject to Section 312.03(b) under
certain conditions without complying with the numerical limitations
of that rule, as long as the sale in the cash transaction met the
Minimum Price requirements, and other applicable requirements of the
Exchange's rules. See Securities Exchange Act Release No. 88572
(April 6, 2020), 85 FR 20323 (April 10, 2020) (SR-NYSE-2020-30)
(waiving certain requirements of Section 312.03 through June 30,
2020). See also Securities Exchange Act Release No. 89219 (July 2,
2020), 85 FR 41640 (July 10, 2020) (SR-NYSE-2020-58) (extending the
waiver through September 30, 2020). See also Securities Exchange Act
Release No. 90020 (September 28, 2020), 85 FR 62357 (October 2,
2020) (SR-NYSE-2020-79) (extending the waiver through December 31,
2020). See also Securities Exchange Act Release No. 2712 (January 7,
2021), 86 FR 2712 (January 13, 2021) (SR-NYSE-2020-108) (extending
the waiver through March 31, 2021) (``Waiver''). The Exchange also
temporarily waived certain requirements for meeting the bona fide
financing exception under Section 312.03(c). See infra note 44.
\25\ See Amendment No. 1, supra note 6, at 4.
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The Exchange states that the proposed changes would bring its
shareholder approval requirements into closer alignment with other
exchanges, namely Nasdaq and NYSE American.\26\ The Exchange notes that
Nasdaq and NYSE American rules contain substantively identical
requirements to those the Exchange is proposing for transactions in
which a Related Party has an interest in the company or assets to be
acquired or the consideration to be paid in the transaction.\27\ The
Exchange also states that, unlike NYSE, Nasdaq and NYSE American rules
do not have a separate shareholder approval requirement for cash sales
to a Related Party that do not meet the Minimum Price requirement and
that relate to more than one percent of the issuer's common stock or
voting power, although such sales may also be subject to shareholder
approval requirements under the exchanges' equity compensation
rules.\28\ In addition, Nasdaq and NYSE American rules do not include
shareholder approval requirements specifically for issuances to
subsidiaries, affiliates, or closely related persons of Related Parties
or to companies or entities in which a Related Party has a substantial
interest unless the Related Party has a five percent or greater
interest in the company or assets to be acquired or consideration to be
paid in the transaction.\29\ Accordingly, the Exchange states that it
believes that its proposal to limit the Related Party requirements to
directors, officers, and substantial security holders would harmonize
its rules with Nasdaq and NYSE American requirements.\30\
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\26\ See id. See also Nasdaq Marketplace Rule 5635 and NYSE
American Company Guide Sections 712 and 713.
\27\ See Amendment No. 1, supra note 6, at 8. See proposed
Section 312.03(b)(ii).
\28\ See Amendment No. 1, supra note 6, at 6.
\29\ See Nasdaq Marketplace Rule 5635 and NYSE American Company
Guide Sections 712 and 713.
\30\ See Amendment No. 1, supra note 6, at 6.
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The Commission believes that the proposed amendments to Section
312.03(b) to change the circumstances under which shareholder approval
is required for issuances to Related Parties, and where shareholder
approval is required for issuances based on certain relationships with
a Related Party, are consistent with Section 6(b)(5) of the Exchange
Act. Although the circumstances of when shareholder approval is
required under Section 312.03(b) of the Manual will be modified by the
proposal, there will continue to be other protections for shareholders.
The Exchange's rules provide that, notwithstanding that the transaction
does not require approval under Section 312.03(b), shareholder approval
is required if any of the subparagraphs of Section 312.03 require such
approval.\31\ As described above, regardless of the Minimum Price, the
Exchange is proposing to require shareholder approval of any
transaction or series of related transactions in which any Related
Party has a five percent or greater interest (or such persons
collectively have a 10 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 and the present or
potential issuance of common stock, or securities convertible into
common stock, could result in an increase in outstanding common shares
of five percent or more.\32\ This provision therefore would require
shareholder approval under the conditions described above in
circumstances where the transaction is priced at or above the Minimum
Price as well as below the Minimum Price.\33\ Section 312.03(c) would
also continue to require shareholder approval for any non-cash
issuances of 20 percent or more of the issuer's common stock or voting
power and any financing (that is not a public offering for cash)
involving cash sales relating to 20 percent or more of the issuer's
common stock or voting power for less than the Minimum Price.\34\ Under
the proposal, Section 312.03(c) will also require shareholder approval
of all cash sales in connection with an acquisition of the stock or
assets of another company relating to 20 percent of the issuer's common
stock or voting power even if the issuance meets the Minimum Price.\35\
The Exchange also states that Section 312.03(c) applies to any
transaction or series of related transactions, which provides
shareholders with further protection by ensuring that a company cannot
avoid the shareholder approval requirement by separating an overall
transaction into smaller separate transactions that would not
individually require shareholder approval. In addition, any sale that
gives rise to a change of control will be subject to shareholder
approval under Section 312.03(d), a sale of stock to an employee,
director, or service provider would continue to be subject to the
equity compensation shareholder approval rules in Section 303A.08 of
the Manual, and shareholder approval will be required if a vote is
required under any other applicable provision of the Exchange's rules.
As to cash sales of more than one percent of common stock or voting
power to directors, officers, and substantial security holders below
Minimum Price, Section 312.03(b) will continue to require shareholder
approval for such issuances to these Related Parties.\36\ Section
312.03(b) will also continue to require shareholder approval for non-
cash issuances of more than one percent of the number of shares of
common stock or the voting power outstanding before the issuance to
such Related Parties.\37\
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\31\ See proposed Section 312.03(b)(iii). See also Section
312.04(a).
\32\ See proposed Section 312.03(b)(ii). The Exchange notes that
this limitation is substantively identical to a limitation placed
specifically on issuances to related parties in the Nasdaq and NYSE
American rules. See Amendment No. 1, supra note 6, at 7
\33\ Although NYSE is deleting its specific requirement for
shareholder approval issuances to a subsidiary, affiliate, or other
closely-related person of a Related Party, and any company or entity
in which a Related Party has a substantial direct or indirect
interest, shareholder approval for issuances to such entities could
still be required if they meet the requirements of this new
provision.
\34\ See infra note 36 and accompanying text (discussing when
shareholder approval is required for cash sales to Related Parties
for below Minimum Price).
\35\ See proposed Section 312.03(c). In determining whether the
issuance is equal to or exceeds 20 percent, the rule provides that
the issuance is combined with any other present or potential
issuance of common stock or securities convertible into common stock
in connection with the acquisition.
\36\ See Section 312.03(b)(i).
\37\ See supra note 10 and accompanying text.
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Furthermore, Section 314.00 of the Manual, concerning review of
related party transactions, as proposed to be
[[Page 18366]]
amended, states that a company's audit committee or another independent
body of the board of directors shall conduct a reasonable prior review
and oversight of all related party transactions required to be reviewed
\38\ for potential conflicts of interest and will prohibit a related
party transaction if it determines it to be inconsistent with the
interests of the company and its shareholders.\39\ The Commission has
long acknowledged the important role an independent board committee has
in protecting shareholders from potential conflicts of interest.\40\
The Commission believes that prior independent committee review and
oversight of certain related party transactions for conflicts of
interest, with the requirement to prohibit transactions that are
determined to be inconsistent with the interests of the company and its
shareholders, is an additional safeguard to protect shareholder
interests. Additionally, the Exchange has proposed to expand the types
of related parties whose transactions will be subject to review under
Section 314.00 of the Manual, as discussed in more detail below. This
should help to ensure that related party transactions that can present
conflicts of interest are within the scope of the Exchange's rule and
will be reviewed by the audit committee or another independent body of
the board.\41\
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\38\ See infra note 49 and accompanying text (describing
proposed revisions to the related party transactions that must be
reviewed under Section 314.00).
\39\ See supra note 16.
\40\ See 2015 Approval Order, supra note 21, 81 FR at n. 88.
\41\ As discussed above, under Section 314.00 of the Manual,
issuers have an obligation on a continuing basis to evaluate each
related party transaction and determine whether or not it should be
permitted to continue. See supra note 15.
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The Commission believes that the continued requirements for
shareholder approval described above, including, among others, the new
provision in Section 312.02(b)(ii), and the changes to the review of
related party transactions in Section 314.00 of the Manual including,
among others, expanding the scope of related parties whose transactions
are covered by the rule,\42\ on balance, should help to ensure
continued shareholder protections. The Commission also notes that the
changes to Section 312.03(b) of the Manual described above are
consistent with the rules of two other national securities exchanges,
Nasdaq and NYSE American.\43\
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\42\ See supra notes 15-18 and accompanying text. See also infra
note 49 and accompanying text.
\43\ See Nasdaq Marketplace Rule 5635 and NYSE American Company
Guide Sections 712 and 713.
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The Commission believes that the proposed amendments to Section
312.03(c) are consistent with Section 6(b)(5) of the Exchange Act. The
proposed amendments to Section 312.03(c) do not change the rule as it
relates to shareholder approval for issuances of 20 percent or more of
the number of shares of the voting power or common stock outstanding
before the issuance in non-cash transactions or to cash transactions
for a price below the Minimum Price. The amendments would remove the
requirements, under the bona fide private placement exception to
Section 312.03(c), that cash sales at a price at least as great as
Minimum Price must be to multiple purchasers and that a single
purchaser may not acquire, or have the right to acquire more than five
percent of the shares of the issuer's common stock or voting power.\44\
The Exchange states that it believes that current Section 312.03(c) of
the Manual can make it unnecessarily difficult for listed companies to
raise necessary capital in private placement transactions that are in
the interests of the company and its shareholders,\45\ and that the
proposed requirements would allow companies additional flexibility. The
Exchange states that it believes that this change is consistent with
the protection of investors because the Minimum Price requirement
provides protection against economic dilution, while the separately
applicable requirements of Section 312.03(d) provide that shareholders
will have a vote on any transaction that would result in a change of
control. The proposal also adds a new condition to the financing
exception to the shareholder vote requirements under Section 312.03(c)
by requiring shareholder approval if the securities being issued are in
connection with an acquisition of the stock or assets of another
company and the issuance either alone or in combination with any other
present or potential issuance of common stock or securities convertible
into common stock is equal to or exceeds 20 percent of the common stock
or voting power outstanding before the issuance. Under the current bona
fide private financing exception under the Exchange's existing rules,
there was no such requirement. The new requirement will ensure that if
a financing, other than a public offering for cash, involving a 20
percent issuance is for an acquisition, even if at the Minimum Price,
there will be a shareholder vote on the matter. This new requirement
can help to ensure that shareholders will get to vote on potentially
dilutive transactions, whether voting dilution or otherwise, that may
occur due to the acquisition.
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\44\ The Exchange had temporarily waived these requirements of
Section 312.03(c) due to the COVID-19 crisis under certain
conditions. See Waiver, supra note 24 (providing that a listed
company would be exempt from the shareholder approval requirement of
Section 312.03(c) in relation to a private placement transaction
regardless of its size or the number of participating investors or
the amount of securities purchased by any single investor, provided
that the transaction is a sale of the company's securities for cash
at a price that meets the Minimum Price requirement). The waiver did
not apply to any sales of a listed company's securities where the
use of the proceeds was to fund an acquisition. See id.
\45\ See Amendment No. 1, supra note 6 at 4.
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The Exchange further states that the proposed amendments would make
the Exchange's rules for cash sales of securities that meet the Minimum
Price test substantively identical to those of Nasdaq and NYSE
American.\46\ The Commission is cognizant of the fact that the
exchanges operate in a highly competitive environment, including with
respect to the listing of issuers. In addition, shareholder approval
will still be required if any issuance under the new financing
provision results in a change of control or if a vote is required under
any other applicable provisions, such as the equity compensation rules
or the new Related Party provisions of Section 312.03(b)(ii).\47\ The
proposal will allow listed companies more flexibility to raise capital
at market related prices without shareholder approval under Section
312.03(c) while still preserving protections for shareholders through
the other shareholder approval requirements as well as promoting fair
competition among exchanges given that NASDAQ and NYSE American have
substantially identical provisions.
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\46\ See Amendment No. 1, supra note 6, at 9.
\47\ See Section 312.04(a) (providing that. for the purpose of
Section 312.03, shareholder approval is required if any of the
subparagraphs of Section 312.03 require such approval,
notwithstanding the fact that the transaction does not require
approval under one or more of the other subparagraphs).
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Additionally, the proposed amendments to Section 314.00 are
consistent with investor protection pursuant to Section 6(b)(5) of the
Exchange Act. By defining the term ``related party transaction'' by
reference to the Commission's disclosure rules, as discussed below, the
amendment would provide greater clarity and transparency to when the
review of a related party transaction would be required. The related
party transactions required to be reviewed also would be expanded when
compared to the current rule requirement which states ``related party
transactions normally include transactions between officers, directors
and principal shareholders and the
[[Page 18367]]
company.'' \48\ Under the revised provisions, related party
transactions refer to transactions required to be disclosed pursuant to
Item 404 of Regulation S-K (but without applying the transaction value
threshold of that provision) or for a foreign private issuer
transactions required to be disclosed pursuant to Form 20-F, Item 7.B
(but without regard to the materiality threshold of that provision) and
these provisions include a broader group of persons than that listed in
the current Exchange rule.\49\ By proposing to require that
transactions under the rule must be subject to prior review by either
the audit committee or another body of independent directors, and that
such body shall prohibit such a transaction if it determines it to be
inconsistent with the interests of the company and its shareholders,
the Exchange is adding more clarity to the rule's requirements. By
removing the ambiguous language in the current rule that allowed a
listed company flexibility in the kind of committee that it could
choose to review related party transactions, as the Exchange stated in
its proposal, this change will prevent a listed issuer from giving the
role of reviewing transactions to any group that is not entirely made
up of independent directors.\50\
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\48\ See current Section 314.00 of the Manual.
\49\ Among other disclosures, Item 404 of Regulation S-K
generally requires a description of any transaction in which the
issuer was or is to be a participant that meets certain transaction
value thresholds and in which any related party (including, for
example, directors, executive officers, beneficial owners of more
than five percent of any class of the issuer's voting securities,
and their immediate family members) had or will have a direct or
indirect material interest. Item 7.B of Form 20-F generally requires
disclosure of transactions and loans between a foreign private
issuer and certain categories of related parties (including, for
example, directors, senior management, individuals with significant
voting influence over the issuer, close family members of those
categories of persons, and enterprises under common control).
Required disclosure under Item 7.B includes the nature and extent of
any transactions that are material to the company or the related
party or that are unusual in their nature or conditions.
\50\ See Amendment No. 1, supra note 6, at 12.
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Finally, it is consistent with the Exchange Act for the Exchange to
remove Rule 312.03T, which is now obsolete, from the Exchange's rule
text in order to provide greater transparency to the Exchange's rules
and to avoid confusion.
III. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 to the proposed rule
change is consistent with the Exchange Act. Comments may be submitted
by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSE-2020-85 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2020-85. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSE-2020-85, and should be submitted on
or before April 29, 2021.
IV. Accelerated Approval of the Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. The Commission notes that Amendment No. 1
clarifies the proposed rule change. Among other things, Amendment No. 1
amends the proposal to state or to clarify in the rule text: (1) That
shareholder approval would be required for issuances of stock to
Related Parties that exceed one percent of the common stock or the
voting power outstanding before the issuance, except that shareholder
approval will not be required if such transaction is a cash sale for a
price that is at least the Minimum Price; (2) that shareholder approval
is required for securities issued in connection with an acquisition of
the stock or assets of another company if the issuance of securities,
alone or when combined with any other present or potential issuance of
common stock or securities convertible into common stock in connection
with such acquisition, is equal to or exceeds either 20 percent of the
number of shares of common stock or 20 percent of the voting power
before the issuance; (3) that a company's audit committee or another
independent body of the board of directors shall conduct a reasonable
prior review of related party transactions, and will prohibit a
transaction if it determines it to be inconsistent with the interests
of the company and its shareholders; and (4) that, for the purposes of
Section 314.00, the term ``related party transactions'' will not apply
the transaction value threshold under Item 404 of Regulation S-K or the
materiality threshold under Form 20-F, Item 7.B, as applicable.\51\ The
Exchange also made clarifying, conforming, and technical changes in the
filing of the proposed rule change.\52\ The Commission believes that
the changes in Amendment No. 1 provide greater clarity to the proposal
and should help to avoid any confusion as to the scope or application
of the rule changes being adopted herein. Accordingly, the Commission
finds good cause, pursuant to Section 19(b)(2) of the Exchange Act,\53\
to approve the proposed rule change, as modified by Amendment No. 1, on
an accelerated basis.
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\51\ See supra note 6.
\52\ See id.
\53\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\54\ that the proposed rule change (SR-NYSE-2020-85), as
modified by Amendment No. 1, be, and it hereby is, approved on an
accelerated basis.
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\54\ 15 U.S.C. 78s(b)(2).
[[Page 18368]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\55\
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\55\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-07198 Filed 4-7-21; 8:45 am]
BILLING CODE 8011-01-P
