On April 6, 2020, the Securities and Exchange Commission (“SEC") announced (available here) that it has immediately approved the New York Stock Exchange's (“NYSE") proposed rule changes that temporarily waive certain shareholder approval requirements relating to private investments in public equity (PIPEs). The rule changes were proposed in light of the unprecedented disruption caused by COVID-19 and will apply through June 30, 2020. While these temporary waivers to Section 312.03 of the NYSE Listed Company Manual (the “Listing Manual") (available here) provide companies added flexibility in conducting PIPEs more quickly, companies must still obtain shareholder approval if required under any other applicable rule, including the equity compensation requirements of Section 303A.08 or the change of control requirements of Section 312.03(d) of the Listing Manual. For more information, please see our recent client alert (available here) discussing key considerations for PIPE transactions.
Section 312.03(b) – Issuance to a Related Party
Section 312.03(b) generally requires shareholder approval for any issuance of voting stock to a “Related Party," including the company's directors, officers or substantial security holders, if the number of shares of common stock to be issued or, if convertible, the number of shares of common stock into which the securities may be converted exceeds (i) 1% of the number of shares of common stock outstanding or (ii) 1% of the voting power outstanding before the issuance. There is a limited exception to this rule for cash sales of up to 5% of the company's outstanding stock to a substantial security holder at a price equal to at least the “Minimum Price" requirement set forth in Section 312.04(i). Minimum Price is defined as “a price that is the lower of: (i) the Official Closing Price immediately preceding the signing of the binding agreement; or (ii) the average Official Closing Price for the five trading days immediately preceding the signing of the binding agreement."
The new rule change waives, subject to certain conditions, shareholder approval requirements for cash transactions with related parties that exceed the applicable 1% and 5% limits so long as the cash price meets the Minimum Price definition and the transaction is “reviewed and approved by the company's audit committee or a comparable committee comprised solely of independent directors."
Section 312.03(c) – Transactions of 20% or More
Section 312.03(c) generally requires shareholder approval for transactions (other than public offerings for cash) involving (i) 20% or more of the company's outstanding common stock or (ii) 20% or more of the voting power outstanding before the issuance. There is an exception for transactions involving a cash sale that comply with the Minimum Price test described above and that satisfy the definition of a “bona fide private financing" under Section 312.04(g). The Listing Manual defines “bona fide private financing" as a sale in which “either a registered broker-dealer purchases the securities from the issuer with a view to the private sale of such securities to one or more purchasers; or the issuer sells the securities to multiple purchasers, and no one such purchaser, or group of related purchasers, acquires, or has the right to acquire upon exercise or conversion of the securities, more than five percent of the shares of the issuer's common stock or more than five percent of the issuer's voting power before the sale."
The new rule change applies to the bona fide private financing element of the exception described above. The NYSE will temporarily waive “the 5% limitation for any sale to an individual investor in a bona fide private financing pursuant to Section 312.03(c)." The waiver also permits “companies to undertake a bona fide private financing … in which there is only a single purchaser." Finally, if such transaction involves a Related Party, the transaction must be “reviewed and approved by the company's audit committee or a comparable committee comprised solely of independent directors." Note that the equity must still be sold at a price no less than the Minimum Price.
In summary, so long as the private placement transaction is a sale for cash at a price that meets the Minimum Price definition, the temporary waiver exempts a listed company from the shareholder approval requirement of Section 312.03(c) “regardless of the size or the number of participating investors or the amount of securities purchased by a single investor."
Special thanks to Harrison Tucker and Brian Downs in our Houston office for their contributions to this article.