On August 19, 2021, the New York Stock Exchange
(“NYSE”) proposed
an amendment to Section 314.00 of the NYSE Listed Company Manual (the “NYSE
Manual”), the NYSE’s related party transaction approval rule. The proposal follows the NYSE’s recent
amendments to Section 314.00, approved by the
Securities and Exchange Commission (the “SEC“) on April 2, 2021, which had amended the rules to, among other things,
require “reasonable prior review and oversight” of related party transactions
and had defined related party transactions (for companies other than foreign
private issuers) to be those subject to Item 404 of the SEC’s Regulation S-K,
but “without applying the transaction threshold of that provision.” For foreign
private issuers, the previous amendments had defined related party transactions
to be those subject to disclosure under Form 20-F, but “without regard to the
materiality threshold of that provision.”
As a result of those amendments, NYSE-listed companies were faced with
the prospect of potentially presenting immaterial transactions, or transactions
in which related parties’ interests were immaterial, before their independent
directors for approval.
In its latest proposal, the NYSE noted that the
prior amendment had been intended to “provide greater clarity as to the types
of transactions that were specifically subject to review and approval under the
rule” but that “[i]n the period since the adoption of that amendment, it has
become clear to the Exchange that the amended rule’s exclusion of the
applicable transaction value and materiality thresholds is inconsistent with
the historical practice of many listed companies, and has had unintended
consequences.” As such, the NYSE’s latest
amendments to Section 314.00 “provide that the review and approval requirement
of that rule will be applicable only to transactions that are required to be
disclosed after taking into account the transaction value and materiality
thresholds set forth in Item 404 of Regulation S-K or Item 7.B of Form 20-F,
respectively, as applicable.” Notably, Item
404 of Regulation S-K only requires disclosure of transactions where the amount
involved is greater than $120,000 and in which the related person “had or will
have a direct or indirect material interest” in the transaction. The notes to Item 404 also contain various
other exclusions.
The text of the NYSE’s latest amendment to
Section 314.00 of the NYSE Manual follows (with deleted text shown in
strikethrough):
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 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. For
purposes of this rule, the term “related party transaction” refers to
transactions required to be disclosed pursuant to Item 404 of Regulation S-K
under the Securities Exchange Act (but without applying the transaction
value threshold of that provision). In the case of foreign private issuers,
the term “related party transactions” 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).
The proposed rule took effect immediately, but
can be suspended by the SEC within
60 days of the filing, and is open for comment for interested persons to submit
written data, views, and arguments concerning the amendment. As a result of this latest proposal,
NYSE-listed companies may still need to amend their related person transaction
approval polices to address the “reasonable prior review” standard, but can
otherwise more easily integrate the NYSE’s standards with those utilized for
transactions under Item 404 of the SEC’s Regulation S-K, and have greater
flexibility to establish reasonable processes for identifying and reviewing
potentially disclosable transactions.