The NYSE amended its shareholder approval rules to make it easier for listed companies to sell securities to passive existing shareholders without obtaining shareholder approval. The SEC approved the change on an accelerated basis.
The amendment would limit the shareholder approval requirement to sales to parties whose interest is not passive, including directors, officers, “controlling shareholders or members of a control group or any other substantial security holder of the company that has an affiliated person who is an officer or director of the company.”
The SEC has approved the rule change.
The NYSE’s changes to are intended to make capital raising easier by removing from the shareholder approval requirement sales of securities to investors who are considered substantial security holders, but play no part in the company management (aside from voting their shares).
The NYSE’s Listed Company Manual requires shareholder approval before the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction to a director, officer or substantial security holder of the company 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 1% of the total shares or 1% of the voting power outstanding before the issuance.
A separate rule provides that an interest consisting of less than either 5% of the number of shares of common stock or 5% of the voting power outstanding of a company or entity is not to be considered a substantial interest or cause the holder of such an interest to be regarded as a substantial security holder.
The manual provides an exception to the shareholder approval requirement if the transaction is a cash sale for a price that is at least the Minimum Price.
Rationale for the amendment
The NYSE believes there are significant benefits from the protection provided to a listed company’s investors by the shareholder approval requirements when the purchaser is an officer, director or other control person of the company. In these cases, the potential exists for a related party purchaser to use their influence within the company to obtain superior terms to the detriment of the company’s other shareholders. However, the current definition of substantial security holder used in the rule also applies to holders of a company’s common stock who do not participate in the governance or management of the company. The NYSE believes that transactions with these shareholders who are not involved in the governance or management of the company generally do not present the potential conflicts of interest in the determination of transaction terms that exist where the purchaser has a role on the board or with management. The NYSE believes that these shareholders who do not participate actively in the company generally do not have the same ability to influence decision making as is the case with a related party that directly participates in management.
As a result, the NYSE amended the rule to limit its application to related parties whose interest in the company is not passive. The new rule would apply to stock sales to a director, officer, controlling shareholder or member of a control group or any other substantial security holder of the company that also has an affiliated person who is an officer or director of the company.
The NYSE said it intends to revise its internal procedures for reviewing proposed transactions so the exchange is able to decide whether shareholders are Active Related Parties.
Under the proposal the NYSE will continue to require shareholder approval for below market sales over 1% to Active Related Parties. However, under the new amendment, below market sales over 1% to substantial stockholders who are not Active Related Parties will be permitted without shareholder approval, but will still be subject to all the other requirements. Read more.