On December 26, 2023, the SEC approved an NYSE rule change to make it easier for listed companies to raise money from existing substantial shareholders. In particular, the NYSE has amended Section 312.03(b) and 312.04 of the NYSE Listed Company Manual to modify the circumstances under which a listed company must obtain shareholder approval prior to the sale of securities below the Minimum Price to a substantial security holder.
Section 312.03 of the NYSE Listed Company Manual lists the circumstances upon which shareholder approval must be obtained prior to the issuance of securities. Pre-amendment Section 312.03(b)(i) requires shareholder approval prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions, to a director, officer or substantial security holder of the company (each a “Related Party”) 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 (1%) of the number of shares of common stock or of the voting power outstanding before the issuance. However, shareholder approval will not be required if such a transaction is a cash sale for a price that is at least the Minimum Price.
Although the rule does not define “substantial security holder,” Section 312.04(e) states that the holder of an interest of less than 5% of either outstanding shares or voting power, would not be considered a substantial shareholder.
Even though most of Section 312.03 tracks the shareholder approval requirements in Nasdaq Rule 5635, Nasdaq does not have a provision similar to 312.03(b)(i) for sales to Related Parties. In fact, the NYSE is the only national exchange in the U.S. with this rule. Rather the Nasdaq, and NYSE American, require shareholder approval for private transactions, below the defined Minimum Price, resulting in 20% or more dilution, regardless of whether the purchasers are related parties. The NYSE reasons that the rule protects shareholders as a whole by preventing management and control persons from asserting undue influence when negotiating private security purchases. For more on Nasdaq rule 5635, including the 20% Rule, see HERE and links contained therein.
Section 312.04 provides definitions and further explanations as to the application of Section 312.03. Section 312.04(h) defines “Minimum Price” 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. “Official Closing Price” is in turn defined as 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.
Most small cap issuers are significantly dependent on the ability to regularly raise new capital, which often involves private placements at discounts to the market price. Existing shareholders provide a good source for this capital since they are already familiar with the company and its prospects. In that regard, the overarching purpose of the amendment is to improve access to that capital by reducing company burdens associated with obtaining shareholder approval. The NYSE also points out that there is a lesser possibility that a substantial shareholder may exercise influence over the terms of a transaction with the company if they do not have representation on the board or in management, thus satisfying the goals of market integrity and investor protection.
As noted above, Section 312.03(b)(i) requires shareholder approval for certain transactions involving officers, directors and substantial shareholders. The NYSE has amended the rules to narrow those persons that may be considered a “substantial shareholder,” including by adopting a new definition of “Active Related Party” in Section 312.03(b)(i), distinguishing between passive related parties and active related parties. The amendments also add new definitions of “control” and “group” to Section 312.04 to provide clarity as to the meaning of the terms “controlling shareholder” and “control group.”
Amended Section 312.03(b)(i) requires shareholder approval prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions, to a director, officer, controlling shareholder or member 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 (each an “Active Related Party”) 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 (1%) of the number of shares of common stock or of the voting power outstanding before the issuance. However, shareholder approval will not be required if such a transaction is a cash sale for a price that is at least the Minimum Price.
The NYSE has amended Section 312.04 to define a “group” as determined under Section 13(d)(3) or Section 13(g)(3) of the Exchange Act; and (ii) “control” as defined in Rule 12b-2 of Regulation 12B under the Exchange Act. Rule 12b-2 defines “control” (including the terms “controlling,” “controlled by” and “under common control with”) as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. For purposes of determining a “group” the NYSE will rely on filings on Schedule 13D and 13G. For more on the Exchange Act definition of “control” and affiliation, see HERE.
Section 312.03(b)(ii) provides that shareholder approval is required prior to the issuance of common stock, or of 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 a Related Party has a five percent (5%) or greater interest (or such persons collectively have a ten 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 or series of related transactions and the present or potential issuance of common stock, or securities convertible into common stock, could result in an issuance that exceeds either five percent (5%) of the number of shares of common stock or of the voting power outstanding before the issuance. Nasdaq and the NYSE American both have substantially the same rule. The “related party” definition in this Section 312.03(b)(ii) which is not contingent upon a Minimum Price parameter, remains unchanged as does its application.
Laura Anthony, Esq.
Anthony, Linder & Cacomanolis, PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The Anthony, Linder & Cacomanolis team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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