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Also on Friday, the SEC posted notice & request for comment for a proposed NYSE rule change that would make it easier for companies to raise money from existing shareholders. Long story short, under the proposed amendment, companies would no longer have to get shareholder approval before issuing shares at a discount to “passive” (non-controlling) shareholders, even if the shareholder is buying more than 1% of currently outstanding shares and even if the shareholder owns 5% or more of the company’s outstanding stock or voting power at the time of the transaction – as long as they aren’t part of a control group. Here’s the rationale:

Certain NYSE listed companies are significantly dependent on their ability to regularly raise additional capital to fund their operations or acquire new assets. For example, pre-revenue stage biotechnology companies regularly seek additional capital to fund their research and development activities and real estate investment trusts seek to fund the acquisition of new properties by selling equity securities in private placements or direct registered sales priced at a small discount to the prevailing market price.

It is the Exchange’s understanding that, in many cases, existing shareholders of the listed company are willing purchasers of securities in such circumstances, as they already understand the company’s business and have a positive view of its future prospects. Sales to existing shareholders can also be advantageous to both the issuer and the shareholders because of the speed with which a direct sale to an existing shareholder can be completed if no shareholder approval is required.

However, the benefits of low transaction costs and speed of execution that typically exist when conducting these transactions with existing shareholders face countervailing factors if the counterparty is deemed to be a substantial securityholder for purposes of Section 312.03(b)(i). In such cases, to mitigate potential conflicts of interest, Exchange rules require that any sale below the Minimum Price can relate to no more than one per cent of the shares of common stock or one percent of the voting power outstanding before the issuance. Any such transaction that relates to more than one per cent of the common stock is subject to shareholder approval, which imposes significant delay and additional costs on the issuer, thereby often making the sale impracticable.

The NYSE notes that it is currently the only U.S. exchange with this requirement, which puts its listed companies at a disadvantage. The Exchange believes that transactions with these kinds of passive holders do not give rise to the potential conflicts of interest in the determination of transaction terms that exist where the purchaser has a role in the listed company’s board or management.

The shareholder approval requirement for issuances that exceed 1% of outstanding shares or voting power (other than cash sales for at least the “Minimum Price”) would continue to apply to issuances to officers or directors. In addition, it would apply to any 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. The proposal emphasizes that other shareholder approval requirements also would continue to apply:

The Exchange notes that any listed company selling securities in a private placement that does not meet the Minimum Price requirement to a passive investor will remain subject to the shareholder approval requirement of Section 312.03(c) if such transaction relates to 20 percent or more of the issuer’s common stock. In addition, any such transaction would remain subject to shareholder approval under Section 312.03(e) if it resulted in a change of control. Finally, the Exchange notes that Section 312.03(b)(i) as proposed to be amended would continue to provide a significant protection to shareholders against conflicts of interest in sales of securities to related parties and that no other listing venue has such a protection in its rules.

The SEC is seeking comments on the proposal. We have resources in our “NYSE” Practice Area for anyone who is trying to navigate approval requirements or other compliance issues.

– Liz Dunshee