TheCorporateCounsel.net

I blogged a few months ago about proposed changes to NYSE Rules 312.03(b) and 312.04 that would make it easier for companies to raise money from certain existing shareholders who are “passive” in nature. The SEC has now approved the amendment – as amended & restated by this late-December NYSE filing that gives additional reasons for the proposal and refines the wording.

Here’s the text of the rule change. This Cooley blog explains how it will make capital raising easier in some situations:

As amended, the rule change will add a new definition of an “Active Related Party” for purposes of Section 312.03(b)(i), but also retain the existing broader concept of “Related Party” for purposes of Section 312.03(b)(ii). Under the amended rules, the Section 312.03(b)(i) shareholder approval requirement will be limited to sales to an Active Related Party, that is, 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.

Affiliation will be determined taking into account all relevant facts and circumstances, including whether the person is an affiliate as defined under the federal securities laws. The rule will also import other federal securities law definitions, specifically including in amended Section 312.04, (i) 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 Reg 12B under the Exchange Act. For purposes of determining a “control group,” the NYSE will look to Schedules 13D or Schedules 13G disclosing the existence of a group, along with any additional follow-up inquiry that is needed. The release indicates that the NYSE “intends to revise its internal procedures in reviewing proposed transactions to the extent necessary to obtain the necessary information to make determinations with respect to whether shareholders participating in transactions are Active Related Parties.”

Shareholder approval is still required for issuances that don’t fit within this carveout. Here’s more detail from the NYSE’s filing:

In addition to the proposed definition of Active Related Party in the proposed amended version of Section 312.03(b)(i), the Exchange proposes for purposes of Section 312.03(b)(ii) to retain the broader definition of a Related Party included in the current rule (i.e., “a director, officer or substantial security holder of the company”). Consequently, this proposal would not have any substantive effect on the application of Section 312.03(b)(ii) and a listed company selling securities to a Related Party under the circumstances set forth in the rule as amended remains subject to the shareholder approval requirements in that provision.

The Exchange also notes that any listed company selling securities in a private placement that does not meet the Minimum Price requirement 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, if the securities in such financing are issued in connection with an acquisition of the stock or assets of another company, shareholder approval will be required if the issuance of such securities alone or when combined with any other present or potential issuance of common stock, or securities convertible into common stock in connection with such acquisition, is equal to or exceeds either 20 percent of the number of shares of common stock or 20 percent of the voting power outstanding before the issuance.

Sales of securities will also continue to be subject to all other shareholder approval requirements set forth in Section 312.03 (including limitations with respect to equity compensation under Section 312.03(a) and Section 303A.08) and the change of control requirement of Section 312.03(d). The Exchange notes that Section 312.04(a) provides that shareholder approval is required if any of the subparagraphs of Section 312.03 require such approval, notwithstanding the fact that the transaction does not require approval under one or more of the other subparagraphs.

Under the proposal the Exchange will continue to require shareholder approval for below market sales (i.e., below the Minimum Price) over one percent to Active Related Parties. However, as a consequence of the proposed amendment, below market sales over one percent to substantial securityholders who are not Active Related Parties will be permitted without shareholder approval under 312.03(b)(i), but will continue to be subject to all the other applicable shareholder approval requirements under 312.03.

– Liz Dunshee