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January 11, 2024

NYSE Amends Shareholder Approval Rules for Substantial Security Holders

Advisory

On December 26, 2023, the Securities and Exchange Commission approved New York Stock Exchange rule amendments limiting the “substantial securities holders” to which the shareholder approval requirements of Section 312.03(b)(i) of the NYSE Listed Company Manual (Manual) apply to a newly defined class of “Active Related Parties.”

Prior to the amendments, Section 312.03(b)(i) required shareholder approval before an issuance of common stock, or securities convertible into or exercisable for common stock, in any transaction or series of related transactions, to a director, officer, or substantial security holder1 of the company if the number of shares of common stock to be issued, or the number of shares of common stock into which the securities may be convertible or exercisable, exceeds either 1% of the number of shares of common stock or voting power outstanding before the issuance. There is an exception for cash sales for a price that is at least the Minimum Price.2 As amended, Section 312.03(b)(i) applies to issuances to an Active Related Party, which is defined as a director, officer, controlling shareholder, or member of a control group or any other substantial security holder of the company that has an affiliated person3 who is an officer or director of the company. A “group” means a group for purposes of Exchange Act Section 13(d)(3)/13(g)(3)4 and “control” has the same meaning as defined in Exchange Act Rule 12b-2.5 For purposes of determining group existence, the NYSE will rely on Schedule 13D and Schedule 13G filings, along with any additional follow-up inquiry that is needed.

The NYSE noted that although there are significant benefits from the investor protections provided by the shareholder approval requirements in Section 312.03(b)(i) when a purchaser of the securities is an officer, director, or other control person of the company, the previous definition of substantial security holder also applied to security holders who do not participate in the governance or management of the company. Transactions with these “passive” shareholders generally do not give rise to the potential conflicts of interest that exist where the purchaser has a role in the listed company’s board or management. The NYSE also noted that no other national securities exchange has a similar shareholder approval requirement applicable to issuances to these “passive” shareholders.

For purposes of Section 312.03(b)(ii),6 the NYSE has retained the broader definition of a Related Party (i.e., “a director, officer or substantial security holder of the company”). Sales of securities will also continue to be subject to the other shareholder approval requirements of Section 312.03 (including with respect to specified share issuances of 20% or more in number or voting power under 312.03(c), specified equity compensation under Section 312.03(a) and Section 303A.08, and the change of control requirement of Section 312.03(d)). As stated in Manual Section 312.04(a), 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. As a result, below market sales over 1% to substantial security holders who are not Active Related Parties will be permitted without shareholder approval under Section 312.03(b)(i), but will continue to be subject to all other applicable shareholder approval requirements under Section 312.03.


© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. Under Manual Section 312.04(e), an interest consisting of less than either 5% of the number of shares of common stock or the voting power outstanding of an entity shall not be considered a substantial interest or cause the holder of such an interest to be regarded as a substantial security holder.

  2. The Minimum Price is the lower of: (1) the Official Closing Price immediately preceding the signing of the binding agreement or (2) the average Official Closing Price for the five trading days immediately preceding the signing of the binding agreement. “Official Closing Price” is the official closing price on the NYSE as reported to the Consolidated Tape immediately preceding the signing of a binding agreement to issue the securities.

  3. In determining whether a person is an affiliated person for purposes of the definition of an Active Related Party, the NYSE will consider all relevant facts and circumstances, including, but not limited to, whether such person is an affiliate within the meaning of that term under provisions of the federal securities laws and the rules thereunder.

  4. Section 13(d)(3)/13(g)(3) provides: “When two or more persons act as a … group for the purpose of acquiring, holding, or disposing of [equity] securities of an issuer, such … group shall be deemed a ‘person’....” The determination under Sections 13(d)(3) and 13(g)(3) as to whether two or more persons are acting as a group does not depend solely on the presence of an express agreement. Depending on the particular facts and circumstances, concerted actions by two or more persons for the purpose of acquiring, holding (which includes voting), or disposing of securities of an issuer are sufficient to constitute the formation of a group.

  5. Exchange Act Rule 12b-2 provides that “[t]he term ‘control’ (including the terms ‘controlling,’ ‘controlled by’ and ‘under common control with’) means 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.”

  6. 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 5% or greater interest (or such persons collectively have a 10% 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 5% of the number of shares of common stock or 5% of the voting power outstanding before the issuance.