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May 20, 2020

NYSE Provides Additional Relief from Its Shareholder Approval Requirements for Specified Private Placements Through June 30, 2020

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Introduction

On May 13, 2020, recognizing that some listed companies need to raise additional equity capital quickly in response to the COVID-19 pandemic, the NYSE proposed (and the SEC approved the following day) NYSE Listed Company Manual (Manual) Section 312.03T. The rule provides a limited, temporary exception to the shareholder approval requirements set forth in Manual Section 312.03(c) pertaining to 20% issuances, accompanied by limited related exceptions to Manual Section 312.03(b) pertaining to related party issuances, and Sections 312.03(a) and 303A.08 pertaining to equity compensation. Section 312.03T suspends the requirement to obtain shareholder approval for 20% stock issuances for cash at a price below the Minimum Price Requirement (described below). The new rule is operative through and including June 30, 2020, is subject to various conditions, and is similar to the shareholder approval exceptions recently adopted by Nasdaq described in our May 7, 2020 Advisory1.

Background

20% Issuances: Section 312.03(c) requires shareholder approval prior to the issuance of common stock (or securities convertible into or exercisable for common stock), in any transaction or series of related transactions if: (i) the common stock has, or will have upon issuance, 20% or more of the voting power outstanding before such issuance; or (ii) the number of shares of common stock to be issued is, or will be upon issuance, equal to 20% or more of the common stock outstanding before the issuance. Shareholder approval is not required for a public offering for cash and certain bona fide private financings for cash at a price at least equal to the lower of the official closing price immediately preceding the signing of the binding agreement or the average official closing price for the five trading days immediately preceding the signing of the binding agreement (the Minimum Price Requirement).

Related Party Issuances: Section 312.03(b) requires shareholder approval prior to the issuance of common stock (or securities convertible into or exercisable for common stock), in any transaction or series of related transactions, to: (i) a director, officer or substantial security holder of the company (Related Party); (ii) a subsidiary, affiliate or other closely-related person of a Related Party; or (iii) any company or entity in which a Related Party has a substantial direct or indirect interest; 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. However, if the Related Party involved in the transaction is classified as such solely because of security ownership in the company, a cash sale that meets the Minimum Price Requirement does not require shareholder approval if it relates to no more than 5% of the company's common stock or voting power outstanding prior to the issuance.

Equity Compensation: Section 303A.08 requires shareholder approval, with certain exceptions, prior to the issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees, or consultants. Section 312.03(a) incorporates the requirements of Section 303A.08 into Section 312.03.

While an exception to the foregoing requirements is currently available for companies in financial distress where the delay in securing stockholder approval would seriously jeopardize the financial viability of the company, the NYSE has determined that this "viability" exception does not adequately address most situations arising from COVID-19.

Section 312.03T

Under Section 312.03T, notwithstanding the requirements of Section 312.03(c), a listed company may issue securities without shareholder approval if the delay in securing shareholder approval would: (i) have a material adverse impact on the company's ability to maintain operations under its pre-COVID-19 business plan; (ii) result in workforce reductions; (iii) adversely impact the company's ability to undertake new initiatives in response to COVID-19; or (iv) seriously jeopardize the financial viability of the enterprise. In addition, the company must demonstrate that the transaction is needed due to circumstances related to COVID-19, that the proceeds will not be used to fund any acquisition transaction, and that the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company. The company's audit committee (or a comparable committee comprised solely of independent, disinterested directors) must expressly approve reliance on Section 312.03T, and determine that the transaction is in the best interest of shareholders. This relief, however, does not override any requirements arising under applicable laws or a company's own governance documents that would otherwise require a company to obtain shareholder approval for a transaction.

To rely on Section 312.03T, the listed company must submit a supplemental listing application (SLAP), as well as a certification to the NYSE that it complies with all applicable requirements of the rule, describing with specificity how it complies. Unlike the Nasdaq temporary rule, however, the NYSE must approve all transactions in advance of any issuance of securities in reliance on Section 312.03T. Companies are advised to commence discussions with the NYSE and provide the required documentation as far in advance of the proposed transaction as possible.

A company relying on Section 312.03T must also make a public announcement by filing a Form 8-K, where required by SEC rules, or by issuing a press release disclosing as promptly as possible, but no later than two business days before the issuance of the securities: (i) the terms of the transaction (including the number of shares of common stock that could be issued and the consideration received); (ii) that shareholder approval would ordinarily be required under NYSE rules but for the fact that the company is relying on the exception to the shareholder approval rules; and (iii) that the audit committee (or a comparable body of the board of directors comprised solely of independent, disinterested directors) expressly approved reliance on the exception and determined that the transaction is in the best interest of shareholders.

As investors in the foregoing transactions often require a company's senior management to participate, transactions relying on Section 312.03T are also exempt from the shareholder approval requirements of Sections 312.03(b), 312.03(a) and 303A.08 for participation in the transaction by any person whose participation would otherwise be subject to shareholder approval under such sections, provided that: (i) the affiliate's participation was specifically required by unaffiliated investors; (ii) each affiliate's participation must be less than 5% of the transaction and all affiliates' participation collectively must be less than 10% of the transaction; and (iii) any investing affiliate must not have participated in negotiating the economic terms of the transaction.

Issuances pursuant to Section 312.03T must comply with all other applicable NYSE requirements, including the shareholder approval requirements of Sections 312.03(b) and (c) in relation to issuances other than for cash, the change of control provision of Section 312.03(d), and the equity compensation requirements of Sections 312.03(a) and 303A.08 (subject to the limited exceptions described above). In addition, funds raised from the issuance of securities pursuant to Section 312.03T may not be used to fund acquisition transactions.

To rely on Section 312.03T, the listed company must submit the related SLAP and required certification, obtain NYSE approval, and thereafter sign a binding agreement no later than June 30, 2020. The issuance of the securities may occur after June 30, 2020, provided it takes place no later than 30 calendar days following the date of the binding agreement. If the company does not issue securities within such 30 calendar day period, it may no longer rely on Section 312.03T.

The NYSE will aggregate issuances of securities in reliance on Section 312.03T with any subsequent issuance by the company, other than a public offering for cash, at a discount to the Minimum Price Requirement, if the binding agreement governing the subsequent issuance is executed within 90 days of the prior issuance. Accordingly, if, following the subsequent issuance, the aggregate issuance (including shares issued in reliance on the exception) equals or exceeds 20% of the total shares or the voting power outstanding before the initial issuance, then shareholder approval would be required under Section 312.03(c) before the issuance can occur.

© Arnold & Porter Kaye Scholer LLP 2020 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. The NYSE previously waived, through and including June 30, 2020: (i) the provision in Section 312.03(b) limiting specified related parties or their affiliates to purchasing securities representing no more than 5% of the company's then-outstanding shares or voting power before the issuance in a transaction meeting a specified minimum price; and (ii) the requirements for meeting the bona fide private financing exception to Section 312.03(c) that there must be multiple purchasers in the transaction and that no purchaser may acquire securities representing more than 5% of the company's then-outstanding shares or voting power before the issuance. See our May 4, 2020 Advisory.

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