Temporary NYSE Waiver Relaxes Shareholder Approval Rules for PIPEs

TEMPORARY NYSE WAIVER RELAXES SHAREHOLDER APPROVAL RULES FOR PIPES

The SEC announced on April 6, 2020, that, effective immediately and until June 30, 2020, the NYSE shareholder approval requirements for issuances to related parties and for private placements under the “20% rule” are partially waived. Cognizant of the extraordinary liquidity implications of the COVID-19 pandemic on NYSE-listed companies, the NYSE proposed these emergency temporary waivers to facilitate much-needed capital raising, which may otherwise be constrained by the existing shareholder approval rules.

At a time when public equity markets experience significant volatility, these waivers will enable more flexible raising by NYSE-listed companies of equity capital in private transactions, which are often referred to as “PIPEs.” PIPEs can implicate the NYSE shareholder approval rules if they involve common stock or securities convertible or exercisable into common stock.

The NYSE waivers will especially help with PIPEs where an existing substantial shareholder makes a large investment or where only one investor purchases the entire issuance in a direct issuer sale not effected through a broker-dealer acting as initial purchaser. Without the waivers, those PIPEs may trigger a shareholder vote under existing NYSE rules even if they are executed at a sale or conversion price for the underlying common stock that represents a premium to the pre-announcement market price.

The chart below provides a summary of the shareholder approval requirements for issuances to related parties and for private placements under the “20% rule” as well as the related temporary waivers. A link to the full SEC release is here.

EXISTING NYSE RULE

UNTIL JUNE 30, 2020

Related Party Transactions

Shareholder approval is required for any issuance to a director, officer or 5% shareholder (or a subsidiary, affiliate or other closely-related person of any of them, or any company in which any of them has a 5% direct or indirect interest) 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 1% of the outstanding shares before the issuance.

Limited exception permits cash sales only to 5% shareholders (who are not also a director or officer) that meet the Minimum Price Condition (see “20% Rule” row below) so long as issuance does not exceed 5% of the outstanding shares before the issuance.^[1]

1% and 5% thresholds can be triggered based on either voting power or number of shares of common stock.

Issuances of common stock or securities convertible or exercisable into common stock that would otherwise trigger shareholder approval under these 1% or 5% tests are exempt if they meet all of the following criteria:

sale is for cash;
Minimum Price Condition (see “20% Rule” row below); and
review and approval by the audit committee or a comparable committee comprised solely of independent directors.

This temporary exemption may not be available if the proceeds are used to fund an acquisition.

“20% Rule”

Shareholder approval is required for any issuance of 20% or more of the company’s outstanding common stock or voting power outstanding before such issuance, other than a public offering for cash.

An exception allows issuances of securities for cash if they:

comply with the Minimum Price Condition; and
constitute a “bona fide private financing,” which is a sale in which either:

a registered broker-dealer purchases the securities from the issuer with a view to the private sale of such securities to one or more purchasers (as in a Rule 144A offering); or
the issuer sells the securities to multiple purchasers, and no one purchaser, or group of related purchasers, acquires, or has the right to acquire upon exercise or conversion of the securities, more than 5% of the shares of the issuer’s common stock or voting power before the sale.

“Minimum Price Condition” means that the sale price or conversion price must be at least equal to the lower of the (i) official closing or (ii) the average official closing price for the five trading days, in each case, immediately preceding the signing of the binding agreement.

The 5% limit for sales to any one purchaser is waived. In addition, private placements that are not effected through a broker-dealer acting as initial purchaser will no longer need to be made to multiple purchasers but can be executed with a single investor.

NYSE shareholder approval rules are otherwise unaffected. Therefore, any transaction benefitting from these waivers will still be subject to shareholder approval if required under any other applicable NYSE rule, including the equity compensation requirements and the change of control requirements. NYSE considers the issuance of common stock or securities convertible or exercisable into common stock to directors and officers at a discount to the market price equity compensation for this purpose if it does not occur as part of a public offering. Such issuances may therefore trigger shareholder approval under the equity compensation rules even if otherwise exempt from approval under the partially waived related party rules.

Footnotes

[1] An additional limited exception is available for Early Stage Companies (companies with revenues less than $20 million in any 2 consecutive years since inception) if issuance approved by audit committee, unless proceeds are used to fund an acquisition where a director, officer or 5% shareholder (or their affiliates) has a direct or indirect interest in the acquired company or assets or consideration paid.

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