[Federal Register Volume 83, Number 244 (Thursday, December 20, 2018)]
[Notices]
[Pages 65378-65381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27510]
[[Page 65378]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84821; File No. SR-NYSE-2018-54]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change Amending Sections 312.03 and
312.04 of the Listed Company Manual To Amend the Price Requirements for
Certain Exceptions From the Shareholder Approval Rules
December 14, 2018.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that on December 3, 2018, New York Stock Exchange LLC (``NYSE'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Sections 312.03 and 312.04 of the
Listed Company Manual (the ``Manual'') to amend the price requirements
companies must meet in order to avail themselves of certain exceptions
from the shareholder approval requirements set forth in Section 312.03.
The proposed rule change is available on the Exchange's website at
www.nyse.com, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Sections 312.03 and 312.04 of the
Manual to modify the circumstances in which listed companies are exempt
from obtaining shareholder approval for share issuances subject to
those rules. The Exchange notes that the proposed amendments are
substantially similar to amendments NASDAQ recently made to its own
shareholder approval requirements.\4\
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\4\ See footnote 4 [sic] infra.
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Section 312.03(b) of the Manual provides that shareholder approval
is required prior to the issuance of common stock, or of securities
convertible into or exercisable for common stock, in any transaction or
series of related transactions, to:
(1) A director, officer or substantial security holder of the
company (each a ``Related Party'');
(2) a subsidiary, affiliate or other closely-related person of a
Related Party; or
(3) 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 if the number
of shares of common stock into which the securities may be convertible
or exercisable, exceeds either one percent of the number of shares of
common stock or one percent of the voting power outstanding before the
issuance. However, Section 312.03(b) sets forth exceptions to this
shareholder approval requirement. One of these exceptions is applicable
where the Related Party involved in the transaction is classified as
such solely because such person is a substantial security holder and
the issuance relates to a sale of stock for cash at a price at least as
great as each of the book and market value of the issuer's common
stock. Where these conditions are met, shareholder approval will not be
required unless the number of shares of common stock to be issued, or
unless the number of shares of common stock into which the securities
may be convertible or exercisable, exceeds either five percent of the
number of shares of common stock or five percent of the voting power
outstanding before the issuance.
Section 312.03(c) generally requires shareholder approval prior to
the issuance of common stock, or of securities convertible into or
exercisable for common stock, in any transaction or series of related
transactions if:
(1) The common stock has, or will have upon issuance, voting power
equal to or in excess of 20 percent of the voting power outstanding
before the issuance of such stock or of securities convertible into or
exercisable for common stock; or
(2) the number of shares of common stock to be issued is, or will
be upon issuance, equal to or in excess of 20 percent of the number of
shares of common stock outstanding before the issuance of the common
stock or of securities convertible into or exercisable for common
stock.
Among the exceptions to the shareholder approval requirements of
Section 312.03(c) is one applicable to ``bona fide private
financings,'' as such term is defined in Section 312.04(g). A bona fide
private financing is exempt from the shareholder approval requirements
of Section 312.03(c), if such financing involves a sale of:
Common stock, for cash, at a price at least as great as
each of the book and market value of the issuer's common stock; or
securities convertible into or exercisable for common
stock, for cash, if the conversion or exercise price is at least as
great as each of the book and market value of the issuer's common
stock.
Section 312.04(g) defines a bona fide private financing as 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; or
the issuer sells the securities to multiple purchasers,
and no one such purchaser, or group of related purchasers, acquires, or
has the right to acquire upon exercise or conversion of the securities,
more than five percent of the shares of the issuer's common stock or
more than five percent of the issuer's voting power before the sale.
For purposes of the exceptions from the shareholder approval
requirements of Sections 312.03(b) and (c) set forth above, the
Exchange utilizes for the pricing test the definition of ``market
value'' set forth in Section 312.04(i). Section 312.04(i) defines the
``market value'' of an issuer's common stock as the official closing
price on the Exchange as reported to the Consolidated Tape immediately
preceding the entering into of a binding agreement to issue the
securities.
The Exchange proposes to replace the definition of market value in
Section 312.04(i) with a new definition to be
[[Page 65379]]
known as the ``Minimum Price,'' which will be used as the pricing test
for the exceptions in Sections 312.03(b) and (c) for which the market
value definition in Section 312.04(i) is currently used. This proposed
amendment is substantially similar to an amendment NASDAQ recently made
to its own shareholder approval requirements.\5\ Minimum Price will be
defined as a price that is the lower of: (i) The Official Closing Price
immediately preceding the signing of the binding agreement; or (ii) the
average Official Closing Price for the five trading days immediately
preceding the signing of the binding agreement. ``Official Closing
Price'' of an issuer's common stock will be defined in Section 312.04
as meaning the official closing price on the Exchange as reported to
the Consolidated Tape immediately preceding the signing of a binding
agreement to issue the securities.\6\ Section 312.04(i) in its current
form has a provision stating that ``[f]or example, if the transaction
is entered into after the close of the regular session at 4:00 p.m.
Eastern Standard Time on a Tuesday, then Tuesday's official closing
price is used. If the transaction is entered into at any time between
the close of the regular session on Monday and the close if the regular
session on Tuesday, then Monday's official closing price is used.'' The
Exchange proposes to retain this clarifying text as part of the
proposed definition of the ''Official Closing Price.'' In addition, all
references to ``entering into'' agreements in this text and elsewhere
in the proposed definition will be replaced by references to
``signing'' agreements.\7\ The Exchange also proposes to delete text
from the current form of Section 312.04(i) which notes that an average
price over a period of time is not acceptable as ``market value'' for
purposes of Section 312.03, as it will no longer be accurate if the
proposed amendment is approved.
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\5\ See Exchange Act Release No. 34-84287 (September 26, 2018)
(SR-NASDAQ-2018-008); 83 FR 49599 (October 2, 2018). NASDAQ does not
have a provision in its rules which is comparable to the limitations
on cash sales to related parties under Section 312.03(b) and the
related exception available to related parties which have that
status solely because they are substantial securityholders. However,
the rationale NASDAQ applied in adjusting its pricing test where
applicable is relevant to the application of the pricing test in
Section 312.03(b).
\6\ The manner in which the official closing price as reported
to the Consolidated Tape is determined is set forth in NYSE Rule
123C(1)(e). The proposed definition of ``Official Closing Price''
will be numbered as 312.04(j) and the current text of Sections
312.04(j) and (k) will be redesignated as Sections 312.04(k) and (l)
respectively.
\7\ This proposed change is solely for the purpose of conforming
the language used throughout the rule and does not have any
substantive effect.
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It is a widespread practice in commercial transactions involving
the issuance of securities to use a five day average in determining the
market price for purposes of calculating pricing provisions of
agreements, as the use of a single day's closing price can result in
unanticipated and inequitable results due to unexpected price
volatility. There are also potential negative consequences to using a
five-day average as the sole measure of whether shareholder approval is
required. For example, in a declining market, the five day average
price will always be above the current market price, thus making it
difficult for companies to close transactions because investors could
buy shares in the market at a price below the five-day average price
rather than by buying shares from the company at the agreed-upon price.
Conversely, in a rising market, the five day average price will be
lower than the closing price. In addition, if material news is
announced during the five-day period, the average could be
significantly different from the market value of the securities as
reflected by the closing price after the news is disclosed.
Nonetheless, the Exchange believes that these risks are already
accepted in the market, as evidenced by the use of an average price in
transactions that do not require shareholder approval under the
Exchange's rules, such as where less than 20% of the outstanding shares
are issuable in the transaction, notwithstanding the risk of possible
unfavorable price movements borne by both the issuer and the purchaser
of the securities during the time between when the agreement is
executed and the closing of the transaction. The Exchange believes
these concerns about the appropriateness of using a five-day average
are justified and as such, the Exchange's proposed Minimum Price
definition utilizes the lower of the most recent closing price or the
average of closing prices on the five most recent trading days.
The Exchange also proposes to eliminate from Sections 312.03(b) and
(c) the requirement that the price paid in any transaction qualifying
for the exemptions under those rules must not be less than book value.
Book value is an accounting measure and its calculation is based on the
historic cost of assets, not their current value. As such, listed
companies have argued to the Exchange on many occasions, and the
Exchange agrees, that book value is not a meaningful measure to be used
in determining whether a transaction is dilutive or should otherwise
require shareholder approval. The Exchange has also observed that when
the market price is below the book value, issuers are often extremely
surprised when confronted with the effect it has on their proposed
transactions. In that regard, the existing book value test can have
anomalous effects in transactions that appear to be clearly
commercially reasonable for the issuer and have a disproportionate
impact on companies in certain industries and at certain times. For
example, during the financial crisis in 2008 and 2009, many banks and
finance-related companies temporarily traded below book value.
Similarly, companies that make large investments in infrastructure may
have a market capitalization that is significantly less than the
accounting carrying value of those assets. In these situations,
companies are precluded for purely technical accounting reasons from
quickly raising capital on terms that are clearly at or above the
market price. Furthermore, the Exchange is not aware of any evidence
that shareholders consider book value to be a material factor when they
are asked to vote to approve a proposed transaction.
The Exchange notes that the existence of any exception from the
shareholder approval requirements of any subsection of Section 312.03
does not relieve listed companies of their obligation to comply with
any separate shareholder approval requirement under Section 303A.08 \8\
or under other applicable subsections of Section 312.03.\9\ Section
303A.08 provides that any issuance of common stock to any employee,
director or other service provider of a listed company as compensation
for services is generally treated as equity compensation for purposes
of that rule and must either be approved by the shareholders or be
drawn from a shareholder-approved equity compensation plan. Section
303A.08 provides an exception from this requirement for plans that
merely allow employees, directors or other service providers to elect
to buy shares on the open market or from the listed company for their
current fair market value. For purposes of that exception, the Exchange
has always interpreted fair market value as identical to the Official
Closing Price definition proposed to be adopted in Section 312.04. To
avoid any potential confusion, the Exchange intends to submit a
separate rule filing to amend Section 303A.08 to include
[[Page 65380]]
the definition of Official Closing Price in that rule solely for
purposes of qualifying for the exemption under Section 303A.08 for cash
sales for fair market value described above.
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\8\ This is stated in Section 312.03(a).
\9\ Section 312.04(a) states that ``[s]hareholder 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.''
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Exchange Act,\10\ in general, and furthers the
objectives of Section 6(b)(5) of the Exchange Act,\11\ in particular in
that it is designed to promote just and equitable principles of trade,
to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, to remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest and is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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Definition of Market Value
The proposed rule change will modify the minimum price for the
relevant exceptions to the shareholder approval requirements of
Sections 312.03(b) and (c) to the lower of: (i) The Official Closing
Price immediately preceding the signing of the binding agreement; or
(ii) the average Official Closing Price for the five trading days
immediately preceding the signing of the binding agreement. Allowing
share issuances to be priced at the five-day average of the closing
price will better align the Exchange's requirements with how many
transactions that are not designed to comply with the applicable
exceptions in Sections 312.03(b) and (c) are structured, such as
transactions not subject to Sections 312.03(b) and (c) because the
issuance is for less than 20% of the common stock and the parties rely
on the five day average for pricing to smooth out unusual fluctuations
in price. In so doing, the proposed rule change will perfect the
mechanism of a free and open market. Further, allowing a five day
average price continues to protect investors and the public interest
because it will allow companies and investors to price transactions in
a manner designed to eliminate aberrant pricing resulting from unusual
transactions on the day of a transaction. Limiting the allowable
average to a five-day period also protects investors by ensuring the
period is not too long, thereby avoiding any distortion of the average
price by the inclusion in the average historical pricing data that
reflects market factors that are no longer relevant. In a market that
rises each day of the period, the five-day average will be less than
the price at the end of the period, but would still be higher than the
price at the start of such period. This protects investors by ensuring
that the average price will at least partially reflect the benefits of
the more favorable recent market price. Further, aside from Exchange
requirements, when selecting the appropriate price for a transaction
company officers and directors have to consider their state law
requirements, including fiduciary responsibilities intended to protect
shareholder interests.
The Exchange believes that where two alternative measures of value
exist that both reasonably approximate the value of listed securities,
defining the Minimum Price as the lower of those values allows issuers
the flexibility to use either measure because they can also sell
securities at a price greater than the Minimum Price without needing
shareholder approval. This flexibility, and the certainty that a
transaction can be structured at either value in a manner that will not
require shareholder approval, further perfects the mechanism of a free
and open market without diminishing the existing investor protections
of Sections 312.03(b) and (c).
Book Value
The Exchange also believes that eliminating the requirement for
shareholder approval of issuances at a price less than book value but
greater than market value does not diminish the existing investor
protections of Sections 312.03(b) and (c). Book value is primarily an
accounting measure calculated based on historic cost and is generally
perceived as not being a meaningful measure to use in analyzing the
current value of a stock. The Exchange has also observed that the
existing book value test can appear arbitrary and have a
disproportionate impact on companies in certain industries and at
certain times. For example, during the financial crisis in 2008 and
2009, many banks and finance-related companies traded below book value.
Similarly, companies that make large investments in infrastructure may
have a market capitalization that is significantly less than the
accounting carrying value of those assets. Because book value is not a
meaningful measure of the current value of a stock, the elimination of
the requirement for shareholder approval of issuances at a price less
than book value but greater than market value will remove an impediment
to, and perfect the mechanism of, a free and open market, which
currently unfairly burdens companies in certain industries, without
meaningfully diminishing investor protections of Sections 312.03(b) and
(c).
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change
would revise requirements that burden issuers by unnecessarily limiting
the circumstances where they can sell securities without shareholder
approval. All listed companies would be affected in the same manner by
these changes. As such, these changes are neither intended to, nor
expected to, impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or up to 90 days (i) as the Commission may designate
if it finds such longer period to be appropriate and publishes its
reasons for so finding or (ii) as to which the self-regulatory
organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSE-2018-54 on the subject line.
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Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2018-54. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSE-2018-54, and should be submitted on
or before January 10, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2018-27510 Filed 12-19-18; 8:45 am]
BILLING CODE 8011-01-P