[Federal Register Volume 84, Number 58 (Tuesday, March 26, 2019)]
[Notices]
[Pages 11354-11357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05703]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85374; File No. SR-NYSE-2018-54]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Granting Approval of a 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
March 20, 2019.
I. Introduction
On December 3, 2018, New York Stock Exchange LLC (``NYSE'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend Sections 312.03 and 312.04 of the NYSE
Listed Company Manual (``Manual'') to modify the price requirements
that companies must meet to avail themselves of certain exceptions from
the shareholder approval requirements set forth in Section 312.03. The
proposed rule change was published for comment in the Federal Register
on December 20, 2018.\3\ On January 30, 2019, pursuant to Section
19(b)(2) of the Act,\4\ the Commission designated March 20, 2019, as
the date by which it should either approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to disapprove the proposed rule change.\5\ The
Commission has received no comment letters on the proposal. This order
approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 84821 (Dec. 14,
2018), 83 FR 65378 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 85005 (Jan. 30,
2019), 84 FR 1812 (Feb. 5, 2019).
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II. Description of the Proposal
The Exchange has proposed to amend Sections 312.03 and 312.04 of
the Manual to modify the price requirements that companies must meet
[[Page 11355]]
to avail themselves of certain exceptions from the shareholder approval
requirements set forth in Section 312.03.
Currently, under Section 312.03(b), the Exchange requires a NYSE-
listed company to obtain 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, to
a director, officer or substantial security holder of the company (each
a ``Related Party''); a subsidiary, affiliate or other closely-related
person of a Related Party; or 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 (``Related Party Transaction'').\6\ However, if the Related
Party involved in the transaction is classified as such solely because
such person is a substantial security holder (``Substantial Security
Holder Transaction''), and if 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, then shareholder approval would 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.\7\
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\6\ See Section 312.03(b) of the Manual.
\7\ See id.
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In addition, under Section 312.03(c), the Exchange currently
requires a NYSE-listed company to obtain 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 (``20% Issuance'').
However, shareholder approval would not be required for any 20%
Issuance involving any bona fide private financing,\8\ 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 the sale of 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.\9\
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\8\ ``Bona fide private financing'' is defined 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 not 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. See Section 312.04(g) of the
Manual.
\9\ See Section 312.03(c) of the Manual. Shareholder approval is
also not required for any 20% Issuance involving any public offering
for cash. See id.
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``Market value'' of the issuer's common stock is defined in Section
312.04(i), for purposes of shareholder approval required under Section
312.03, 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.\10\ The current rule
provides that, for 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 of the regular session on
Tuesday, then Monday's official closing price is used.\11\ The current
rule also states that an average price over a period of time is not
acceptable as ``market value'' for purposes of Section 312.03.\12\
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\10\ See Section 312.04(i) of the Manual.
\11\ See id.
\12\ See id.
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The Exchange has proposed a new measure of market value for
purposes of Section 312.03, to be known as the ``Minimum Price,'' which
will be defined as a price that is the lower of (1) the Official
Closing Price immediately preceding the signing of the binding
agreement to issue the securities or (2) the average Official Closing
Price for the five trading days immediately preceding the signing of
the binding agreement to issue the securities.\13\ The Exchange has
proposed to define ``Official Closing Price'' of the issuer's common
stock as the official closing price on the Exchange as reported to the
Consolidated Tape \14\ immediately preceding the signing of a binding
agreement to issue the securities.\15\ This definition is based on the
current definition of ``Market Value'' in Section 312.04(i), which
currently uses the official closing price as reported to the
Consolidated Tape in its definition, with certain changes.\16\ Under
the proposal, the exceptions to the shareholder approval requirements
set forth in Sections 312.03(b) and (c) described above \17\ will only
be available for issuances that are priced at least as great as the
Minimum Price. In addition, while the new definition of ``Official
Closing Price'' would retain the example in the current definition of
``Market Value,'' the Exchange proposed to delete the statement that an
average price over a period of time is not acceptable as ``market
value'' for purposes of Section 312.03.\18\ The Exchange stated that
this statement will no longer be accurate upon approval of the proposed
rule change.\19\
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\13\ See proposed Section 312.04(i) of the Manual.
\14\ The Exchange states that 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). See Notice, supra note 3, at
65379 n.6.
\15\ See proposed Section 312.04(j) of the Manual. The Exchange
proposes to renumber existing subsections (j) and (k) as subsections
(k) and (l), respectively. See proposed Section 312.04(j)-(l) of the
Manual.
\16\ See supra notes 10-12 and accompanying text. The new
definition of ``Official Closing Price'' would replace all
references to ``entering into'' agreements and/or transactions with
``signing'' agreements and/or transactions. The Exchange stated in
its proposal that this change would conform the language used
throughout the rule and does not have any substantive effect. See
Notice, supra note 3, at 65379 n.7.
\17\ See supra notes 7-9 and accompanying text.
\18\ See proposed Section 312.04(j) of the Manual.
\19\ See Notice, supra note 3, at 65379.
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In proposing to use a five-day average closing price to determine
if a shareholder vote is required under Sections 312.03(b) and (c), the
Exchange stated that it is a widespread practice in commercial
transactions involving the issuance of securities to use a five-day
average when pricing transactions to avoid unanticipated and
inequitable results that may occur with use of a single day's closing
price if there is unexpected price volatility.\20\ While the Exchange
noted that there are potential negative consequences to using a five-
day average as the sole measure of whether shareholder approval is
required,\21\ the Exchange stated that it believes that the risks of
using the five-day average closing price are already accepted by the
market, as evidenced by
[[Page 11356]]
the use of an average price in transactions that do not require
shareholder approval, such as those transactions where less than 20% of
the outstanding shares are being issued.\22\ Thus, the Exchange
proposed to define market value as the lower of the most recent closing
price or five-day average closing price.\23\
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\20\ See id.
\21\ See id.
\22\ See id.
\23\ See id.
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In conjunction with its proposal to redefine market value for
purposes of determining whether an exception to the shareholder
approval requirements of Sections 312.03(b) and (c) is available, the
Exchange has also proposed to eliminate the current requirement that
the price paid in a Substantial Security Holder Transaction or 20%
Issuance qualifying for such exceptions must not be less than book
value. Currently, as noted above, the Exchange's rules provide
exceptions to the shareholder approval requirements in Sections
312.03(b) and (c) for certain sales of common stock for cash at a price
at least as great as market and book value. Under the proposal,
Substantial Security Holder Transactions and 20% Issuances that
otherwise qualify for the exceptions to the shareholder approval
requirements in Sections 312.03(b) and (c) and are priced below book
value but at or above market value, as defined by the Minimum Price,
would no longer require shareholder approval. In its proposal, the
Exchange stated that book value is an accounting measure that is based
on the historic cost of assets rather than their current value, and
that it believes it is not a meaningful measure of whether a
transaction is dilutive or should otherwise require shareholder
approval.\24\
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\24\ See id.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\25\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\26\ which
requires, among other things, that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, 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 are not designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.
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\25\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\26\ 15 U.S.C. 78f(b)(5).
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The development and enforcement of meaningful corporate governance
listing standards for a national securities exchange is of substantial
importance to financial markets and the investing public, especially
given investor expectations regarding the nature of companies that have
achieved an exchange listing for their securities. The corporate
governance standards embodied in the listing standards of national
securities exchanges, in particular, play an important role in assuring
that exchange-listed companies observe good governance practices
including safeguarding the interests of shareholders with respect to
certain potentially dilutive transactions.\27\
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\27\ See, e.g., Securities Exchange Act Release Nos. 84287
(Sept. 26, 2018), 83 FR 49599 (Oct. 2, 2018) (SR-NASDAQ-2018-008)
(approving amendments to change the definition of market value for
purposes of the shareholder approval rule and eliminate the
requirement for shareholder approval of issuances at a price less
than book value but greater than market value); 76814 (Dec. 31,
2015), 81 FR 0820 (Jan. 7, 2016) (SR-NYSE-2015-02) (approving
amendments to the NYSE Listed Company Manual to exempt early stage
companies from having to obtain shareholder approval in certain
circumstances); 48108 (June 30, 2003), 68 FR 39995 (July 3, 2003)
(SR-NYSE-2002-46 and SR-NASD-2002-140) (approving equity
compensation shareholder approval rules of both the NYSE and the
National Association of Securities Dealers, Inc. n/k/a NASDAQ); and
58375 (Aug. 18, 2008), 73 FR 49498 (Aug. 21, 2008) (File No. 10-182)
(order approving registration of BATS Exchange, Inc. noting that
qualitative listing requirements including shareholder approval
rules are designed to ensure that companies trading on a national
securities exchange will adequately protect the interest of public
shareholders).
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As discussed above, the proposal would, among other things, (i)
change the definition of market value, for purposes of determining
whether exceptions to the shareholder approval requirements under
Sections 312.03(b) and (c) are met, by proposing to use the lower of
the official closing price or five-day average closing price and, as a
result, also remove the prohibition on an average price over a period
of time being used as a measure of market value for purposes of Section
312.03; and (ii) eliminate the requirement for shareholder approval
under Sections 312.03(b) and (c) at a price that is less than book
value but at least as great as market value. The Commission has
carefully considered the proposal and finds that the proposed rule
change is consistent with the Act.
The Commission believes that the proposed change to the
determination of market value (proposed to be defined as ``Minimum
Price''), to use the lower of the official closing price or five-day
average closing price, for determining whether certain exceptions to
the shareholder approval provisions apply to Substantial Security
Holder Transactions in Section 312.03(b) and to 20% Issuances in
Section 312.03(c), is consistent with the Act.\28\ The Commission notes
that, according to the Exchange, the five-day period for establishing
the average closing price is related to the way transactions are
actually structured, in situations where shareholder approval is not
required, to help smooth out price fluctuations.\29\
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\28\ See infra notes 31--35 and accompanying text for a
discussion of other circumstances that may require shareholder
approval.
\29\ See Notice, supra note 3, at 65380. As noted above, the
rule proposal would also remove an explicit provision in the
Exchange's rules that states that an average price over a period of
time is not acceptable as market value for purposes of the
shareholder approval rules. The removal of this prohibition is
necessary in order for the Exchange to adopt the same five-day
average pricing period that Nasdaq currently uses in its shareholder
approval rules. See infra note 36. In approving the removal of this
prohibition, the Commission notes it is only doing so after finding
that the five-day average pricing period is consistent with the Act.
The deletion of the prohibition is not meant to imply any other
period of time to calculate average pricing would be consistent with
the Act, and any proposal to do so would have to be analyzed on its
own merits pursuant to a proposed rule change under Section 19(b) of
the Act.
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The Commission believes that the proposal to eliminate the
requirement for shareholder approval under Sections 312.03(b) and (c)
at a price that is less than book value but at least as great as market
value is also consistent with the Act. As noted by the Exchange,\30\
book value may not be an appropriate indicator of whether a transaction
is dilutive for purposes of the Exchange's shareholder approval rule.
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\30\ See Notice, supra note 3, at 65379.
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The Commission notes, in approving the changes to measure market
value as the lower of the closing price and five-day average closing
price and eliminate the book value requirement, that the ability of
listed companies to issue securities without shareholder approval
continues to remain limited by other important Exchange rules.\31\ For
[[Page 11357]]
example, the Commission notes that any discounted issuance of stock to
a company's employees, directors, or other service providers would
require shareholder approval under the Exchange's equity compensation
rules.\32\ In addition, shareholder approval would continue to be
required if the issuance resulted in a change of control,\33\ as well
as for certain issuances to Related Parties, such as officers,
directors and their affiliates, among others.\34\ Finally, as discussed
above, Sections 312.03(b) and (c) set forth circumstances under which
shareholder approval would be required, and such approval would
continue to be required under the proposal to the extent that an
issuance would not qualify for the exceptions enumerated in those
rules.\35\
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\31\ See, e.g., Sections 312.03(a) and (d) of the Manual. The
Commission notes that, under Exchange rules, if shareholder approval
is not required under the requirements in Sections 312.03(b) or (c)
it could still be required under one of the other shareholder
approval provisions in Section 312.03 of the Manual since these
provisions apply independently of each other. See Section 312.04(a)
of the Manual (``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.''). The
Commission notes that the independent application of these
provisions includes the provisions on shareholder approval for
equity compensation plans as set forth in Section 303A.08, as
referenced in Section 312.03(a) of the Manual.
\32\ See Sections 312.03(a) and 303A.08 of the Manual. The
Commission notes that Section 303A.08 uses the term ``fair market
value'' for purposes of determining whether an issuance of stock
would qualify for an exception from the shareholder approval
requirement in Section 303A.08. The Exchange has represented that
for purposes of qualifying for 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,
and, to avoid any potential confusion, the Exchange will submit a
proposed rule filing to amend Section 303A.08 to codify this
interpretation. See Notice, supra note 3, at 65379-80. For any
avoidance of doubt, the Commission notes that the term Minimum
Price, as defined above by the Exchange in its current proposal, is
not applicable to the equity compensation provisions in Section
303A.08 or Section 312.03(a).
\33\ See Section 312.03(d) of the Manual.
\34\ See Section 312.03(b) of the Manual.
\35\ See supra notes 6-9 and accompanying text.
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The Commission further notes, in approving the changes to measure
market value as the lower of the closing price and five-day average
closing price and eliminate the book value requirement, that the
proposed amendments are similar to the rules of another national
securities exchange that the Commission found consistent with the
Act.\36\
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\36\ See Securities Exchange Act Release No. 84287 (Sept. 26,
2018), 83 FR 49599 (Oct. 2, 2018) (SR-NASDAQ-2018-008). See also
NASDAQ Rule 5635(d).
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The Commission believes that the additional proposed amendments and
clarifications to the rule, including to the definition of official
closing price, will add transparency to the Exchange's rules and are
therefore consistent with the Act.\37\
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\37\ The Commission notes that the Exchange has indicated that
the changes to the definition of Official Closing Price were made to
conform the definition to the language used throughout the rule and
does not have any substantive effect. See supra note 16.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\38\ that the proposed rule change (SR-NYSE-2018-54), be, and it
hereby is, approved.
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\38\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05703 Filed 3-25-19; 8:45 am]
BILLING CODE 8011-01-P