Notice2023-28796
Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1, Amending Sections 312.03(b) and 312.04 of the NYSE Listed Company Manual To Modify the Circumstances Under Which a Listed Company Must Obtain Shareholder Approval of a Sale of Securities Below the Minimum Price to a Substantial Security Holder of the Company
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 2, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 1 (Tuesday, January 2, 2024)</title>
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[Federal Register Volume 89, Number 1 (Tuesday, January 2, 2024)]
[Notices]
[Pages 113-119]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-28796]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99238; File No. SR-NYSE-2023-34]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Amendment No. 1 and Order Granting Accelerated
Approval of Proposed Rule Change, as Modified by Amendment No. 1,
Amending Sections 312.03(b) and 312.04 of the NYSE Listed Company
Manual To Modify the Circumstances Under Which a Listed Company Must
Obtain Shareholder Approval of a Sale of Securities Below the Minimum
Price to a Substantial Security Holder of the Company
December 26, 2023.
I. Introduction
New York Stock Exchange LLC (``NYSE'' or the ``Exchange'') filed on
September 26, 2023, 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 modify the circumstances under which a listed
company must obtain shareholder approval of a sale of securities to a
substantial security holder of the listed company. The proposed rule
change was published for comment in the Federal Register on October 4,
2023.\3\ On November 16, 2023, the Commission designated a longer
period for Commission action on the proposed rule change.\4\ On
December 21, 2023, the Exchange filed Amendment No. 1 to the proposed
rule change, which amended and superseded the original filing in its
entirety.\5\ The
[[Page 114]]
Commission has received no comment letters on the proposal. The
Commission is publishing this notice to solicit comments on Amendment
No. 1 from interested persons and is approving the proposed rule
change, as modified by Amendment No. 1, on an accelerated basis.
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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. 98662 (September 29,
2023), 88 FR 68675 (October 4, 2023) (``Notice'').
\4\ See Securities Exchange Act Release No. 98967 (November 16,
2023), 88 FR 81462 (November 22, 2023) (extending the time period
for Commission action to January 2, 2024).
\5\ In Amendment No. 1, the Exchange revised the proposal to:
(1) adopt a new definition of an ``Active Related Party'' in Section
312.03(b)(i) of the NYSE Listed Company Manual (``Manual'') and to
retain the current definition of Related Party for purposes of
Section 312.03(b)(ii) of the Manual; (2) adopt in Section 312.04 of
the Manual definitions of ``control'' and ``group'' for purposes of
proposed amended Section 312.03(b)(i) of the Manual; (3) include
additional explanation of why the Exchange is proposing the rule
change and believes that it is appropriate; (4) explain that the
proposal would not have any substantive effect on the application of
Section 312.03(b)(ii) of the Manual and that a listed company
selling securities to a Related Party under the circumstances set
forth in 312.03(b)(ii) of the Manual, as amended, would remain
subject to the shareholder approval requirements therein; and (5)
make other clarifying and conforming changes. Amendment No. 1 is
available at <a href="https://www.sec.gov/comments/sr-nyse-2023-34/srnyse202334-320179-832762.pdf">https://www.sec.gov/comments/sr-nyse-2023-34/srnyse202334-320179-832762.pdf</a>.
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II. The Exchange's Description of the Proposed Rule Change, as Modified
by Amendment No. 1 <SUP>6</SUP>
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\6\ This Section II reproduces Amendment No. 1, as filed by the
Exchange.
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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 NYSE previously filed a proposed rule filing to amend Section
312.03(b) of the Manual to modify the circumstances under which a
listed company must obtain shareholder approval of a sale of securities
to a substantial security holder of the listed company.\7\ The proposed
rule change was published for comment in the Federal Register on
October 4, 2023.\8\ This Amendment No. 1 supersedes the original filing
in its entirety.
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\7\ See SR-NYSE-2023-34 (September 26, 2023).
\8\ See Securities Exchange Act Release No. 98662 (September 29,
2023), 88 FR 68675 (October 4. 2023).
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Amendment No. 1 includes in the Purpose and Statutory Basis
sections additional explanation of why the Exchange is proposing the
rule change and believes that it is appropriate, specifically
discussing the Exchange's belief that there is a lesser possibility
that a substantial security holder may exercise influence over the
terms of a transaction with the company if such substantial security
holder does not have representation on the board or in management. In
addition, Amendment No. 1 amends the rule text to adopt a new
definition of an ``Active Related Party'' in Section 312.03(b)(i) and
to retain the current definition of Related Party for purposes of
Section 312.03(b)(ii).\9\ The Purpose section is amended to describe
these proposed amendments, as well as to explain that their purpose is
to ensure that the proposal would not have any substantive effect on
the application of Section 312.03(b)(ii). A listed company selling
securities to a Related Party under the circumstances set forth in the
rule as amended would remain subject to the shareholder approval
requirements in 312.03(b)(ii). Finally, Amendment No. 1 amends the rule
text to adopt in Section 312.04 definitions of ``control'' and
``group'' for purposes of proposed amended Section 312.03(b)(i),
providing clarity as to the meaning of the terms ``controlling
shareholder'' and ``control group'' in that provision as amended. The
Purpose section is amended to describe the addition of those new
defined terms and to include footnotes explaining how ``control'' is
defined and the standards to be applied in determining whether or not a
``group'' exists.
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\9\ 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 five percent or
greater interest (or such persons collectively have a ten percent 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 five percent
of the number of shares of common stock or five percent of the
voting power outstanding before the issuance.
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Section 312.04(e) of the Manual provides that an interest
consisting of less than either five percent of the number of shares of
common stock or five percent of the voting power outstanding of a
company or entity shall not be considered a substantial interest or
cause the holder of such an interest to be regarded as a substantial
security holder.
Section 312.03(b)(i) 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 a director, officer
or substantial security holder of the company 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.
The Manual provides an exception to the shareholder approval
requirement if such transaction is a cash sale for a price that is at
least the Minimum Price. Section 312.04(h) defines the Minimum Price 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. Section 312.04(i)
defines the ``Official Closing Price'' of an issuer's common stock as
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.\10\
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\10\ For example, if the transaction is signed 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 signed 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.
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Certain NYSE listed companies are significantly dependent on their
ability to regularly raise additional capital to fund their operations
or acquire new assets. For example, pre-revenue stage biotechnology
companies regularly seek additional capital to fund their research and
development activities and real estate investment trusts seek to fund
the acquisition of new properties by selling equity securities in
private placements or direct registered sales priced at a small
discount to the prevailing market price. It is the Exchange's
understanding that, in many cases, existing shareholders of the listed
company are willing purchasers of securities in such circumstances, as
they already understand the company's business and have a positive view
of its future prospects. Sales to existing shareholders can also be
advantageous to both the issuer and the shareholders because of the
speed with which a direct sale to an existing shareholder can be
completed if no shareholder approval is required. However, the benefits
of low transaction costs and speed of execution that typically exist
when conducting these transactions with existing shareholders face
countervailing factors if the counterparty is deemed to be a
substantial securityholder for purposes of Section 312.03(b)(i). In
such cases, to mitigate potential conflicts of interest, Exchange rules
require that any sale below the Minimum Price can relate to no more
than one per cent of the shares of common stock or one percent of the
voting power outstanding before the issuance. Any such transaction that
relates to more than one per cent of the
[[Page 115]]
common stock is subject to shareholder approval, which imposes
significant delay and additional costs on the issuer, thereby often
making the sale impracticable. This one percent limitation is therefore
a significant restriction on the ability of an NYSE listed company to
raise capital from its existing shareholders. Notably, the NYSE is the
only listing exchange in the United States that has such a limitation
in its rules and NYSE companies are therefore at a disadvantage in
raising additional capital when compared to their peers listed on other
national securities exchanges.
The Exchange believes there are significant benefits from the
protection provided to a listed company's investors by the shareholder
approval requirements in Section 312.03(b)(i) when a purchaser of the
securities in a transaction is an officer or director or other control
person of the company. In such cases, the potential exists for a
related party purchaser to use their influence within the company to
obtain superior terms from the company to the detriment of the
company's shareholders as a whole. However, the current definition of
substantial security holder used in the rule also applies to holders of
a company's common stock who do not participate in the governance or
management of the company through board or management representation.
The Exchange believes that transactions with these kinds of
shareholders who do not participate in the governance or management of
the company generally do not give rise to the potential conflicts of
interest in the determination of transaction terms that exist where the
purchaser has a role in the listed company's board or management. The
Exchange believes that these shareholders that do not participate
actively in the company in this way generally do not have the same
ability to participate in and influence decision making as is the case
with a related party that directly participates in the governance or
management of the company.\11\ As discussed below the Exchange will be
adopting the definition contained in Rule 12b-2 under Regulation 12B of
the Exchange Act to define control for purposes of the proposed amended
rule.
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\11\ The Exchange recognizes that substantial shareholders who
are not represented on the board or in management are likely to vote
their shares at shareholder meetings but believes that this in
itself is generally not sufficient to create a relationship with the
company that would give a substantial shareholder the ability to
influence inappropriately the terms of any transaction it enters
into with the company.
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In light of the foregoing, the Exchange proposes to amend Section
312.03(b)(i) to limit its application to related parties whose interest
in the company is not passive in nature. As proposed, Section
312.03(b)(i) would be limited in application to sales to a director,
officer, controlling shareholder or member of a control group or any
other substantial security holder of the company that has an affiliated
person \12\ who is an officer or director of the company (each an
``Active Related Party''). For purposes of determining the existence of
a group, the Exchange proposes to rely on the filings on Schedule 13D
or Schedule 13G disclosing the existence of a group as determined under
Section 13(d)(3) or Section 13(g)(3) of the Exchange Act, along with
any additional follow-up inquiry that is needed.\13\ The Exchange
proposes to amend Section 312.04 to include new definitions for
purposes of Section 312.03, providing that: (i) a ``group'' means a
group as determined under Section 13(d)(3) or Section 13(g)(3) of the
Exchange Act; and (ii) ``control'' has the same meaning as defined in
Rule 12b-2 of Regulation 12B under the Exchange Act.\14\ The Exchange
intends to revise its internal procedures in reviewing proposed
transactions to the extent necessary to obtain the necessary
information to make determinations with respect to whether shareholders
participating in transactions are Active Related Parties.
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\12\ In determining whether a person is an affiliated person for
purposes of the definition of an Active Related Party, the Exchange
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.
\13\ Section 13(d)(3) or Section 13(g)(3) provide: ``When two or
more persons act as a [ ] group for the purpose of acquiring,
holding, or disposing of [equity] securities of an issuer, the 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.
\14\ Rule 12b-2 under Regulation 12B of the Exchange Act
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.''
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In addition to the proposed definition of Active Related Party in
the proposed amended version of Section 312.03(b)(i), the Exchange
proposes for purposes of Section 312.03(b)(ii) to retain the broader
definition of a Related Party included in the current rule (i.e., ``a
director, officer or substantial security holder of the company'').
Consequently, this proposal would not have any substantive effect on
the application of Section 312.03(b)(ii) and a listed company selling
securities to a Related Party under the circumstances set forth in the
rule as amended remains subject to the shareholder approval
requirements in that provision.\15\
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\15\ See note 9 supra for a description of Section
312.03(b)(ii).
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The Exchange also notes that any listed company selling securities
in a private placement that does not meet the Minimum Price requirement
will remain subject to the shareholder approval requirement of Section
312.03(c) if such transaction relates to 20 percent or more of the
issuer's common stock. In addition, if the securities in such financing
are issued in connection with an acquisition of the stock or assets of
another company, shareholder approval will be required if the issuance
of such securities alone or when combined with any other present or
potential issuance of common stock, or securities convertible into
common stock in connection with such acquisition, is equal to or
exceeds either 20 percent of the number of shares of common stock or 20
percent of the voting power outstanding before the issuance. Sales of
securities will also continue to be subject to all other shareholder
approval requirements set forth in Section 312.03 (including
limitations with respect to equity compensation under Section 312.03(a)
and Section 303A.08) and the change of control requirement of Section
312.03(d). The Exchange notes that Section 312.04(a) provides that
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. Finally, the Exchange notes that Section 312.03(b)(i) as
proposed to be amended would continue to provide a significant
protection to shareholders against conflicts of interest in sales of
securities to Active Related Parties and that no other listing venue
has such a protection in its rules. The Exchange notes that its
shareholder approval requirements are as stringent in every respect as
those of its competitor listing venues.\16\
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\16\ See, for example, Nasdaq Stock Market Rule 5635.
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Under the proposal the Exchange will continue to require
shareholder approval for below market sales (i.e., below the Minimum
Price) over one
[[Page 116]]
percent to Active Related Parties. However, as a consequence of the
proposed amendment, below market sales over one percent to substantial
securityholders who are not Active Related Parties will be permitted
without shareholder approval under 312.03(b)(i), but will continue to
be subject to all the other applicable shareholder approval
requirements under 312.03.
1. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\17\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \18\ 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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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that proposed amended Section 312.03(b)(i) is
consistent with the protection of investors and the public interest.
Specifically, the amended rule continues to provide for shareholder
approval of below-market sales of securities to Active Related Parties
of a listed company where a potential conflict of interest exists that
Active Related Parties could use their influence within the company to
obtain superior terms from the company to the detriment of the
company's shareholders as a whole. The current definition of
substantial security holder used in the rule extends to holders of a
company's common stock who do not participate in the governance or
management of the company through board or management representation.
The Exchange believes that transactions with these kinds of
shareholders who do not participate in the governance or management of
the company (except by voting at shareholder meetings) in and of
themselves generally do not give rise to the potential conflicts of
interest in the determination of transaction terms that exist where the
purchaser has a role in the listed company's board or management. The
Exchange believes that these shareholders that do not participate
actively in the company in this way do not generally have the same
ability to participate in and influence decision making as is the case
with a related party that directly participates in the governance or
management of the company. The proposed rule only modifies the existing
rule to permit sales to investors who are not a director, officer, a
controlling shareholder or member of a control group or any other
substantial security holder of the company that has an affiliated
person who is an officer or director of the company and with respect to
whom the Exchange therefore believes that the potential for such self-
dealing does not exist.
The Exchange proposes to use definitions of ``control'' and
``group'' in the proposed amended rule that are used in the federal
securities laws and the rules thereunder and, consequently, the
Exchange believes that the use of such definitions is consistent with
the Act.
The Exchange believes that the proposed amendment would promote
competition among listing venues by removing a limitation on capital
raising by listed companies that does not exist for their peers on
other listing exchanges.
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 Exchange believes that
the proposed amendment increases competition among listing venues by
removing a limitation on capital raising by listed companies that does
not exist for their peers on other listing exchanges.
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. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\19\ In particular, the
Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\20\
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 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 are not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\19\ 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).
\20\ 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.\21\
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\21\ See, e.g., Securities Exchange Act Release Nos. 91471 (Apr.
2, 2021), 86 FR 18362 (NYSE-2020-85) (revising the shareholder
approval requirements in Sections 312.03 and 312.04 and the
requirements for related party transactions in Section 314.00);
85374 (Mar. 20, 2019) 84 FR 11354 (Mar. 26, 2019) (NYSE-2018-54)
(modifying the price requirements that companies must meet to avail
themselves of certain exceptions from the shareholder approval
requirements in Section 312.03); 84287 (Sept. 26, 2018) 83 FR 49599
(Oct. 2, 2018) (Nasdaq-2018-008) (approving a Nasdaq proposal to
change to the definition of market value for purposes of the
shareholder approval rule and eliminate the requirement for
shareholder approval of issuances at less than book value but
greater than market value); 76814 (Dec. 31, 2015), 81 FR 0820 (Jan.
7, 2016) (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). See also Securities
Exchange Act Release Nos. 48108 (June 30, 2003), 68 FR 39995 (Jul.
3, 2003) (approving equity compensation shareholder approval rules
of both the NYSE and the National Association of Securities Dealers,
Inc. n/k/a NASDAQ); and 65225 (Aug. 30, 2011), 76 FR 55148 (Sept. 6,
2011) (approving rules for the qualification, listing and delisting
of companies on BATS, 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 Exchange proposes to amend Section
312.03(b)(i)
[[Page 117]]
of the Manual to modify its application. Specifically, the Exchange
proposes to limit the shareholder approval requirements of Section
312.03(b)(i) of the Manual, which applies to issuances of common stock
exceeding either one percent of the number of shares of common stock or
one percent of the voting power outstanding before the issuance for a
price below the Minimum Price,\22\ to require shareholder approval only
for issuances to Active Related Parties, defined as directors,
officers, controlling shareholders or members of a control group or any
other substantial security holders \23\ of the company that have an
affiliated person who is an officer or director of the company,\24\ and
to no longer require shareholder approval under this provision for such
issuances to Related Parties \25\ that are not Active Related Parties
(i.e., substantial security holders that are not controlling
shareholders or a member of a control group or that do not have an
affiliated person who is an officer or director of the company).
According to the Exchange, this change would allow substantial security
holders who do not participate in the governance or management of the
company (and who are thus not in the newly defined Active Related Party
category) to acquire additional stock below the Minimum Price without
the need for shareholder approval under Section 312.01(b(i), thus
making it less burdensome for NYSE listed companies to raise additional
capital quickly.\26\ The Exchange states its belief that transactions
with substantial security holders that are not Active Related Parties
generally do not give rise to the potential conflicts of interest in
the determination of transaction terms that exist where the purchaser
has a role in the listed company's board or management, as there is a
lesser possibility that a substantial security holder that is not an
Active Related Party may exercise influence over the terms of a
transaction with the company if such substantial security holder does
not have representation on the board or in management.\27\ The Exchange
also proposes to adopt two new definitions under the revised rule for
purposes of defining ``control'' and ``group.'' ``Control'' would be
defined using the definition in Rule 12b-2 under the Act \28\ and
``group'' (for purposes of control group) would be defined as a group
as determined under Section 13(d)(3) or Section 13(g)(3) of the
Act.\29\
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\22\ ``Minimum Price'' means 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. See Section 312.04(h) of the Manual.
\23\ Section 312.04(e) of the Manual provides that ``[a]n
interest consisting of less than either five percent of the number
of shares of common stock or five percent of the voting power
outstanding of a company or entity shall not be considered a
substantial interest or cause the holder of such an interest to be
regarded as a substantial security holder.''
\24\ See proposed amended Section 312.03(b)(i) of the Manual
defining ``Active Related Party.''
\25\ See Section 312.03(b)(i) of the Manual and proposed amended
Section 312.03(b)(ii) of the Manual defining Related Party. In each
case, ``Related Party'' is defined as ``a director, officer or
substantial security holder of the company.''
\26\ See supra Section II.A. Shareholder approval is required if
any of the subparagraphs of Section 312.03 of the Manual apply
notwithstanding the fact that the transaction does not require
approval under on or more of the other subparagraphs. See Section
312.04(a). As discussed below, these other shareholder approval
provisions require approval for certain sales of discounted stock
(i.e., below the Minimum Price) in private placements as well as
sales of stock under certain situations regardless of whether or not
such sale is below the Minimum Price.
\27\ See supra Section II.A.
\28\ Rule 12b-2 under Regulation 12B of the Exchange Act
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.'' See supra note 14 and accompanying text.
\29\ Section 13(d)(3) or Section 13(g)(3) provide: ``When two or
more persons act as a [ ] group for the purpose of acquiring,
holding, or disposing of [equity] securities of an issuer, the 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. See supra note 13 and accompanying text.
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After careful consideration, the Commission finds that the proposed
rule change is consistent with the Act. As stated by the Exchange, the
shareholder approval requirement in Section 312.03(b)(i) of the Manual
protects against a potential conflict of interest when the acquirer of
additional stock may have enough influence within the company to obtain
superior terms from the company to the detriment of the company's
shareholders as a whole.\30\ As amended, the shareholder approval
requirement in Section 312.03(b)(i) of the Manual would continue to
apply to below market sales of securities of greater than 1% to Active
Related Parties (i.e., directors, officers, controlling shareholders or
members of a control group or any other substantial security holders of
the company that have an affiliated person \31\ who is an officer or
director of the company). As a result, these Active Related Parties,
that have a role in the listed company's board or management or are
substantial security holders that exercise control and thus have a
potential conflict of interest in connection with the negotiation of
any purchase of stock, will continue to be subject to the shareholder
approval requirements under Section 312.03(b)(i) of the Manual.
Moreover, even though substantial security holders that are not Active
Related Parties will no longer be subject to the shareholder approval
requirement in Section 312.03(b)(i) of the Manual, they will continue
to be subject to the other shareholder approval requirements set forth
in Section 312.03 of the Manual, to the extent applicable.
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\30\ See supra Section II.A.
\31\ In determining whether a person is an affiliated person,
the Exchange 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 the federal securities laws
and rules thereunder. See supra note 12.
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To make it clear that there are no changes being made to the
application of the other shareholder approval requirements in Section
312.03 of the Manual, the Exchange has specifically amended Section
312.03(b)(ii) of the Manual to retain the definition of Related Party
in order to clarify that a listed company selling securities to a
Related Party (that includes a substantial security holder) \32\ under
the circumstances set forth in that rule as amended would remain
subject to the shareholder approval requirements set forth therein.\33\
By amending the proposal so that the substantive requirements of
Section 312.03(b)(ii) of the Manual remain unchanged, the provision
will continue to provide important investor protections for
shareholders when a listed company is selling securities to a Related
Party that has an interest, directly or indirectly, in
[[Page 118]]
the company or assets to be acquired or consideration to be paid.
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\32\ See supra note 23.
\33\ See supra Section II.A and proposed Section 312.03(b)(ii)
of the Manual, as modified by Amendment No. 1. As discussed above,
Section 312.03(b)(ii) 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, where
such securities are issued as consideration in a transaction or
series of related transactions in which a Related Party has a five
percent or greater interest (or such persons collectively have a ten
percent 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 five
percent of the number of shares of common stock or five percent of
the voting power outstanding before the issuance.
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The Commission also finds that the Exchange's proposed definitions
of ``group'' and ``control'' in Sections 312.04(k) and (l) of the
Manual for purposes of Section 312.03 of the Manual are consistent with
the Act.\34\ The Exchange's proposed use of the standards under
Sections 13(d)(3) and 13(g)(3) to determine the existence of a group is
consistent with the guidance given by the Commission that ``[t]he
appropriate legal standard for determining whether a group is formed is
found in sections 13(d)(3) and 13(g)(3) [of the Act].'' \35\ The
Commission further stated that ``[t]he determination depends on an
analysis of all the relevant facts and circumstances and not solely on
the presence or absence of an express agreement, as two or more persons
may take concerted action or agree informally.'' \36\ The Exchange's
proposed use of Rule 12b-2 to determine the existence of control also
is reasonable and consistent with the Act given that definition applies
to ``all reports filed pursuant to section[ ] 13 [ ] of the Act. . .
.'' \37\
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\34\ In its proposal, the Exchange stated that it will revise
its internal procedures in reviewing proposed transactions as
necessary to obtain the information necessary to determine whether
shareholders participating in transaction are Active Related
Parties. In addition, the Exchange stated that it will rely on the
filings on Schedule 13D or Schedule 13G for purposes of determining
the existence of a group, along with any additional follow-up
inquiry that is needed. See supra Section II.A. The Commission
believes this is reasonable and will help the Exchange ensure
compliance with the revised rule.
\35\ See Securities Exchange Act Release No. 98704 (Oct. 10,
2023), 88 FR 76896 (Nov. 7, 2023), 76933.
\36\ See id.
\37\ See Rule 12b-1, which sets forth the scope of Regulation
12B and provides that all rules contained in Regulation 12B,
including Rule 12b-2, apply to such filings. For example, the
Commission has enforced violations of Rule 12b-2 in Regulation 12B
against beneficial owners for disclosure deficiencies in their
Schedule 13D filings.
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The Commission notes, in approving the proposal to amend the
shareholder approval requirement in Section 312.03(b)(i) of the Manual,
that the ability of listed companies to sell securities without
shareholder approval continues to remain limited by other important
Exchange rules.\38\ For example, the Commission notes that any
discounted issuance of stock to a company's officers, directors,
employees, or consultants would require shareholder approval under the
Exchange's equity compensation rules.\39\ In addition, any listed
company selling securities in a private placement that does not meet
the Minimum Price requirement will remain subject to the shareholder
approval requirement of Section 312.03(c) of the Manual if such
transaction relates to 20 percent or more of the issuer's common stock
or voting power.\40\ Section 312.03(c) of the Manual also requires
shareholder approval for issuances of 20% or more of the common stock
or the voting power in connection with an acquisition of the stock or
assets of another company irrespective of whether the price meets or
exceeds the Minimum Price. Furthermore, shareholder approval would be
required if the issuance resulted in a change of control and, as
discussed above, for the acquisition of stock or assets of another
company where the issuance increases voting power or common shares by
5% or more and a Related Party has a 5% direct or indirect interest (or
collectively 10%) in the company or assets to be acquired.\41\
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\38\ See, e.g., Section 312.03(a), (b)(ii), (b)(iii), (c) and
(d) of the Manual. The Commission notes that if shareholder approval
was not required under Section 312.03(b)(i) of the Manual, 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.
\39\ See Sections 312.03(a), 312.03(b)(iii) and 303A.08 of the
Manual.
\40\ See Section 312.03(c) of the Manual.
\41\ See Sections 312.03(d) and 312.03(b)(ii) of the Manual. See
also, supra note 33 and accompanying text concerning Section
312.03(b)(ii).
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Finally, the Exchange also states its belief that Section
312.03.(b)(i) as proposed to be amended would continue to provide a
significant protection to shareholders against conflicts of interest in
sales of securities to Active Related Parties and that no other listing
exchange has such a requirement.\42\ The Exchange also represents that
its shareholder approval requirements are as stringent as those of its
competitor listing venues.\43\ The Commission is cognizant of the fact
that the Exchange operates in a highly competitive environment
including with respect to the listing of issuers. While the proposal
would allow below market sales (i.e., below the Minimum Price) over one
percent by listed companies to substantial security holders that are
not Active Related Parties without shareholder approval, the other
shareholder approval requirements remain unchanged and provide
additional protections on the amount of shares that can be issued
without a shareholder vote.\44\ Importantly, Active Related Parties,
that have a role in the listed company's board or management or are
substantial security holders that exercise control and thus have a
potential conflict of interest in connection with the negotiation of
any purchase of stock, will continue to be subject to the shareholder
approval requirements under Section 312.03(b)(i) of the Manual. The
proposal also will promote fair competition among listing exchanges.
For the reasons discussed above, the Commission believes that the
proposed rule change, as modified by Amendment No. 1, is consistent
with the Act.
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\42\ See, e.g., Nasdaq Rule 5635; NYSE American LLC Company
Guide, Section 711-713.
\43\ See supra Section II.A at note 16 and accompanying text.
\44\ See, for example, Section 312 (b)(ii), (c) and (d) and
supra notes 39-42 and accompanying text.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Amendment No. 1, is consistent with the Act.
Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#f587809990d8969a9898909b8186b5869096db929a83"><span class="__cf_email__" data-cfemail="5022253c357d333f3d3d353e2423102335337e373f26">[email protected]</span></a>. Please include
file number SR-NYSE-2023-34 on the subject line.
Paper Comments
<bullet> 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-2023-34. 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 (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). 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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the
[[Page 119]]
Exchange. Do not include personal identifiable information in
submissions; you should submit only information that you wish to make
available publicly. We may redact in part or withhold entirely from
publication submitted material that is obscene or subject to copyright
protection. All submissions should refer to file number SR-NYSE-2023-34
and should be submitted on or before January 23, 2024.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act, to approve the proposed rule change, as modified by Amendment
No. 1, prior to the 30th day after the date of publication of Amendment
No. 1 in the Federal Register. As discussed above, Amendment No. 1, the
Exchange revised the proposal to: (1) adopt a new definition of an
``Active Related Party'' in Section 312.03(b)(i) of the Manual and to
retain the current definition of ``Related Party'' for purposes of
Section 312.03(b)(ii) of the Manual; (2) adopt in Section 312.04 of the
Manual definitions of ``control'' and ``group'' for purposes of
proposed amended Section 312.03(b)(i) of the Manual; (3) include
additional explanation of why the Exchange is proposing the rule change
and believes that it is appropriate; (4) explain that the proposal
would not have any substantive effect on the application of Section
312.03(b)(ii) of the Manual and that a listed company selling
securities to a Related Party under the circumstances set forth in
312.03(b)(ii) of the Manual, as amended, would remain subject to the
shareholder approval requirements therein; and (5) make other
clarifying and conforming changes. The Commission believes that these
revisions provide greater clarity on the application of the proposal
and its scope and the circumstances under which shareholder approval is
still required under Section 312.03 of the Manual. The additional
explanation in support of the proposal as well as the amended rule
language in Amendment No. 1 assist the Commission in evaluating the
Exchange's proposal and in determining that it is consistent with the
Act.
Accordingly, the Commission finds good cause for approving the
proposed rule change, as modified by Amendment No. 1, on an accelerated
basis, pursuant to Section 19(b)(2) of the Act.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\45\ that the proposed rule change (SR-NYSE-2023-34), as modified by
Amendment No. 1, be, and hereby is, approved.
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\45\ 15 U.S.C. 78f(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
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\46\ 17 CFR 200.30-3(a)(12).
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Christina Z. Milnor,
Assistant Secretary.
[FR Doc. 2023-28796 Filed 12-29-23; 8:45 am]
BILLING CODE 8011-01-P
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