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

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”) and Rule 19b-4 thereunder, 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. On January 30, 2019, pursuant to Section 19(b)(2) of the Act, 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. The Commission has received no comment letters on the proposal. This order approves the proposed rule change.

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 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”). 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.

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, 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.

“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. 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. 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.

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. 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 immediately preceding the signing of a binding agreement to issue the securities. 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. Under the proposal, the exceptions to the shareholder approval requirements set forth in Sections 312.03(b) and (c) described above 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. The Exchange stated that this statement will no longer be accurate upon approval of the proposed rule change.

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. 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, 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 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. Thus, the Exchange proposed to define market value as the lower of the most recent closing price or five-day average closing price.

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.

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. In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act, 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.

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.

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. 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.

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, book value may not be an appropriate indicator of whether a transaction is dilutive for purposes of the Exchange's shareholder approval rule.

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. For 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. In addition, shareholder approval would continue to be required if the issuance resulted in a change of control, as well as for certain issuances to Related Parties, such as officers, directors and their affiliates, among others. 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.

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.

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.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-NYSE-2018-54), be, and it hereby is, approved.