NYSE Annual Compliance Guidance Memo And Amended Rules

by Laura Anthony, Esq. on July 22, 2021 in Uncategorized

In January, NYSE Regulation sent out its yearly Compliance Guidance Memo to NYSE American listed companies.  Although we are already halfway through the year, the annual letter has useful information that remains timely.  As discussed in the Compliance Memo, the NYSE sought SEC approval to permanently change its shareholder approval rules in accordance with the temporary rules enacting to provide relief to listed companies during Covid.  The SEC approved the amended rules on April 2, 2021.

Amendment to Shareholder Approval Rules

The SEC has approved NYSE rule changes to the shareholder approval requirements in Sections 312.03 and 312.04 of the NYSE Listed Company Manual (“Manual”) and the Section 314 related party transaction requirements.  The rule changes permanently align the rules with the temporary relief provided to listed companies during Covid (for more on the temporary relief, see HERE

Prior to the amendment, Section 312.03 of the Manual prohibited certain issuances to (i) directors, officers or substantial shareholders (related parties), (ii) a subsidiary, affiliate, or other closely related person of a related party; or (iii) any company or entity in which a related party has a substantial direct or indirect interest.  In particular, related party issuances were prohibited 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 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance.  The rule had limited exception if the issuances were for cash, above a minimum price, no more than 5% of the outstanding common stock and the related party was a related party solely because it is a substantial shareholder of the company.

The amended rules modify the class of persons for which shareholder approval would be required prior to an issuance.  The amended rules only require shareholder approval prior to issuances to directors, officers and substantial shareholders.  The restriction on 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 has been removed.  In addition, the amended rule broadens the exception such that all cash sales at or above the minimum price would be exempted.    Other provisions of the NYSE rules may still require shareholder approval prior to issuances to officers and directors, such as the equity compensation rules that require shareholder approval for issuances to employees, officers, directors and service providers.

The amendment also adds a provision whereby shareholder approval is required prior to any acquisition transaction or series of related transactions in which any related party has a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction and the present or potential issuance of common stock, or securities convertible into common stock, could result in an increase in either the number of shares of common stock or voting power outstanding of 5% or more before the issuance.

The amendments more closely align the NYSE rules with those of the NYSE American and Nasdaq.  For a review of the NYSE American and Nasdaq rules for affiliate issuances associated with acquisitions, see HERE.  For a review of the NYSE American and Nasdaq rules governing equity compensation shareholder approval requirements, see HERE.

The NYSE has also amended its 20% Rule.  In particular, NYSE Section 312.03(c) requires shareholder approval of any transaction relating to 20% or more of the company’s outstanding common stock or voting power outstanding before such issuance but provides the following exceptions: (i) any public offering for cash; and (ii) any bona fide private financing involving a cash sale of the company’s securities that comply with the minimum price requirement.  A “bona fide private financing” referred to a sale in which either: (i) 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 (ii) 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 5% of the shares of the issuer’s common stock or voting power before the sale.

Under the amended rules, the NYSE has replaced the term “bona fide financing” with “other financing (that is not a public offering for cash) in which the company is selling securities for cash.”  This change eliminated the requirement that the issuer sell the securities to multiple purchasers, and that no one such purchaser, or group of related purchasers, acquires more than 5% of the issuer’s common stock or voting power.  Also, under the rule change, the provision related to broker-dealer purchases becomes moot.

Of course, the new rules would not eliminate shareholder voting requirements under other NYSE rules such as the acquisition rules where the issuance equals or exceeds 20% of the common stock or voting power.  Like the affiliate rule change, the amendment is meant to further align NYSE rules with those of the NYSE American and Nasdaq.  For a review of the NYSE American and Nasdaq 20% rules, see HERE.

The NYSE has also made a change to Section 314 of the Manual requiring related party transactions to be reviewed by the audit committee.  The Exchange has updated the definition of “related party” from officers, directors and principal shareholders to align with the definition provided in Item 404 of Regulation S-K of the Exchange Act.

Annual Compliance Guidance Memo

The NYSE Memo provides a list of important reminders to all exchange listed companies, starting with the requirement to provide a timely alert of all material news.  Listed companies may comply with the NYSE’s Timely Alert/Material News policy by disseminating material news via a press release or any other Regulation FD compliant method.  For news being released between 7:00 a.m. and 4:00 p.m. EST, a company must call the NYSE’s Market Watch Group (i) ten minutes before the dissemination of news that is deemed to be of a material nature or that may have an impact on trading in the company’s securities; or (ii) at the time the company becomes aware of a material event having occurred and take steps to promptly release the news to the public and provide a copy of any written form of that announcement at the same time via email.

For news releases outside the hours of 7:00 a.m. and 4:00 p.m. EST companies are generally not required to call the Exchange in advance of issuing news, although companies should still provide a copy of material news once it is disclosed, by submitting it electronically through Listing Manager or via e-mail to nysealert@nyse.com.  Where the news is related to a dividend or stock distribution, advance notice must be provided regardless of the time of the announcement either by a call within operating hours or in writing after hours.

The requirement to provide the exchange with advance notice of the public release of information also applies to verbal information such as part of a management presentation, investor call or investor conference.  In practice, companies usually file their scripts and any presentation materials via a Form 8-K immediately prior to the verbal release of information.

Between the hours of 9:25 a.m. and 4:00 p.m. EST, NYSE will determine if a temporary trading halt should be implemented to allow the market time to fully absorb the news.  Between the hours of 7:00 a.m. and 9:25 a.m. EST, NYSE will implement news pending trading halts only at the request of the company.

Companies are prohibited from publishing material news after the official closing time for the NYSE’s trading session until the earlier of 4:05 p.m. EST or the publication of the official closing price of the listed company’s security. This requirement is designed to alleviate confusion caused by price discrepancies between trading prices on other markets after the NYSE official closing time, which is generally 4:00 p.m. EST, and the NYSE closing price upon completion of the auction, which can be after 4:00 p.m. EST.

NYSE notes that a change in the earnings announcement date can sometimes affect the trading price of a company’s stock and/or related securities and those market participants who are in possession of this information before it is broadly disseminated may have an advantage over other market participants. Consequently, listed companies are required to promptly and broadly disseminate to the market, news of the scheduling of their earnings announcements or any change in that schedule and to avoid selective disclosure of that information prior to its broad dissemination. The purpose of these rules is to prevent insider trading or even a jump-start advantage to trading on material information.

The compliance letter also addresses the following matters:

Annual Meeting Requirements – If an annual meeting is postponed or adjourned, such as if quorum is not reached, the company will not be in compliance with Section 302 of the Manual, which requires that a company hold an annual meeting during each fiscal year.

Record Date Notification – To participate in shareholder meetings as well as receive company distributions and other important communications, investors must hold their securities on the relevant record date established by the listed company. For this reason, the NYSE disseminates record date information to the marketplace so that investors can plan their holdings accordingly.  Listed companies are required to notify the NYSE at least ten calendar days in advance of all record dates set for any purpose or changes to a set date.  Record dates should be set for business days.  A press release or filing with the SEC cannot satisfy the notice requirements.  The NYSE has no power to waive these requirements and so, if notice is not provided to NYSE as required, a record date may have to be reset.

Redemption and Conversion of Listed Securities – Advance notice must be provided to the NYSE of any call redemptions or conversions of a listed security.  The NYSE tracks redemptions and conversions to ensure that any reduction in securities outstanding does not result in noncompliance with the Exchange’s distribution and market capitalization continued listing standards.  Also, the NYSE relies on a listed company’s transfer agent or depositary bank to report share information. Transfer agents are required to report shares no later than the 10th day following the end of each calendar quarter.

Annual Report Website Posting Requirement – Section 203.01 of the Manual requires that a company post its annual report on its website simultaneously with the filing of the report with the SEC.  A listed company that is not required to comply with the SEC proxy rules (such as foreign issuers) must also post a prominent undertaking on its website to provide all holders the ability, upon request, to receive a hard copy of the complete audited financial statements free of charge; and issue a press release that discloses that the Form 10-K, 20-F, 40-F or N-CSR has been filed with the SEC, includes the company’s website, and indicates that shareholders have the ability to receive hard copy of the complete audited financial statements free of charge upon request.

Corporate Governance Requirements – All listed companies must file an annual affirmation that it is in compliance with the corporate governance requirements.  The affirmation must be filed no later than 30 days after the company’s annual meeting and if no meeting is held, 30 days after the filing of its annual report (10-K, 20-F, 40-F or N-CSR) with the SEC.  In addition, a listed company must file an Interim Written Affirmation promptly (within 5 business days) after any triggering event specified on that form. Domestic companies are not required to submit an Interim Written Affirmation for changes that occur within 30 days after the annual meeting, as these can be included in the Annual Written Affirmation.

Transactions Requiring Supplemental Listing Applications – A company is required to file a Listing of Additional Securities (“LAS”) application to obtain authorization from the NYSE for a variety of corporate events, including (i) the issuance or reserve for issuance of additional shares of a listed security; (ii) the issuance or reserve for issuance of additional shares of a listed security that are issuable upon conversion of another security; (iii) change in corporate name, state of incorporation or par value; and/or (iv) the listing of a new security (such as preferred stock or warrants).  No additional securities can be issued until the NYSE authorizes the LAS.  Moreover, authorization is required whether the securities will be issued privately or through a registration and even if conversion is not possible until some future date.  Authorization takes approximately 2 weeks.

Broker Search Cards – SEC Rule 14a-13 requires any company soliciting proxies in connection with a shareholder meeting to send a search card to any entity that the company knows is holding shares for beneficial owners.  The search card must be sent: (i) at least 20 business days before the record date for the annual meeting; or (ii) such later time as permitted by the rules of the national exchange on which the securities are listed.  The NYSE American does not have any rules allowing for a later search card and accordingly, all listed companies must comply with the Rule 14a-13 20-day requirement.

NYSE Rule 452, Voting by Member Organizations – The Exchange reviews all listed company proxy materials to determine whether NYSE American member organizations that hold customer securities in “street name” accounts as brokers are allowed to vote on proxy matters without having received specific client instructions.  The Exchange recommends that listed companies submit their preliminary proxies for preliminary, confidential review.

Shareholder Approval and Voting Rights Requirements – Sections 303A.08 and 312.03 of the Manual outline the Exchange’s shareholder approval requirements including the 20% rules.  Listed companies are strongly encouraged to consult the Exchange prior to entering into a transaction that may require shareholder approval including, but not limited to, the issuance of securities: (i) with anti-dilution price protection features; (ii) that may result in a change of control; (iii) to a related party; (iv) in excess of 19.9% of the pre-transaction shares outstanding; and (v) in an underwritten public offering in which a significant percentage of the shares sold may be to a single investor or to a small number of investors (as this may be deemed a private offering requiring approval).

Listed companies are also encouraged to consult the Exchange prior to entering into a transaction that may adversely impact the voting rights of existing shareholders of the listed class of common stock, as such transactions may violate the Exchange’s voting rights. Examples of transactions which adversely affect the voting rights of shareholders of the listed common stock include transactions which result in a particular shareholder having: (i) board representation that is out of proportion to that shareholder’s investment in the company; or (ii) special rights pertaining to items that normally are subject to shareholder approval under either state or federal securities laws, such as the right to block mergers, acquisitions, disposition of assets, voluntary liquidation, or certain amendments to the company’s organizational/governing documents.

Voting Requirements for Proposals at Shareholder Meetings – Section 312.07 of the Manual provides that, where shareholder approval is required under NYSE rules, the minimum vote that constitutes approval for such purposes is approval by a majority of votes cast (i.e., the number of votes cast in favor of the proposal exceeds the aggregate of votes cast against the proposal plus abstentions).