In times of economic distress, insiders can sometimes be the only source of capital for a company with urgent liquidity needs. Applying lessons learned in the 2008-2009 financial crisis to the current COVID-19 market disruptions, the NYSE temporarily relaxed its shareholder approval rules on April 6, 2020, effective immediately and extending through June 30, 2020. This waiver (available here) will permit NYSE-listed companies to raise capital in large private placements with existing large shareholders or other insiders without first obtaining shareholder approval, subject to pricing and other conditions.
A listed company taking advantage of the waiver should be aware that other considerations may still restrict its ability to raise funds through large private placements with insiders. Companies will need to consider the corporate law of their state of incorporation, charter and bylaw provisions, including the terms of any preferred stock, and any contractual limitations, as well as duties of controlling shareholders and boards of directors to other shareholders. Companies should also consider the NYSE rule requiring shareholder approval of an issuance that results in a change of control, which has not been waived.
- One Percent/Five Percent Limitations. Through June 30, 2020, listed companies can now issue stock or convertible securities for cash to an officer, director or substantial shareholder without regard to whether the shares to be issued exceed 1% or 5% of the common stock outstanding before the offering under Rule 312.03(b) of the NYSE Listed Company Manual. The sale must be at a price not less than the “minimum price,” meaning the lower of the last closing price before the binding agreement is signed or the average closing prices over the five immediately preceding trading days. The transaction must be reviewed and approved by the audit committee or a comparable committee of independent directors. The sale cannot be used to fund the purchase of another company if any director, officer or substantial security holder has a 5% or greater interest in the other company, or if all such persons collectively have a 10% or greater interest in the other company.
- Twenty Percent Limitations. Through June 30, 2020, listed companies can now also issue stock in a private placement in amounts exceeding 20% of the pre-transaction shares outstanding or voting power at a price not less than the minimum price described above without regard to whether there are multiple purchasers in the private placement and without regard to whether any individual purchaser or group of purchasers acquires more than 5% of the company’s stock under Section 312.03(c) of the Listed Company Manual, subject, however to the change of control limitation.
The NYSE waiver temporarily aligns the NYSE shareholder approvals with existing Nasdaq listing rules. Nasdaq requires shareholder approval for the sale, other than in a public offering, of more than 20% of a listed company’s stock prior to the offering at a price less than the current market price. However, it does not apply special limitations on the participation of significant shareholders in a private placement other than in the acquisition context, and does not require multiple investors in an otherwise qualifying private placement.
The NYSE has also suspended the application of its minimum listing standard relating to global market capitalization (see here) through June 30, 2020, in light of the effect of the COVID-19 crisis on markets. Stock exchanges are monitoring the impact of market disruptions on their listed companies, and are reported to be considering further relief.
Your regular Locke Lord contact and any of the authors can discuss these matters with you. Please visit our COVID-19 Resource Center often for up-to-date information to help you stay informed of the legal issues related to COVID-19.