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THE NEW YORK STOCK EXCHANGE (NYSE) HAS SPECIFIC requirements applicable to listed companies to receive shareholder approval in connection with certain transactions, including issuing equity and convertible securities, which are in addition to any applicable requirements under state law and SEC rules. Although these rules can be seen as complex and technical, it is very important to understand them, especially considering the extra time and expense that may come with the shareholder approval process. Under Section 312.03 of the NYSE Listed Company Manual, shareholder approval by a majority of votes cast on a proposal is a prerequisite to issuing securities in connection with any of the following situations.
Pursuant to Section 303A.08, with limited exemptions explained below, shareholders must be given the opportunity to vote on all equity-based compensation plans, which are defined as plans or other arrangements that provide for the delivery of equity securities (either newly issued or treasury shares) of the listed company to any employee, director, or other service provider as compensation for services. Moreover, a compensatory grant of options or other equity securities that is not made under a plan is considered an equity compensation plan under the NYSE rule and triggers a shareholder vote.
In addition, shareholder approval is required for a material revision of an equity compensation plan, which includes but is not limited to the following:
It is important to note that an amendment will not be considered a material revision if it curtails rather than expands the scope of the plan in question.
The NYSE provides certain exemptions to the rule and does not consider the following to be equity compensation plans; therefore, no shareholder approval is needed:
In addition, as explained in more detail below, the NYSE does not require shareholder approval of employment inducement awards, certain grants, plans, and amendments in the context of mergers and acquisition transactions, and certain specific types of plans as long as they are made with the approval of the listed company’s independent compensation committee or the approval of a majority of the listed company’s independent directors and the NYSE is notified in writing.
A plan adopted in contemplation of a merger or acquisition transaction would not be considered preexisting for purposes of this exemption.
Shareholder approval will also not be required for:
Shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, if the number of shares to be issued or that 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, in any transaction or series of related transactions, to:
Under a recent exemption adopted on December 31, 2015, these requirements do not apply to the sale of stock for cash by an early stage company, which is defined as a company that has not reported revenues in excess of $20 million in any two consecutive fiscal years since its incorporation, provided that the early stage company’s audit committee (or a comparable committee comprised solely of independent auditors) approves the transaction prior to completion. The early stage company exemption covers only sales for cash and is not available for stock issuances in connection with an acquisition.
If the related party involved in the transaction is classified as such solely because such person is a substantial security holder, 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 will 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 5% of the number of shares of common stock or 5% of the voting power outstanding before the issuance.1
Under the NYSE rules, voting power outstanding refers to the aggregate number of votes that may be cast by holders of those securities outstanding that entitle the holders thereof to vote generally on all matters submitted to the company’s security holders for a vote.
Shareholder approval is required for the issuance of securities convertible into or exercisable for common stock if the stock that can be issued upon conversion or exercise exceeds the applicable percentages. This is the case even if such convertible or exchangeable securities are not to be listed on the NYSE. Only shares actually issued and outstanding (excluding treasury shares or shares held by a subsidiary) are to be used in making the calculations above. Shares reserved for issuance upon conversion of securities or upon exercise of options or warrants will not be regarded as outstanding for this purpose.
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 if:
However, shareholder approval is not required for any such issuance involving:
Bona fide private financing is defined as a sale in which either:
Shareholder approval is required for the issuance of securities convertible into or exercisable for common stock if the stock that can be issued upon conversion or exercise exceeds the applicable percentages. This is the case even if such convertible or exchangeable securities are not to be listed on the NYSE. Only shares actually issued and outstanding (excluding treasury shares or shares held by a subsidiary) are to be used in making the calculation above. Shares reserved for issuance upon conversion of securities or upon exercise of options or warrants will not be regarded as outstanding for this purpose.
Shareholder approval is required prior to an issuance that could result in a change of control of the issuer. The NYSE does not define change of control and the NYSE staff has not historically provided any clear written guidance as to its scope. Nevertheless, the NYSE’s 2005 decision in the transaction that involved Banco Santander of Spain, Sovereign Bank and Independence Community Savings (the Sovereign case) indicated that the NYSE considers all facts and circumstances to determine whether a change of control has occurred instead of following a strict numerical test. Indeed, the NYSE implied in the Sovereign case that even smaller transactions that involve less than 20% of the issuer’s outstanding shares may be deemed to be a change of control transaction, and thus trigger a shareholder vote, if certain specific veto and other rights are also given, such as the right to appoint directors or to terminate or veto the appointment of the CEO.
NYSE also provides an additional exception from the shareholder approval requirements in situations where the delay in securing stockholder approval would seriously jeopardize the financial viability of the company. This exception is generally used under extreme circumstances, such as when there is a real risk of bankruptcy, and requires an approval from the NYSE in advance. In addition, in order to take advantage of this exception, the company’s audit committee must expressly approve the reliance on this exception by the company, and the company must mail to all shareholders, not later than 10 days before issuance of the securities, a letter alerting them to its omission to seek the shareholder approval that would otherwise be required by the NYSE and indicating that the audit committee has expressly approved the exception.
Companies listed on the NYSE need to consider these rules carefully before issuing securities in order to understand whether their contemplated transaction would trigger a shareholder vote. The NYSE does not issue interpretations or guidance on its rules; however, the NYSE is willing to engage in discussions regarding interpretation of the shareholder approval rules. Depending on the circumstances, listed companies should discuss questions relating to shareholder approval and their potential transactions with their counsel and potentially NYSE representatives sufficiently early for the calling of a shareholders’ meeting and the solicitation of proxies where shareholder approval may be involved.
Stuart H. Gelfond is a partner in Fried Frank’s Corporate Department and co-head of the firm’s Capital Markets practice, resident in the New York office. Burcin Eren is a Content Manager for the Lexis Practice Advisor Capital Markets & Corporate Governance Module.
For more information on when companies that are listed on the NYSE must seek shareholder approval in general, see
> THE 20% RULE AND OTHER NYSE AND NASDAQSHAREHOLDER APPROVAL REQUIREMENTS
RESEARCH PATH: Capital Markets & Corporate Governance > Corporate Governance and Compliance Requirements for Public Companies > Corporate Governance > Practice Notes > Shareholder Rights
For additional information on when NYSE listed companies must seek shareholder approval for equity compensation plans, see
> DISCLOSING EQUITY COMPENSATION PLANS
1. NYSE Listed Company Manual 312.03(b), http://nysemanual.nyse.com/lcm/Help/mapContent.asp?sec=lcm-sections&title=sx-ruling-nyse-policymanual_310.00&id=chp_1_4_12 2. Prior to December 21, 2006, this rule included an exception from the required calculations for issuances of treasury stock. Under that exception, shareholder approval for securities issuances was only required if the securities were not already listed and shares repurchased and held as treasury shares were still considered listed. Under the limited transition period provided by the NYSE, if a company executed a binding contract prior to October 23, 2006, with respect to the issuance of common stock, the existing treasury share exception continues to be available for that transaction.