81 FR 820 - Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, Amending Sections 312.03(b) and 312.04 of the NYSE Listed Company Manual To Exempt Early Stage Companies From Having To Obtain Shareholder Approval Before Issuing Shares for Cash to Related Parties, Affiliates of Related Parties or Entities in Which a Related Party Has a Substantial Interest
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 4 (January 7, 2016)
Federal Register Volume 81, Issue 4 (January 7, 2016)
| Page Range | 820-826 | |
| FR Document | 2015-33313 |
[Federal Register Volume 81, Number 4 (Thursday, January 7, 2016)] [Notices] [Pages 820-826] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2015-33313] [[Page 820]] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-76814; File No. SR-NYSE-2015-02] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, Amending Sections 312.03(b) and 312.04 of the NYSE Listed Company Manual To Exempt Early Stage Companies From Having To Obtain Shareholder Approval Before Issuing Shares for Cash to Related Parties, Affiliates of Related Parties or Entities in Which a Related Party Has a Substantial Interest December 31, 2015. I. Introduction New York Stock Exchange LLC (``NYSE'' or the ``Exchange'') filed on April 16, 2015, 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 exempt early stage companies from having to obtain shareholder approval before issuing shares to related parties, affiliates of related parties, or entities in which a related party has a substantial interest. The proposed rule change was published for comment in the Federal Register on May 6, 2015.\3\ The Commission received no comment letters on the proposal. On June 18, 2015, the Commission designated a longer period for Commission action on the proposed rule change \4\ and on August 4, 2015, initiated proceedings under Section 19(b)(2)(B) of the Act \5\ to determine whether to approve or disapprove the proposed rule change.\6\ In response to the Order Instituting Proceedings, the Commission received a comment letter from the Exchange and Amendment No. 1 to the proposed rule change.\7\ The Commission also received a recommendation regarding the proposed rule change from the Office of the Investor Advocate (``OIAD'') \8\ and a comment letter.\9\ On October 30, 2015, the Commission extended the time period for Commission action \10\ and on November 12, 2015, the Exchange submitted a letter responding to the comments.\11\ On December 10, 2015, the Exchange filed Amendment No. 2 to the proposed rule change.\12\ This order approves the proposed rule change, as modified by Amendment Nos. 1 and 2. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ See Securities Exchange Act Release No. 74849 (April 30, 2015), 80 FR 26118 (May 6, 2015) (``Notice''). \4\ See Securities Exchange Act Release No. 75248 (June 18, 2015), 80 FR 36385 (June 24, 2015) (extending the time period for Commission action to August 4, 2015). \5\ 15 U.S.C. 78s(b)(2)(B). \6\ See Securities Exchange Act Release No. 75599 (August 4, 2015), 80 FR 47979 (August 10, 2015) (``Order Instituting Proceedings''). \7\ See letter to Brent J. Fields, Secretary, Commission from Clare F. Saperstein, Associate General Counsel, New York Stock Exchange, dated August 31, 2015 (``NYSE Response Letter I'') and Amendment No. 1 to the proposed rule change dated August 31, 2015. In Amendment No. 1, the Exchange stated that it believed there was a potential ambiguity in the proposed rule language submitted as part of the original proposal. Amendment No. 1 amends the original proposed rule language to clarify that the proposed exemption from shareholder approval transactions involving the sale of stock for cash by an early stage company applies not only to a related party, as originally proposed, but also to 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. \8\ See Memorandum to the Commission from Rick. A. Fleming, Office of the Investor Advocate, Commission, dated October 16, 2015 (``OIAD Recommendation''). As discussed in more detail below, the Commission has carefully considered the OIAD Recommendation. The OIAD was established pursuant to Section 915 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, sec. 911, 124 Stat. 1376, 1822 (July 21, 2010) (the ``Dodd-Frank Act''). The Dodd-Frank Act authorizes the Investor Advocate, among other things, to identify areas in which investors would benefit from changes in the regulations of the Commission or the rules of self- regulatory organizations and to propose to the Commission changes in the regulations or orders of the Commission that may be appropriate to promote the interests of investors. \9\ See Public comment email from Suzanne Shatto, dated October 16, 2015 (``Shatto Letter''). \10\ See Securities Exchange Act Release No. 76323 (October 30, 2015), 80 FR 68585 (November 5, 2015) (extending the time period for Commission action to December 31, 2015). \11\ See letter to Brent J. Fields, Secretary, Commission from Clare F. Saperstein, Associate General Counsel, New York Stock Exchange, dated November 12, 2015 (``NYSE Response Letter II''). \12\ In Amendment No. 2, the Exchange amended the proposed rule language to clarify that (i) an early stage company may not use the proposed exemption to fund an acquisition of stock or assets of another company that would otherwise require shareholder approval under Section 312.03(b) of the Listed Company Manual; (ii) any sale of a listed company's securities at a below-market price constitutes equity compensation under Section 303A.08 of the Manual and is therefore subject to the shareholder approval requirements under that rule; and (iii) shareholder approval of any issuance 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 Section 312.03(b) or one or more of the other subparagraphs. See also letter to Brent J. Fields, Secretary, Commission from Martha Redding, Senior Counsel and Assistant Secretary, New York Stock Exchange, dated December 14, 2015 (``Amendment No. 2''). --------------------------------------------------------------------------- II. Description of the Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 The Exchange proposes to amend Sections 312.03(b) and 312.04 of the Listed Company Manual (``Manual'') to provide an exemption to an ``early stage company'' listed on the Exchange from having to obtain shareholder approval, under certain circumstances, before issuing shares of common stock, or securities convertible into or exercisable for common stock, to a (1) director, officer \13\ or substantial security holder \14\ of the company (``Related Party'' or ``Related Parties''), (2) subsidiary, affiliate or closely-related person of a Related Party or (3) company or entity in which a Related Party has a substantial direct or indirect interest (together, a ``Proposed Exempted Party'' or ``Proposed Exempted Parties'').\15\ In particular, shareholder approval will no longer be required under Section 312.03(b) for an ``early stage company,'' before the issuance of shares for cash to a Proposed Exempted Party, provided that the company's audit committee or a comparable committee comprised solely of independent directors reviews and approves of all such transactions prior to their completion.\16\ Today, shareholder approval is required prior to the issuance of shares, among other things, where the number of shares to be issued to the Proposed Exempted Party exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance (or 5% of the number of shares or voting power, if the Related Party is classified as such solely because it is a substantial security holder, and 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 [[Page 821]] company's common stock).\17\ Shareholder approval is also required for issuances relating to 20% or more of the company's common stock, and prior to any issuance that will result in a change of control.\18\ --------------------------------------------------------------------------- \13\ Section 312.04(h) of the Manual states that the term ``officer'' has the same meaning as defined by the Commission in Rule 16a-1(f) under the Act. \14\ Section 312.04(e) of the Manual states that an interest consisting of less than either 5% of the number of shares of common stock or 5% 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. \15\ The Exchange seeks to permit early stage companies to sell up to 19.9% of their outstanding equity securities to the Proposed Exempted Parties ``without undertaking the costly and time-consuming process of obtaining shareholder approval.'' See NYSE Response Letter I, supra note 7. \16\ The Exchange believes that independent committee review and approval of Related Party transactions is an appropriate safeguard to protect shareholder interests because directors owe a fiduciary duty to their shareholders and can be held personally liable for any violation of that duty. See NYSE Response Letter I, supra note 7. \17\ The Exchange states that neither The NASDAQ Stock Market LLC (``NASDAQ'') nor NYSE MKT LLC (``NYSE MKT'') has a rule comparable to Section 312.03(b) requiring listed companies to obtain shareholder approval prior to 1% (or in certain cases 5%) share issuances in cash sales to a Proposed Exempted Party. See Notice, supra note 3, at 26120. Thus, the Exchange believes the proposed rule change is necessary to enable the Exchange to compete with NASDAQ for the listing of early stage companies. See id. \18\ See Sections 312.03(c) and 312.03(d) of the Manual. --------------------------------------------------------------------------- In addition, the Exchange proposes to amend Section 312.03(b) to make clear that the proposed exemption will not be applicable to a sale of securities by a listed company to any person subject to the provisions of Section 312.03(b) in a transaction, or series of transactions, whose proceeds will be used to fund an acquisition of stock or assets of another company where such person has a direct or indirect interest in the company or assets to be acquired or in the consideration to be paid for such acquisition.\19\ --------------------------------------------------------------------------- \19\ See Amendment No. 2, supra note 12. The Exchange states that this amendment is intended to address concerns that a listed company may sell its securities to a Proposed Exempted Party and then use the proceeds to acquire stock or assets from a company in which that Proposed Exempted Party had a direct or indirect interest. See id. The Exchange believes that ``permitting this sort of two-step transaction would enable companies to utilize the proposed exemption for acquisition transactions rather than capital raising and is inconsistent with the intended purpose of the exemption.'' See id. See also NASDAQ Rule 5635 which requires shareholder approval when acquiring stock or assets of another company where an officer, director, or substantial security holder has a 5% (or collectively 10% or greater interest) directly or indirectly in the company or assets to be acquired and the outstanding common shares or voting power to be issued will increase by 5% or more. --------------------------------------------------------------------------- The Exchange also proposes to clarify in Section 312.03(b) that the sale of stock to a Related Party that is an employee, director or service provider is subject to the equity compensation rules in Section 303A.08 of the Manual.\20\ Accordingly, an early stage company will be unable to issue securities to a Related Party that is an employee, director or service provider, at a discount to the then-current market price, without complying with the shareholder approval requirements of Section 303A.08. Furthermore, the Exchange proposes to include a statement in Section 312.03(b) 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 Section 312.03(b) or one or more of the other subparagraphs in Section 312.03.\21\ Therefore, the Exchange states that shareholder approval requirements of Sections 312.03(c) \22\ and 312.03(d) \23\ will still be applicable.\24\ --------------------------------------------------------------------------- \20\ For example, a sale of stock by an early stage company to any of such Related Parties at a discount to the then market price will be treated as equity compensation under Section 303A.08 notwithstanding the exemption from shareholder approval provided under Section 312.03(b). Consequently, an early stage company will be required to either: (i) Obtain shareholder approval of such sale, or (ii) issue such shares under an equity compensation plan that had previously been approved by shareholders and for which shareholder approval under Section 303A.08 is not otherwise required. \21\ See also Section 312.04(a) of the Manual. \22\ Section 312.03(c) of the Manual, with certain exceptions, requires shareholder approval of any issuance of securities in any transaction or related transactions relating to 20% or more of a listed company's stock before the issuance. When applying Section 312.03(c), the Exchange states that it reviews issuances to determine whether they are related and should be aggregated for purposes of the rule. See Notice, supra note 3, at 26120. The Exchange analyzes the relationship between separate stock issuances if they occur within a short period of time, are made to the same or related parties, or if there is a common use of proceeds. See id. The Exchange represents that it will engage in this analysis with respect to any series of sales made by an early stage company to a Related Party. See id. Moreover, should the Exchange determine that it is necessary to aggregate the series of sales and, as aggregated, the total number of shares sold exceeds 19.9% of the shares outstanding, shareholder approval will be required pursuant to Section 312.03(c). See id. \23\ Section 312.03(d) of the Manual requires shareholder approval prior to an issuance giving rise to a change of control. \24\ See Notice, supra note 3, at 26119-20. The Commission notes, however, that Section 312.03(c)(2) of the Manual contains an exception for sales of common stock (or securities convertible into common stock) for cash in a ``bona fide private financing,'' as defined in Section 312.04(g), if certain requirements are met. --------------------------------------------------------------------------- The Exchange also proposes to amend Section 312.04 to include a definition of the term ``early stage company.'' \25\ The Exchange proposes to define an early stage company as a company that has not reported revenues greater than $20 million in any two consecutive fiscal years since its incorporation.\26\ The Exchange represents that a company's annual financial statements prior to listing on the Exchange will also be considered when determining if the company should lose its early stage company designation.\27\ --------------------------------------------------------------------------- \25\ See proposed Section 312.04(k) of the Manual. \26\ A company that qualifies as an early stage company does not necessarily maintain such designation indefinitely and can lose its designation as an early stage company anytime it reports two consecutive fiscal years with revenues greater than $20 million each year. See Notice, supra note 3, at 26119. The Exchange believes that only a small number of currently listed companies will qualify under the proposed exemption from shareholder approval. See id. at 26120. \27\ See Notice, supra note 3, at 26119, n.6. As an example, the Exchange states that if a company files an annual report with the Commission one year after listing on the Exchange and such annual report shows that the company has had revenues greater than $20 million in each of two consecutive years (even if one of those years was prior to listing on the Exchange), the company will lose its early stage company designation at that time. See id. Moreover, once the early stage company designation is lost, it cannot be regained if the subject company later reports reduced revenues. See id. at 26120. --------------------------------------------------------------------------- Lastly, the Exchange also proposes to delete obsolete text from Section 312.03 of the Manual related to a limited transition period that is no longer relevant. III. Summary of Comments Received As noted above, the Commission received a comment letter on the proposed rule change,\28\ the OIAD Recommendation,\29\ and two supplemental submissions from the Exchange.\30\ The OIAD and the comment letter each recommended that the Commission disapprove the proposed rule change.\31\ --------------------------------------------------------------------------- \28\ See supra note 9. \29\ See supra note 8. \30\ See supra notes 7 and 11. \31\ See OIAD Recommendation, supra note 8, at 3; and Shatto Letter, supra note 9. The Shatto Letter stated that it concurred with the reasoning of the OIAD Recommendation and requested that the Exchange explain the ``driving necessity that caused the NYSE to put forth [the] proposal.'' --------------------------------------------------------------------------- A. Dilution of Economic and Ownership Interest OIAD expressed the view that the proposed rule change is inconsistent with investor protection because it could result in economic dilution of the value and ownership control of an existing shareholder's interest in an early stage company.\32\ OIAD reasoned that the proposed rule change could allow shares of an early stage company to be sold to substantial security holders at a discount to book or fair market value without shareholder approval unless the transaction exceeded twenty percent of outstanding shares or resulted in a change of control of the issuer.\33\ OIAD stated that ``[w]hen new shares are sold at a discount from the greater of book or fair market value, it results in economic dilution'' that ``reduces the value of an existing shareholder's investment in the issuer.'' \34\ --------------------------------------------------------------------------- \32\ See OIAD Recommendation, supra note 8, at 7. \33\ See id. \34\ See id. --------------------------------------------------------------------------- In addition, OIAD highlighted that ``all Related Parties . . . could obtain a significantly larger share of ownership control by paying the then-current market price for additional shares in a private transaction, without a vote of the existing shareholders.'' \35\ In effect, [[Page 822]] OIAD believed that such issuances result in an immediate transfer of value from existing shareholders to the new shareholder who injects a ``less-than-proportionate share of capital into the business.'' \36\ Finally, OIAD also noted that current investors in these companies would face potential dilution of their voting interest in connection with issuances to Related Parties.\37\ --------------------------------------------------------------------------- \35\ See id. \36\ See id. OIAD also stated that even if an infusion of capital into a company could be in an existing shareholder's long- term best interest, when the recipient of new shares is a Related Party, it creates a risk that the company may be engaging in a ``sweetheart deal'' that is motivated by a conflict of interest. See id. at 8. In such circumstances, the transaction creates a heightened risk of harm to existing shareholders, and therefore, such shareholders should be given the opportunity to evaluate the merits of the transaction and to vote on whether to approve it. See id. \37\ See id. --------------------------------------------------------------------------- In response, the Exchange stated that OIAD's analysis failed to consider circumstances that make it ``commercially reasonable to price private placement issuances at a discount to the then current market price.'' \38\ The Exchange stated that ``a discount is commercially reasonable because investors in private placements are generally unable to resell the shares they purchase in the public market until either the end of the applicable Rule 144 holding period or such time as the company files and obtains effectiveness of a registration statement.'' \39\ In addition, the Exchange asserted that the resale limitations on restricted securities make them ``riskier and more illiquid in the hands of the purchaser in a private placement and therefore less valuable.'' \40\ Accordingly, ``it is generally necessary to sell shares in a private placement at a lower price than the prevailing public market price.'' \41\ Moreover, the Exchange stated that a discount in the sale of shares in a private placement should only be viewed as economically dilutive if there are other sources of capital available on better terms.\42\ --------------------------------------------------------------------------- \38\ See NYSE Response Letter II, supra note 11, at 1. \39\ See id. at 1-2. \40\ See id. at 2. \41\ See id. \42\ See id. --------------------------------------------------------------------------- The Exchange also noted that Section 312.03(d) of the Manual provides a ``significant limitation'' on any increase in the relative voting power of Related Parties by requiring shareholder approval of any share issuance that gives rise to a change of control.\43\ As a result, the Exchange represented that ``the proposed exemption could never be used as a mechanism for obtaining overall control of a listed company without shareholder approval.'' \44\ Furthermore, the Exchange asserted that ``the voting rights of existing shareholders are not being diluted in any unfair manner'' because ``investors in any private placement will receive voting rights on the same terms as all other shareholders.'' \45\ --------------------------------------------------------------------------- \43\ See id. \44\ See id. \45\ See id. --------------------------------------------------------------------------- B. Time-Sensitive Situations OIAD suggested that the Exchange's existing rules already provide a way for early stage companies to address time-sensitive situations without first obtaining shareholder approval.\46\ Specifically, OIAD identified Section 312.05 of the Manual as providing ``NYSE-listed issuers assistance when the delay in securing shareholder approval would seriously jeopardize the financial viability of the enterprise.'' \47\ --------------------------------------------------------------------------- \46\ See OIAD Recommendation, supra note 8, at 8. \47\ See id. Section 312.05 of the Manual provides that ``[e]xceptions may be made to the shareholder approval policy in Para. 312.03 upon application to the Exchange when (1) the delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise and (2) reliance by the company on this exception is expressly approved by the Audit Committee of the Board.'' --------------------------------------------------------------------------- In response, the Exchange stated that OIAD's suggested application of Section 312.05 is ``inconsistent with the language and longstanding application of the limited exemption from obtaining shareholder approval.'' \48\ The Exchange stated that the intent and current application of Section 312.05 is only for circumstances where ``a bankruptcy filing is the only realistic alternative'' for a company.\49\ In other words, the exemption is ``intended for use in a crisis'' and not as a ``useful tool to enable [e]arly [s]tage [c]ompanies to meet their ongoing capital needs.'' \50\ Furthermore, as ``illustrative of the fact that the exemption is rarely a realistic option,'' the Exchange highlighted the fact that it has not received a single financial distress exemption application in the last year.\51\ --------------------------------------------------------------------------- \48\ See NYSE Letter Response II, supra note 11, at 2. \49\ See id. \50\ See id. \51\ See id. --------------------------------------------------------------------------- C. Audit Committee Approval OIAD stated that the audit committee (or a comparable committee of independent directors) approval requirement is not an adequate substitute for a shareholder vote on Related Party transactions,\52\ explaining that ``[a]lthough the audit committee performs many critical functions that serve to protect the interests of investors, an audit committee will not always reach the same conclusion as shareholders regarding the best interest of the company.'' \53\ As a result, OIAD believed that certain corporate actions that significantly impact shareholders' interests should be subject to shareholder approval, similar to the standard for equity compensation plans.\54\ The Order Instituting Proceedings also raised questions about whether the audit committee would be an appropriate substitute for the approval of shareholders.\55\ --------------------------------------------------------------------------- \52\ See OIAD Recommendation, supra note 8, at 8. \53\ See id. \54\ See id. at 9. \55\ See Order Instituting Proceedings, supra note 6, at 47978. --------------------------------------------------------------------------- In response, the Exchange stated that directors owe a fiduciary duty to the shareholders they represent and can be held personally liable for any violation of that duty.\56\ The Exchange further noted that independent directors are often well-positioned to evaluate related party transactions because of their knowledge of company affairs.\57\ --------------------------------------------------------------------------- \56\ See NYSE Response Letter I, supra note 7. \57\ See id. --------------------------------------------------------------------------- D. Reduced Qualitative Standards for Listed Companies OIAD expressed concern that the proposal reflects a ``race to the bottom'' among the exchanges,\58\ believing that the Commission ``should be encouraging the exchanges to enhance their standards, not devolve to the lowest common denominator because of competitive concerns.'' \59\ OIAD stated that investors have an expectation that listed companies on NYSE are subject to heightened qualitative listing standards.\60\ Given these public expectations, OIAD believed ``it is inadvisable to create what could be considered a de facto second tier on the NYSE, with lower corporate governance standards for smaller companies,'' \61\ warning that this could lead to ``significant investor confusion'' about the listing standards on the Exchange because not all listed companies would have ``the same standards of accountability.'' \62\ --------------------------------------------------------------------------- \58\ See OIAD Recommendation, supra note 8, at 9. \59\ See id. \60\ See id. \61\ See id. at 9. Moreover, OIAD believed that the benefit to be afforded to a small subset of early stage company issuers listed on NYSE would be unreasonable when weighed against the possible investor confusion concerning corporate governance and shareholder rights on the Exchange. See id. at 10. \62\ See id. at 9-10. OIAD also stated that the proposal ``does not appear to take any meaningful steps to preclude likely investor confusion; for example, NYSE's Manual will not otherwise describe or highlight the proposed exception.'' See id. at 10. --------------------------------------------------------------------------- [[Page 823]] In response, the Exchange stated that the concerns of creating a ``de facto two-tier exchange'' and ``race to the bottom'' are misplaced because only a limited number of companies would qualify for the proposed exemption.\63\ In addition, the Exchange emphasized that the proposal would only provide an exemption to early stage companies from shareholder approval for transactions that would also be exempt from shareholder approval under the exchange listing rules of NASDAQ and NYSE MKT.\64\ --------------------------------------------------------------------------- \63\ See NYSE Response Letter II, supra note 11, at 3-4. \64\ See id. at 4. The Exchange also stated that early stage companies would remain subject to the shareholder approval requirement for private placements relating to more than 20% of their outstanding shares without regard to price. See id. Accordingly, ``even if the proposal is approved, the Exchange's requirements would remain higher than those on other exchanges.'' Id. Furthermore, in response to commenter concerns that the proposal would lead to investor confusion about which shareholder approval standards would apply to specific listed companies, the Exchange noted that all listing exchanges currently have exemptions in their corporate governance requirements that apply to different categories of issuers (e.g., controlled companies), so having a limited exemption in its rules for early stage companies would not be novel to investors. See id. The Exchange also asserted that, to alleviate concerns with respect to how investors would become aware that an early stage company qualifies for the proposed exemption, companies generally disclose the applicability of exemptions in their annual reports or proxy statements filed with the Commission. See id. Moreover, the Exchange stated that it believes early stage companies that were likely to avail themselves of the proposed exemption ``should include disclosures in their SEC filings about that fact and the possible risks to investors.'' See id. Given the limited nature of the exemption, the Exchange stated that a separate designation for early stage companies would be ``confusing and would be unnecessary given the issuers' own disclosure obligations.'' See id. --------------------------------------------------------------------------- E. Impact of Proposal on Efficiency, Competition, and Capital Formation OIAD stated that the Notice does not provide sufficient information for the Commission to evaluate the proposal's impact on efficiency, competition, and capital formation, under Section 3(f) of the Act,\65\ in particular highlighting that the Notice does not provide a ``count or description of the current NYSE-listed companies that would qualify for the proposed exemption, nor is there a count or description of the larger universe of such companies listed on other exchanges or quoted over-the-counter.'' \66\ OIAD also stated that the Notice did not describe how many companies list (or delist) in a given year and how often, if ever, such companies accessed capital through private placements to Related Parties.\67\ OIAD further emphasized that there is no description of the cost imposed on companies seeking shareholder approval in those instances, or the suggestion that any of those companies experienced issues with the level of access to capital afforded by NYSE's listing standards.\68\ OIAD suggested that the Exchange obtain information regarding NASDAQ-listed companies that would qualify as early stage companies on the Exchange,\69\ asserting that ``such information would allow for a data-driven and meaningful consideration of the proposed rule's impact on efficiency, competition, and capital formation.'' \70\ --------------------------------------------------------------------------- \65\ See OIAD Recommendation, supra note 8, at 10. \66\ See id. at 10-11. \67\ See id. at 11. \68\ See id. \69\ See id. \70\ See id. --------------------------------------------------------------------------- In response, the Exchange provided data on the impact of the proposal. The Exchange stated that there are currently 21 listed companies (out of 2,133 operating companies listed on the Exchange) that would qualify as an early stage company under the proposal.\71\ Based on the data provided, the Exchange asserted that the impact of the proposal would be minimal as the number of early stage companies ``is tiny both in absolute terms and as a percentage of listed companies (less than 1%).'' \72\ In addition, the Exchange highlighted from the data that the availability of the proposed exemption to early stage companies would typically be for a limited period.\73\ The Exchange also stated that it did not believe data on NASDAQ-listed companies would be ``particularly helpful'' given that ``a large percentage of NASDAQ listed companies do not qualify for listing on the Exchange and that transfers between the two exchanges are relatively infrequent.'' \74\ --------------------------------------------------------------------------- \71\ See NYSE Response Letter II, supra note 11, at 3. The Exchange noted that many of these 21 companies do not have an extensive history of selling stock in private placements to fund their operations while listed on the Exchange. See id. Furthermore, the Exchange stated that 13 out of 15 companies that were designated as early stage companies a year ago that no longer qualify as such continue to be listed on the Exchange, while only five companies listed in the past year currently qualify as early stage companies. See id. \72\ See id. \73\ See id. \74\ See id. --------------------------------------------------------------------------- In addition, the Exchange explained that the costs to comply with the proposed exemption will vary depending on the company and, among other things, the number and type of shareholders.\75\ Based on the Exchange's experience in the listing of early stage companies on its affiliated exchange, NYSE MKT, the Exchange stated that such listed companies are ``frequently highly dependent on capital infusions from private placements in which management and significant shareholders participate to enable them to continue their operations until they reach the point of commercialization.'' \76\ The Exchange represented that these companies frequently raise capital in transactions that would have required shareholder approval under Section 312.03(b), but to which shareholder approval requirements are not applicable under NYSE MKT or NASDAQ rules.\77\ Furthermore, the Exchange stated that it believed that, ``while the companies that would avail themselves of the proposed exemption would likely be very small, the alternative could be very significant to the survival and success of those that utilize it.'' \78\ --------------------------------------------------------------------------- \75\ See id. \76\ See id. The Exchange stated that NYSE MKT lists many ``R&D- focused biotech companies and exploration stage mining companies.'' Id. \77\ See id. \78\ See id. --------------------------------------------------------------------------- IV. 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.\79\ In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,\80\ 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. The Commission recognizes that some commenters did not support the proposed rule change. The Commission, however, must approve a proposed rule change if it finds that the proposed rule change is consistent with the requirements of the Act and the [[Page 824]] applicable rules and regulations thereunder.\81\ --------------------------------------------------------------------------- \79\ 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). \80\ 15 U.S.C. 78f(b)(5). \81\ 15 U.S.C. 78s(b)(2)(C)(i). --------------------------------------------------------------------------- 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.\82\ Commenters raised several concerns with the proposed rule change. --------------------------------------------------------------------------- \82\ See, e.g., Securities Exchange Act Release No. 48108 (June 30, 2003), 68 FR 39995 (July 3, 2003) (approving equity compensation shareholder approval rules of both the NYSE and the National Association of Securities Dealers, Inc. n/k/a NASDAQ). See also Securities Exchange Act Release No. 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (order approving registration of BATS Exchange, Inc. 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). --------------------------------------------------------------------------- As discussed above, OIAD noted that the proposed rule change could result in economic dilution of the value and ownership control of an existing shareholder's interest in an early stage company.\83\ OIAD expressed concern that the potential for a greater percentage of shares to be issued at a discount to substantial security holders, without a shareholder vote, could lead to harmful dilution of the economic value of existing shares.\84\ OIAD also expressed concern that the voting power of existing shareholders could be inappropriately diluted as a result of the proposal's increased flexibility to issue additional shares at fair market value to all Related Parties.\85\ --------------------------------------------------------------------------- \83\ See OIAD Recommendation, supra note 8, at 7. See also Shatto Letter, supra note 9, which stated that it concurred with the reasoning of the OIAD Recommendation. Therefore, the Commission notes that any discussion in this Order addressing the concerns raised in the OIAD Recommendation, by its terms, also applies to the Shatto Letter concerns. \84\ See OIAD Recommendation, supra note 8, at 7. \85\ See id. --------------------------------------------------------------------------- The Commission has carefully considered these and the other concerns expressed by the commenters. The Commission nevertheless finds, however, that the proposed rule change, on balance, is consistent with the Act, for the reasons set forth below. The Commission acknowledges that the proposed rule change, by expanding the circumstances under which an early stage company could issue additional stock without shareholder approval, raises concern that such companies could engage in transactions with a harmful dilutive impact on existing shareholders. In the Commission's view, however, the significant proposed limitations on the ability of early stage companies to engage in such transactions, together with the countervailing potential benefits to the ability of small issuers to efficiently raise capital, and to fair competition among the listing exchanges, sufficiently offset those risks. Because the proposal allows early stage companies the flexibility to meet their financing needs while still preserving significant shareholder rights afforded under the other provisions of Section 312.03, the Commission finds that the proposal is consistent with investor protection and the public interest. First, the Commission notes that the additional flexibility provided by the proposed rule change for early stage companies to issue additional stock without shareholder approval is limited by other important Exchange rules. For one, any discounted issuance of stock to an early stage company's officers or directors, or to a substantial security holder that is an employee or other service provider, would require shareholder approval under the Exchange's equity compensation rules.\86\ Shareholder approval also generally is required for an issuance of additional stock, even at fair market value, that is in excess of 20% of an issuer's outstanding shares.\87\ --------------------------------------------------------------------------- \86\ See Amendment No. 2, supra note 12. \87\ The Commission notes that Section 312.03(c)(2) of the Manual contains an exception for sales of common stock (or securities convertible into common stock) for cash in a ``bona fide private financing,'' as defined in Section 312.04(g), if certain requirements are met. These require, among other things, that the offering is priced at or above book or fair market value. See Section 312.03(c) of the Manual. Shareholder approval also would be required if the transaction would result in a change of control. See Section 312.03(d) of the Manual. --------------------------------------------------------------------------- In addition, the proposed rule change requires that, for all such transactions, the approval of the early stage company's audit committee, or a comparable committee comprised solely of independent directors, first be obtained. The Commission has long acknowledged the important role an independent Board committee has in protecting shareholders from potential conflicts of interest.\88\ The Commission agrees with the Exchange that an independent committee review and approval of these transactions is an appropriate safeguard to protect shareholder interests. As noted by the Exchange, the knowledge of independent directors of the company's business affairs, together with their fiduciary obligations to shareholders, make them well-positioned to effectively protect shareholder interests under these circumstances.\89\ --------------------------------------------------------------------------- \88\ For example, the Commission stated in approving an NASD proposed rule change regarding related party transactions that ``requiring an independent body of the board of directors to approve all related party transactions should help to protect investors because directors not related to management should be less likely to approve of related party transactions that could be detrimental to the interests of shareholders.'' See Securities Act Release No. 48745 (November 1, 2003), 68 FR 64154, 64179 (November 12, 2003) (NASD and NYSE proposed rule change regarding corporate governance). See also Securities Act Release No. 9862 (July 1, 2015), 80 FR 38995 (July 8, 2015) (concept release on possible revisions to audit committee disclosures). See also Securities Act Release No. 8220 (April 9, 2003), 68 FR 18788 (April 16, 2003) (adopting Exchange Act Rule 10A-3 prohibiting national securities exchanges and national securities associations from listing any securities of an issuer that is not in compliance with the audit committee requirements mandated by the Sarbanes-Oxley Act of 2002). \89\ See NYSE Response Letter I, supra note 7. --------------------------------------------------------------------------- The Commission believes that an independent director committee is a proper forum, in executing its fiduciary duty, to review and approve these transactions and can appropriately protect shareholder interests. Additionally, the Commission notes that the Exchange, as a self- regulatory organization, is required, among other things, to enforce compliance with all Exchange rules, including its listing standards. To help the Exchange appropriately surveil its listed companies for compliance with the shareholder approval rules, under Section 703.01(A) of the Manual, listed companies are required to submit in writing, in advance of any issuance, a supplemental listing application to issue any additional shares of a listed security, including shares issued in a private transaction. Section 703.01(A) also requires that the company state whether shareholder approval is required under Exchange rules and, if so, when it was obtained. These provisions facilitate the monitoring of listed companies for compliance with the shareholder approval rules under the Manual and should aid the Exchange in monitoring compliance with the requirements for issuing private securities under the exemption, as well as whether shareholder approval is required under the change of control or equity compensation rules, among others.\90\ As provided by the Act, any future changes to exchange listing standards, including the shareholder [[Page 825]] approval provisions, will have to be submitted under Section 19(b) of the Act. The Commission will, of course, evaluate any future proposed rule changes to exchange listing standards for consistency with the requirements under the Act, including to ensure adequate investor protection for shareholders. --------------------------------------------------------------------------- \90\ See Sections 312.03(d) and 303A.08 of the Manual. --------------------------------------------------------------------------- The Commission also believes that facilitating the ability of early stage companies to efficiently raise needed capital under the limited circumstances permitted by the proposed rule change is in the public interest. By definition, early stage companies are those that have not yet generated significant revenue from operations, and may therefore need to raise capital quickly in order to fund their ongoing operations. Allowing early stage companies to flexibly raise capital, subject to audit committee approval and the other limitations described above, but without the delays inherent in a shareholder vote, could improve the business prospects of such companies and ultimately inure to the benefit of shareholders. Further, the Commission recognizes that, as noted by the Exchange, the rules of other listing exchanges such as NASDAQ and NYSE MKT permit early stage companies similar flexibility in issuing additional stock without shareholder approval. While the Commission acknowledges OIAD's concern about a ``race to the bottom'' by the exchanges, the Commission also is cognizant of the fact that the exchanges operate in a highly competitive environment, including with respect to the listing of issuers. If the Commission were not to allow the Exchange to provide the same flexibility to listed companies offered by other listing markets, the Exchange Act goal of facilitating fair competition among the exchanges could be undermined. At the same time, investor protection might not materially improve, since early stage companies seeking the flexibility proposed by the Exchange simply may choose to list on NASDAQ or NYSE MKT. The Commission notes that, in determining to approve the Exchange's proposed rule change, the Commission has considered, under Section 3(f) of the Act, whether the action will promote efficiency, competition, and capital formation.\91\ The proposed rule change would allow early stage companies to more timely access the capital markets when they critically need funds. To the extent that the proposed rule change would make it easier for such companies to raise the needed capital and continue their operations, it would likely improve the allocation of capital thus enhancing efficiency. On the other hand, if the rule change is primarily used by Related Parties to more easily gain control of a company and in the process expropriate other (minority) shareholders, then the proposed rule change could have a negative effect on efficiency. Given that Section 312.03(d) of the Manual significantly limits any increase in the relative voting power of Related Parties by requiring shareholder approval of any share issuance that gives rise to a change of control, the proposed rule change is unlikely to lead to significant minority shareholder expropriation. --------------------------------------------------------------------------- \91\ See 15 U.S.C. 78c(f). --------------------------------------------------------------------------- By making it less costly for early stage companies to raise additional capital they need to continue their operations, the proposed rule change will promote capital formation. Allowing these companies to stay afloat and grow also increases the likelihood that they would raise more funds in the future, further enhancing capital formation. In addition, the proposed rule change could enhance competition by allowing NYSE to compete for the listing of these companies in a competitive environment that allows these companies to list on other markets such as NASDAQ or NYSE MKT. In conclusion, the Commission believes that the proposed rule change could promote efficiency, competition, and capital formation. Finally, the Commission acknowledges the important contributions that are being made by its Investor Advocate on a range of important policy matters, including those raised by individual proposed rule changes filed by the exchanges, such as the proposal that is the subject of this Order. While the Commission today determined that the NYSE's proposed rule change is consistent with the Act, the Commission encourages the Investor Advocate to continue bringing important matters to our attention, including identifying circumstances where incremental changes, while consistent with the Act, may be contributing to cumulative impacts that harm investors or impede fair and orderly markets. In this instance, the comments of the Investor Advocate prompted the Exchange to bolster the justification for its proposal, including through the provision of additional data, and to clarify its limited scope. As a result, the extent and quality of information available to the Commission in considering the proposed rule change was substantially enhanced, to the benefit of investors and all market participants. As our markets and regulatory structure continue to evolve, the views of the Investor Advocate will remain critical in helping the Commission further its mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. For the reasons discussed above, the Commission believes that the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent with the Act.\92\ --------------------------------------------------------------------------- \92\ The Commission also finds that deleting obsolete language in Section 312.03 of the Manual, relating to the limited transition period described above, is consistent with Section 6(b)(5) of the Act. --------------------------------------------------------------------------- V. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether this filing, as modified by whether Amendment Nos. 1 and 2, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-NYSE-2015-02 on the subject line. Paper Comments Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NYSE-2015-02. 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 Web site (http://www.sec.gov/rules/sro.shtml). 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 Web site 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 10:00 a.m. and 3:00 p.m. Copies of the [[Page 826]] filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSE-2015-02 and should be submitted on or before January 28, 2016. VI. Accelerated Approval of Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 The Commission finds good cause, pursuant to Section 19(b)(2) of the Act, to approve the proposed rule change, as modified by Amendment Nos. 1 and 2, prior to the 30th day after the date of publication of Amendment Nos. 1 and 2 in the Federal Register. As discussed above, Amendment No. 1 merely clarified that the proposed exemption from shareholder approval transactions involving the sale of stock for cash by an early stage company applies not only to a Related Party, as originally proposed, but also to 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.\93\ Similarly, Amendment No. 2 clarified that (i) an early stage company may not use the proposed exemption to fund an acquisition of stock or assets of another company that would otherwise require shareholder approval under Section 312.03(b) of the Manual; (ii) any sale of a listed company's securities at a below-market price to an employee, director or service provider constitutes equity compensation under Section 303A.08 of the Manual and is therefore subject to the shareholder approval requirements under that rule; and (iii) shareholder approval of any issuance 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 Section 312.03(b) or one or more of the other subparagraphs.\94\ The Commission believes that these revisions provide greater clarity on the application of the proposal and remove uncertainty as to which transactions the Exchange proposes to exempt from shareholder approval under Section 312.03. --------------------------------------------------------------------------- \93\ See supra note 7. \94\ See Amendment No. 2, supra note 12. --------------------------------------------------------------------------- Accordingly, the Commission finds good cause for approving the proposed rule change, as modified by Amendment Nos. 1 and 2, on an accelerated basis, pursuant to Section 19(b)(2) of the Act. VII. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act \95\ that the proposed rule change (SR-NYSE-2015-02), as modified by Amendment Nos. 1 and 2, be, and hereby is, approved. --------------------------------------------------------------------------- \95\ 15 U.S.C. 78f(b)(2). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\96\ --------------------------------------------------------------------------- \96\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Jill M. Peterson, Assistant Secretary. [FR Doc. 2015-33313 Filed 1-6-16; 8:45 am] BILLING CODE 8011-01-P
![820 Federal Register / Vol. 81, No. 4 / Thursday, January 7, 2016 / Notices
SECURITIES AND EXCHANGE a recommendation regarding the II. Description of the Proposed Rule
COMMISSION proposed rule change from the Office of Change, as Modified by Amendment
the Investor Advocate (‘‘OIAD’’) 8 and a Nos. 1 and 2
[Release No. 34–76814; File No. SR–NYSE–
2015–02] comment letter.9 On October 30, 2015,
the Commission extended the time The Exchange proposes to amend
period for Commission action 10 and on Sections 312.03(b) and 312.04 of the
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of November 12, 2015, the Exchange Listed Company Manual (‘‘Manual’’) to
Filing of Amendment Nos. 1 and 2 and provide an exemption to an ‘‘early stage
submitted a letter responding to the
Order Granting Accelerated Approval company’’ listed on the Exchange from
comments.11 On December 10, 2015, the
of Proposed Rule Change, as Modified having to obtain shareholder approval,
Exchange filed Amendment No. 2 to the
by Amendment Nos. 1 and 2 Thereto, under certain circumstances, before
proposed rule change.12 This order
Amending Sections 312.03(b) and issuing shares of common stock, or
approves the proposed rule change, as
312.04 of the NYSE Listed Company securities convertible into or exercisable
modified by Amendment Nos. 1 and 2.
Manual To Exempt Early Stage for common stock, to a (1) director,
Companies From Having To Obtain officer 13 or substantial security
August 31, 2015 (‘‘NYSE Response Letter I’’) and
Shareholder Approval Before Issuing Amendment No. 1 to the proposed rule change
holder 14 of the company (‘‘Related
Shares for Cash to Related Parties, dated August 31, 2015. In Amendment No. 1, the Party’’ or ‘‘Related Parties’’), (2)
Affiliates of Related Parties or Entities Exchange stated that it believed there was a subsidiary, affiliate or closely-related
in Which a Related Party Has a potential ambiguity in the proposed rule language person of a Related Party or (3) company
submitted as part of the original proposal. or entity in which a Related Party has
Substantial Interest Amendment No. 1 amends the original proposed
rule language to clarify that the proposed a substantial direct or indirect interest
December 31, 2015. exemption from shareholder approval transactions (together, a ‘‘Proposed Exempted Party’’
I. Introduction involving the sale of stock for cash by an early stage or ‘‘Proposed Exempted Parties’’).15 In
company applies not only to a related party, as particular, shareholder approval will no
New York Stock Exchange LLC originally proposed, but also to a subsidiary,
affiliate or other closely-related person of a related
longer be required under Section
(‘‘NYSE’’ or the ‘‘Exchange’’) filed on
party; or any company or entity in which a related 312.03(b) for an ‘‘early stage company,’’
April 16, 2015, with the Securities and
party has a substantial direct or indirect interest. before the issuance of shares for cash to
Exchange Commission (‘‘Commission’’), 8 See Memorandum to the Commission from Rick.
a Proposed Exempted Party, provided
pursuant to Section 19(b)(1) of the A. Fleming, Office of the Investor Advocate, that the company’s audit committee or
Securities Exchange Act of 1934 Commission, dated October 16, 2015 (‘‘OIAD
a comparable committee comprised
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a Recommendation’’). As discussed in more detail
below, the Commission has carefully considered the solely of independent directors reviews
proposed rule change to exempt early
OIAD Recommendation. The OIAD was established and approves of all such transactions
stage companies from having to obtain pursuant to Section 915 of the Dodd-Frank Wall
shareholder approval before issuing prior to their completion.16 Today,
Street Reform and Consumer Protection Act, Pub. shareholder approval is required prior
shares to related parties, affiliates of L. 111–203, sec. 911, 124 Stat. 1376, 1822 (July 21,
related parties, or entities in which a 2010) (the ‘‘Dodd-Frank Act’’). The Dodd-Frank Act to the issuance of shares, among other
related party has a substantial interest. authorizes the Investor Advocate, among other things, where the number of shares to be
The proposed rule change was things, to identify areas in which investors would issued to the Proposed Exempted Party
benefit from changes in the regulations of the exceeds either 1% of the number of
published for comment in the Federal Commission or the rules of self-regulatory
Register on May 6, 2015.3 The organizations and to propose to the Commission
shares of common stock or 1% of the
Commission received no comment changes in the regulations or orders of the voting power outstanding before the
letters on the proposal. On June 18, Commission that may be appropriate to promote the issuance (or 5% of the number of shares
2015, the Commission designated a
interests of investors. or voting power, if the Related Party is
9 See Public comment email from Suzanne Shatto,
longer period for Commission action on classified as such solely because it is a
dated October 16, 2015 (‘‘Shatto Letter’’).
the proposed rule change 4 and on 10 See Securities Exchange Act Release No. 76323
substantial security holder, and the
August 4, 2015, initiated proceedings (October 30, 2015), 80 FR 68585 (November 5, 2015)
issuance relates to a sale of stock for
under Section 19(b)(2)(B) of the Act 5 to (extending the time period for Commission action cash, at a price at least as great as each
determine whether to approve or to December 31, 2015). of the book and market value of the
11 See letter to Brent J. Fields, Secretary,
disapprove the proposed rule change.6
Commission from Clare F. Saperstein, Associate 13 Section 312.04(h) of the Manual states that the
In response to the Order Instituting General Counsel, New York Stock Exchange, dated term ‘‘officer’’ has the same meaning as defined by
Proceedings, the Commission received a November 12, 2015 (‘‘NYSE Response Letter II’’). the Commission in Rule 16a–1(f) under the Act.
comment letter from the Exchange and 12 In Amendment No. 2, the Exchange amended
14 Section 312.04(e) of the Manual states that an
Amendment No. 1 to the proposed rule the proposed rule language to clarify that (i) an interest consisting of less than either 5% of the
change.7 The Commission also received early stage company may not use the proposed number of shares of common stock or 5% of the
exemption to fund an acquisition of stock or assets voting power outstanding of a company or entity
1 15
of another company that would otherwise require shall not be considered a substantial interest or
U.S.C. 78s(b)(1). shareholder approval under Section 312.03(b) of the
2 17
cause the holder of such an interest to be regarded
CFR 240.19b–4. Listed Company Manual; (ii) any sale of a listed as a substantial security holder.
3 See Securities Exchange Act Release No. 74849
company’s securities at a below-market price 15 The Exchange seeks to permit early stage
(April 30, 2015), 80 FR 26118 (May 6, 2015) constitutes equity compensation under Section companies to sell up to 19.9% of their outstanding
(‘‘Notice’’). 303A.08 of the Manual and is therefore subject to equity securities to the Proposed Exempted Parties
4 See Securities Exchange Act Release No. 75248
the shareholder approval requirements under that ‘‘without undertaking the costly and time-
(June 18, 2015), 80 FR 36385 (June 24, 2015) rule; and (iii) shareholder approval of any issuance consuming process of obtaining shareholder
(extending the time period for Commission action
rmajette on DSK2TPTVN1PROD with NOTICES
is required if any of the subparagraphs of Section approval.’’ See NYSE Response Letter I, supra note
to August 4, 2015). 312.03 require such approval, notwithstanding the 7.
5 15 U.S.C. 78s(b)(2)(B).
fact that the transaction does not require approval 16 The Exchange believes that independent
6 See Securities Exchange Act Release No. 75599 under Section 312.03(b) or one or more of the other committee review and approval of Related Party
(August 4, 2015), 80 FR 47979 (August 10, 2015) subparagraphs. See also letter to Brent J. Fields, transactions is an appropriate safeguard to protect
(‘‘Order Instituting Proceedings’’). Secretary, Commission from Martha Redding, shareholder interests because directors owe a
7 See letter to Brent J. Fields, Secretary, Senior Counsel and Assistant Secretary, New York fiduciary duty to their shareholders and can be held
Commission from Clare F. Saperstein, Associate Stock Exchange, dated December 14, 2015 personally liable for any violation of that duty. See
General Counsel, New York Stock Exchange, dated (‘‘Amendment No. 2’’). NYSE Response Letter I, supra note 7.
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![Federal Register / Vol. 81, No. 4 / Thursday, January 7, 2016 / Notices 821
company’s common stock).17 discount to the then-current market Lastly, the Exchange also proposes to
Shareholder approval is also required price, without complying with the delete obsolete text from Section 312.03
for issuances relating to 20% or more of shareholder approval requirements of of the Manual related to a limited
the company’s common stock, and prior Section 303A.08. Furthermore, the transition period that is no longer
to any issuance that will result in a Exchange proposes to include a relevant.
change of control.18 statement in Section 312.03(b) that
shareholder approval is required if any III. Summary of Comments Received
In addition, the Exchange proposes to
amend Section 312.03(b) to make clear of the subparagraphs of Section 312.03 As noted above, the Commission
that the proposed exemption will not be require such approval, notwithstanding received a comment letter on the
applicable to a sale of securities by a the fact that the transaction does not proposed rule change,28 the OIAD
listed company to any person subject to require approval under Section Recommendation,29 and two
the provisions of Section 312.03(b) in a 312.03(b) or one or more of the other supplemental submissions from the
transaction, or series of transactions, subparagraphs in Section 312.03.21 Exchange.30 The OIAD and the
whose proceeds will be used to fund an Therefore, the Exchange states that comment letter each recommended that
acquisition of stock or assets of another shareholder approval requirements of the Commission disapprove the
company where such person has a Sections 312.03(c) 22 and 312.03(d) 23 proposed rule change.31
direct or indirect interest in the will still be applicable.24
The Exchange also proposes to amend A. Dilution of Economic and Ownership
company or assets to be acquired or in Interest
the consideration to be paid for such Section 312.04 to include a definition of
acquisition.19 the term ‘‘early stage company.’’ 25 The OIAD expressed the view that the
The Exchange also proposes to clarify Exchange proposes to define an early proposed rule change is inconsistent
in Section 312.03(b) that the sale of stage company as a company that has with investor protection because it
stock to a Related Party that is an not reported revenues greater than $20 could result in economic dilution of the
employee, director or service provider is million in any two consecutive fiscal value and ownership control of an
subject to the equity compensation rules years since its incorporation.26 The existing shareholder’s interest in an
in Section 303A.08 of the Manual.20 Exchange represents that a company’s early stage company.32 OIAD reasoned
Accordingly, an early stage company annual financial statements prior to that the proposed rule change could
will be unable to issue securities to a listing on the Exchange will also be allow shares of an early stage company
Related Party that is an employee, considered when determining if the to be sold to substantial security holders
director or service provider, at a company should lose its early stage at a discount to book or fair market
company designation.27 value without shareholder approval
17 The Exchange states that neither The NASDAQ unless the transaction exceeded twenty
21 See also Section 312.04(a) of the Manual.
Stock Market LLC (‘‘NASDAQ’’) nor NYSE MKT
22 Section
percent of outstanding shares or
LLC (‘‘NYSE MKT’’) has a rule comparable to 312.03(c) of the Manual, with certain
exceptions, requires shareholder approval of any
resulted in a change of control of the
Section 312.03(b) requiring listed companies to
obtain shareholder approval prior to 1% (or in issuance of securities in any transaction or related issuer.33 OIAD stated that ‘‘[w]hen new
certain cases 5%) share issuances in cash sales to transactions relating to 20% or more of a listed shares are sold at a discount from the
a Proposed Exempted Party. See Notice, supra note company’s stock before the issuance. When greater of book or fair market value, it
3, at 26120. Thus, the Exchange believes the applying Section 312.03(c), the Exchange states that
it reviews issuances to determine whether they are results in economic dilution’’ that
proposed rule change is necessary to enable the
Exchange to compete with NASDAQ for the listing related and should be aggregated for purposes of the ‘‘reduces the value of an existing
of early stage companies. See id. rule. See Notice, supra note 3, at 26120. The shareholder’s investment in the
Exchange analyzes the relationship between
18 See Sections 312.03(c) and 312.03(d) of the
separate stock issuances if they occur within a short
issuer.’’ 34
Manual. In addition, OIAD highlighted that
period of time, are made to the same or related
19 See Amendment No. 2, supra note 12. The
parties, or if there is a common use of proceeds. See ‘‘all Related Parties . . . could obtain a
Exchange states that this amendment is intended to id. The Exchange represents that it will engage in
address concerns that a listed company may sell its significantly larger share of ownership
this analysis with respect to any series of sales
securities to a Proposed Exempted Party and then made by an early stage company to a Related Party. control by paying the then-current
use the proceeds to acquire stock or assets from a See id. Moreover, should the Exchange determine market price for additional shares in a
company in which that Proposed Exempted Party that it is necessary to aggregate the series of sales private transaction, without a vote of the
had a direct or indirect interest. See id. The and, as aggregated, the total number of shares sold
Exchange believes that ‘‘permitting this sort of two- exceeds 19.9% of the shares outstanding,
existing shareholders.’’ 35 In effect,
step transaction would enable companies to utilize shareholder approval will be required pursuant to
the proposed exemption for acquisition transactions Section 312.03(c). See id. an annual report with the Commission one year
rather than capital raising and is inconsistent with 23 Section 312.03(d) of the Manual requires after listing on the Exchange and such annual report
the intended purpose of the exemption.’’ See id. See shareholder approval prior to an issuance giving shows that the company has had revenues greater
also NASDAQ Rule 5635 which requires rise to a change of control. than $20 million in each of two consecutive years
shareholder approval when acquiring stock or 24 See Notice, supra note 3, at 26119–20. The (even if one of those years was prior to listing on
assets of another company where an officer, Commission notes, however, that Section the Exchange), the company will lose its early stage
director, or substantial security holder has a 5% (or 312.03(c)(2) of the Manual contains an exception for company designation at that time. See id. Moreover,
collectively 10% or greater interest) directly or sales of common stock (or securities convertible once the early stage company designation is lost, it
indirectly in the company or assets to be acquired into common stock) for cash in a ‘‘bona fide private cannot be regained if the subject company later
and the outstanding common shares or voting financing,’’ as defined in Section 312.04(g), if reports reduced revenues. See id. at 26120.
power to be issued will increase by 5% or more. certain requirements are met. 28 See supra note 9.
20 For example, a sale of stock by an early stage 25 See proposed Section 312.04(k) of the Manual. 29 See supra note 8.
company to any of such Related Parties at a 26 A company that qualifies as an early stage 30 See supra notes 7 and 11.
discount to the then market price will be treated as company does not necessarily maintain such 31 See OIAD Recommendation, supra note 8, at 3;
equity compensation under Section 303A.08 designation indefinitely and can lose its designation and Shatto Letter, supra note 9. The Shatto Letter
rmajette on DSK2TPTVN1PROD with NOTICES
notwithstanding the exemption from shareholder as an early stage company anytime it reports two stated that it concurred with the reasoning of the
approval provided under Section 312.03(b). consecutive fiscal years with revenues greater than
OIAD Recommendation and requested that the
Consequently, an early stage company will be $20 million each year. See Notice, supra note 3, at
Exchange explain the ‘‘driving necessity that caused
required to either: (i) Obtain shareholder approval 26119. The Exchange believes that only a small
the NYSE to put forth [the] proposal.’’
of such sale, or (ii) issue such shares under an number of currently listed companies will qualify 32 See OIAD Recommendation, supra note 8, at 7.
equity compensation plan that had previously been under the proposed exemption from shareholder
33 See id.
approved by shareholders and for which approval. See id. at 26120.
34 See id.
shareholder approval under Section 303A.08 is not 27 See Notice, supra note 3, at 26119, n.6. As an
otherwise required. example, the Exchange states that if a company files 35 See id.
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OIAD believed that such issuances without shareholder approval.’’ 44 investors, an audit committee will not
result in an immediate transfer of value Furthermore, the Exchange asserted that always reach the same conclusion as
from existing shareholders to the new ‘‘the voting rights of existing shareholders regarding the best interest
shareholder who injects a ‘‘less-than- shareholders are not being diluted in of the company.’’ 53 As a result, OIAD
proportionate share of capital into the any unfair manner’’ because ‘‘investors believed that certain corporate actions
business.’’ 36 Finally, OIAD also noted in any private placement will receive that significantly impact shareholders’
that current investors in these voting rights on the same terms as all interests should be subject to
companies would face potential dilution other shareholders.’’ 45 shareholder approval, similar to the
of their voting interest in connection standard for equity compensation
B. Time-Sensitive Situations
with issuances to Related Parties.37 plans.54 The Order Instituting
In response, the Exchange stated that OIAD suggested that the Exchange’s Proceedings also raised questions about
OIAD’s analysis failed to consider existing rules already provide a way for whether the audit committee would be
circumstances that make it early stage companies to address time- an appropriate substitute for the
‘‘commercially reasonable to price sensitive situations without first approval of shareholders.55
private placement issuances at a obtaining shareholder approval.46 In response, the Exchange stated that
discount to the then current market Specifically, OIAD identified Section directors owe a fiduciary duty to the
price.’’ 38 The Exchange stated that ‘‘a 312.05 of the Manual as providing shareholders they represent and can be
discount is commercially reasonable ‘‘NYSE-listed issuers assistance when held personally liable for any violation
because investors in private placements the delay in securing shareholder of that duty.56 The Exchange further
are generally unable to resell the shares approval would seriously jeopardize the noted that independent directors are
they purchase in the public market until financial viability of the enterprise.’’ 47 often well-positioned to evaluate related
either the end of the applicable Rule 144 In response, the Exchange stated that party transactions because of their
holding period or such time as the OIAD’s suggested application of Section knowledge of company affairs.57
company files and obtains effectiveness 312.05 is ‘‘inconsistent with the
language and longstanding application D. Reduced Qualitative Standards for
of a registration statement.’’ 39 In
of the limited exemption from obtaining Listed Companies
addition, the Exchange asserted that the
resale limitations on restricted securities shareholder approval.’’ 48 The Exchange OIAD expressed concern that the
make them ‘‘riskier and more illiquid in stated that the intent and current proposal reflects a ‘‘race to the bottom’’
the hands of the purchaser in a private application of Section 312.05 is only for among the exchanges,58 believing that
placement and therefore less circumstances where ‘‘a bankruptcy the Commission ‘‘should be encouraging
valuable.’’ 40 Accordingly, ‘‘it is filing is the only realistic alternative’’ the exchanges to enhance their
generally necessary to sell shares in a for a company.49 In other words, the standards, not devolve to the lowest
private placement at a lower price than exemption is ‘‘intended for use in a common denominator because of
the prevailing public market price.’’ 41 crisis’’ and not as a ‘‘useful tool to competitive concerns.’’ 59 OIAD stated
Moreover, the Exchange stated that a enable [e]arly [s]tage [c]ompanies to that investors have an expectation that
discount in the sale of shares in a meet their ongoing capital needs.’’ 50 listed companies on NYSE are subject to
private placement should only be Furthermore, as ‘‘illustrative of the fact heightened qualitative listing
viewed as economically dilutive if there that the exemption is rarely a realistic standards.60 Given these public
are other sources of capital available on option,’’ the Exchange highlighted the expectations, OIAD believed ‘‘it is
better terms.42 fact that it has not received a single inadvisable to create what could be
The Exchange also noted that Section financial distress exemption application considered a de facto second tier on the
312.03(d) of the Manual provides a in the last year.51 NYSE, with lower corporate governance
‘‘significant limitation’’ on any increase C. Audit Committee Approval standards for smaller companies,’’ 61
in the relative voting power of Related warning that this could lead to
Parties by requiring shareholder OIAD stated that the audit committee ‘‘significant investor confusion’’ about
approval of any share issuance that (or a comparable committee of the listing standards on the Exchange
gives rise to a change of control.43 As a independent directors) approval because not all listed companies would
result, the Exchange represented that requirement is not an adequate have ‘‘the same standards of
‘‘the proposed exemption could never substitute for a shareholder vote on accountability.’’ 62
be used as a mechanism for obtaining Related Party transactions,52 explaining
overall control of a listed company that ‘‘[a]lthough the audit committee 53 See id.
performs many critical functions that 54 See id. at 9.
36 See id. OIAD also stated that even if an serve to protect the interests of 55 See Order Instituting Proceedings, supra note 6,
infusion of capital into a company could be in an at 47978.
existing shareholder’s long-term best interest, when 44 See id. 56 See NYSE Response Letter I, supra note 7.
the recipient of new shares is a Related Party, it 45 See id. 57 See id.
creates a risk that the company may be engaging in 46 See OIAD Recommendation, supra note 8, at 8. 58 See OIAD Recommendation, supra note 8, at 9.
a ‘‘sweetheart deal’’ that is motivated by a conflict 47 See id. Section 312.05 of the Manual provides 59 See id.
of interest. See id. at 8. In such circumstances, the that ‘‘[e]xceptions may be made to the shareholder 60 See id.
transaction creates a heightened risk of harm to approval policy in Para. 312.03 upon application to 61 See id. at 9. Moreover, OIAD believed that the
existing shareholders, and therefore, such the Exchange when (1) the delay in securing
shareholders should be given the opportunity to benefit to be afforded to a small subset of early stage
stockholder approval would seriously jeopardize company issuers listed on NYSE would be
evaluate the merits of the transaction and to vote the financial viability of the enterprise and (2)
on whether to approve it. See id. unreasonable when weighed against the possible
reliance by the company on this exception is
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37 See id. investor confusion concerning corporate
expressly approved by the Audit Committee of the governance and shareholder rights on the Exchange.
38 See NYSE Response Letter II, supra note 11, at
Board.’’ See id. at 10.
1. 48 See NYSE Letter Response II, supra note 11, at
62 See id. at 9–10. OIAD also stated that the
39 See id. at 1–2. 2.
40 See id. at 2. 49 See id.
proposal ‘‘does not appear to take any meaningful
steps to preclude likely investor confusion; for
41 See id. 50 See id.
example, NYSE’s Manual will not otherwise
42 See id. 51 See id.
describe or highlight the proposed exception.’’ See
43 See id. 52 See OIAD Recommendation, supra note 8, at 8. id. at 10.
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![826 Federal Register / Vol. 81, No. 4 / Thursday, January 7, 2016 / Notices
filing also will be available for Nos. 1 and 2, on an accelerated basis, announcements (‘‘CCF Announcement
inspection and copying at the principal pursuant to Section 19(b)(2) of the Act. Files’’) until further notice; and (ii) the
office of the Exchange. All comments implementation of a fee associated with
VII. Conclusion
received will be posted without change; the use of CCF Announcement Files.
the Commission does not edit personal It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 95 that the II. Clearing Agency’s Statement of the
identifying information from Purpose of, and Statutory Basis for, the
submissions. You should submit only proposed rule change (SR–NYSE–2015–
02), as modified by Amendment Nos. 1 Proposed Rule Change
information that you wish to make
available publicly. All submissions and 2, be, and hereby is, approved. In its filing with the Commission,
should refer to File Number SR–NYSE– For the Commission, by the Division of DTC included statements concerning
2015–02 and should be submitted on or Trading and Markets, pursuant to delegated the purpose of and basis for the
before January 28, 2016. authority.96 proposed rule change and discussed any
Jill M. Peterson, comments it received on the proposed
VI. Accelerated Approval of Proposed rule change. The text of these statements
Rule Change, as Modified by Assistant Secretary.
may be examined at the places specified
Amendment Nos. 1 and 2 [FR Doc. 2015–33313 Filed 1–6–16; 8:45 am]
in Item IV below. DTC has prepared
BILLING CODE 8011–01–P
The Commission finds good cause, summaries, set forth in sections A, B,
pursuant to Section 19(b)(2) of the Act, and C below, of the most significant
to approve the proposed rule change, as aspects of such statements.
SECURITIES AND EXCHANGE
modified by Amendment Nos. 1 and 2, COMMISSION (A) Clearing Agency’s Statement of the
prior to the 30th day after the date of Purpose of, and Statutory Basis for, the
[Release No. 34–76811; File No. SR–DTC–
publication of Amendment Nos. 1 and 2015–013] Proposed Rule Change
2 in the Federal Register. As discussed
above, Amendment No. 1 merely 1. Purpose
Self-Regulatory Organizations; The
clarified that the proposed exemption Depository Trust Company; Notice of The proposed rule change would (i)
from shareholder approval transactions Filing and Immediate Effectiveness of postpone the date for the retirement of
involving the sale of stock for cash by Proposed Rule Change Postponing the CCF Announcement Files until further
an early stage company applies not only Date for Retirement of Computer to notice, and (ii) implement a fee
to a Related Party, as originally Computer Facility Corporate Action associated with the use of CCF
proposed, but also to a subsidiary, Announcement Files, and Announcement Files, as described
affiliate or other closely-related person Implementing a Fee Associated With below.5
of a Related Party; or any company or Its Use Background
entity in which a Related Party has a
substantial direct or indirect interest.93 December 31, 2015. DTC handles essential aspects of
Similarly, Amendment No. 2 clarified Pursuant to Section 19(b)(1) of the processing corporate action 6 events by
that (i) an early stage company may not Securities Exchange Act of 1934 routinely receiving and distributing
use the proposed exemption to fund an (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 information to its Participants using
acquisition of stock or assets of another notice is hereby given that on December CCF Announcement Files. There are
company that would otherwise require 24, 2015, The Depository Trust three corporate action event groups for
shareholder approval under Section Company (‘‘DTC’’) filed with the which CCF files are available:
312.03(b) of the Manual; (ii) any sale of Securities and Exchange Commission Distributions, Redemptions, and
a listed company’s securities at a below- (‘‘Commission’’) the proposed rule Reorganizations. Participants subscribe
market price to an employee, director or change as described in Items I, II and III to the CCF files for each event group
service provider constitutes equity below, which Items have been prepared separately.
compensation under Section 303A.08 of by DTC. DTC filed the proposed rule Postponement of the Date for Retirement
the Manual and is therefore subject to change pursuant to Section 19(b)(3)(A)
of the Act 3 and Rules 19b–4(f)(2) and Since 2011, DTC has informed
the shareholder approval requirements
(f)(4) thereunder.4 The proposed rule Participants that CCF Announcement
under that rule; and (iii) shareholder
change was effective upon filing with Files will be retired in 2015, and has
approval of any issuance is required if
the Commission. The Commission is been supporting Participant efforts to
any of the subparagraphs of Section
publishing this notice to solicit migrate to the ISO 20022 standard by
312.03 require such approval,
comments on the proposed rule change providing a robust online learning
notwithstanding the fact that the
from interested persons. center, hosting ISO specific monthly
transaction does not require approval
under Section 312.03(b) or one or more I. Clearing Agency’s Statement of the 5 Each term not otherwise defined herein has its
of the other subparagraphs.94 The Terms of Substance of the Proposed respective meaning as set forth in the Rules, By-
Commission believes that these Rule Change Laws and Organization Certificate of DTC (the
revisions provide greater clarity on the ‘‘Rules’’), available at http://www.dtcc.com/legal/
application of the proposal and remove The proposed rule change consists of rules-and-procedures.aspx and the Guide to the
(i) the postponement of the date for the 2015 DTC Fee Schedule (‘‘Fee Schedule’’), available
uncertainty as to which transactions the at http://www.dtcc.com/∼/media/Files/Downloads/
Exchange proposes to exempt from retirement of DTC’s proprietary legal/fee-guides/dtcfeeguide.pdf?la=en.
shareholder approval under Section computer to computer facility (‘‘CCF’’) 6 Corporate actions processed by DTC include but
rmajette on DSK2TPTVN1PROD with NOTICES
312.03. files for corporate action are not limited to the restructuring of DTC-eligible
securities resulting from mergers, acquisitions, and
Accordingly, the Commission finds 95 15 reverse splits. DTC performs corporate actions
U.S.C. 78f(b)(2).
good cause for approving the proposed 96 17 CFR 200.30–3(a)(12).
processing through its Mandatory and Voluntary
rule change, as modified by Amendment 1 15 U.S.C. 78s(b)(1).
Reorganization Services. See DTC Operational
Arrangements (‘‘OA’’), available at http://
2 17 CFR 240.19b–4.
www.dtcc.com/∼/media/Files/Downloads/legal/
93 See supra note 7. 3 15 U.S.C. 78s(b)(3)(A).
issue-eligibility/eligibility/operational-
94 See Amendment No. 2, supra note 12. 4 17 CFR 240.19b–4(f)(2) and (f)(4). arrangements.pdf.
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Document Created: 2016-01-07 00:12:43
Document Modified: 2016-01-07 00:12:43
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 820 |
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