
[Federal Register Volume 80, Number 153 (Monday, August 10, 2015)]
[Notices]
[Pages 47978-47980]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-19536]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75599; File No. SR-NYSE-2015-02]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Instituting Proceedings To Determine Whether To Disapprove Proposed 
Rule Change 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

August 4, 2015.

I. Introduction

    On April 16, 2015, New York Stock Exchange LLC (``NYSE'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \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, until August 4, 2015.\4\ This order institutes 
proceedings under Section 19(b)(2)(B) of the Act \5\ to determine 
whether to disapprove the proposed rule change.
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    \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 (``Notice'').
    \4\ See Securities Exchange Act Release No. 75248 (June 18, 
2015), 80 FR 36385 (June 24, 2015).
    \5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal

    The Exchange proposes to amend Sections 312.03(b) and 312.04 of the 
NYSE 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 \6\ or substantial 
security holder \7\ 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'').\8\ In particular, 
shareholder approval would no longer be required for an ``early stage 
company,'' \9\ 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. Today, 
shareholder approval would be 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 company's 
common stock).\10\
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    \6\ 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.
    \7\ Section 312.04(e) of the Manual states that an interest 
consisting of less than either 5% percent 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.
    \8\ The Commission notes that there is an inconsistency between 
the proposed rule text in Exhibit 5 and the proposed shareholder 
approval exception discussed in the Notice. The proposed rule text 
in Exhibit 5 states that the exception only applies to Related 
Parties, which is defined in Section 312.03(b)(1) of the Manual. 
However, the Notice clearly states that the proposed rule change is 
meant to apply to all Proposed Exempted Parties, as set forth in 
Sections 312.03(b)(1), (2), and (3) of the Manual, not just Related 
Parties under Section 312.03(b)(1) of the Manual. See Notice, supra 
note 3, at 26119.
    \9\ See supra notes 11 through 13 and accompanying text.
    \10\ The Exchange states that neither The NASDAQ Stock Market 
LLC (``NASDAQ'') nor NYSE MKT LLC 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.

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[[Page 47979]]

    The Exchange also proposes to amend Section 312.04 to include a 
definition of the term ``early stage company.'' \11\ 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. Further, an early stage company 
would lose that designation at any time after listing on the Exchange 
that the company files an annual report with the Commission in which 
the company reports two consecutive fiscal years with revenues greater 
than $20 million in each year.\12\ The Exchange represents that a 
company's annual financial statements prior to listing on the Exchange 
would also be considered when determining if the company should lose 
its early stage company designation.\13\
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    \11\ See proposed Section 312.04(k) of the Manual.
    \12\ The Exchange believes that only a small number of currently 
listed companies would qualify under the proposed exemption from 
shareholder approval. See Notice, supra note 3, at 26120.
    \13\ See Notice, supra note 3, at 26119, n.6. As an example, the 
Exchanges 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 would 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.
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    The Exchange also states that any issuance of shares that is not a 
sale for cash, including any issuance in connection with the 
acquisition of stock or assets of another company, would remain subject 
to the shareholder approval provisions of Section 312.03(b) of the 
Manual.\14\ Additionally, the Exchange highlights that under Section 
312.04(a) of the Manual, an exemption from one provision of Section 
312.03 is not a general exemption from all of Section 312.03. 
Therefore, notwithstanding that a transaction by an early stage company 
may have an exemption under the proposed amendments to Sections 
312.03(b) of the Manual, the Exchange states that shareholder approval 
requirements of Sections 312.03(c) \15\ and 312.03(d) \16\ would still 
be applicable.\17\
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    \14\ See Notice, supra note 3, at 26119.
    \15\ 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% of 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 would 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 would be required pursuant to 
Section 312.03(c). See id.
    \16\ Section 312.03(d) of the Manual requires shareholder 
approval prior to an issuance giving rise to a change of control.
    \17\ 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.
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    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. Proceedings To Determine Whether To Approve or Disapprove SR-NYSE-
2015-02 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \18\ to determine whether the proposed rule 
change should be disapproved. Institution of such proceedings appears 
appropriate at this time in view of the legal and policy issues raised 
by the proposal, as discussed below. Institution of disapproval 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, as 
described in greater detail below, the Commission seeks and encourages 
interested persons to comment on the proposed rule change to inform the 
Commission's analysis whether to approve or disapprove the proposed 
rule change.
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    \18\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
See id. The time for conclusion of the proceedings may be extended 
for up to 60 days if the Commission finds good cause for such 
extension and publishes its reasons for so finding. See id.
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    Pursuant to Section 19(b)(2)(B) of the Act,\19\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the consistency 
of the proposed rule change with Section 6(b)(5) of the Act,\20\ which 
requires that the rules of a national securities exchange be designed, 
among other things, to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
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    \19\ Id.
    \20\ 15 U.S.C. 78f(b)(5).
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    As discussed above, the Exchange proposes to amend Sections 
312.03(b) and 312.04 of the Manual, in order to exempt early stage 
companies from having to obtain shareholder approval before issuing a 
substantial amount of shares for cash, even at a discount from book and 
market value, to Related Parties, namely officers, directors and 
substantial security holders, as well as the other Proposed Exempted 
Parties.\21\ Although the Exchange conditions its proposed exemption on 
the company obtaining the approval of the transaction by its audit 
committee (or comparable committee comprised solely of independent 
directors), the Commission is concerned that audit committee approval 
may not be an effective substitute for the approval of shareholders, 
whose interests would be directly impacted by the potentially dilutive 
effect of such a transaction. In addition, while the Exchange believes 
that the proposal would benefit shareholders of early stage companies 
because it could allow those companies to raise additional capital 
quickly and inexpensively, any such benefit must be weighed against the 
potentially detrimental impact of a dilutive transaction on 
shareholders who would no longer have the right to approve it.\22\
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    \21\ See supra notes 6 and 7.
    \22\ The Commission also notes that the Exchange has not 
addressed how the proposal is consistent with the shareholder 
approval requirements of Section 303A.08 of the Manual that 
generally requires that shareholders must be given the opportunity 
to vote on all equity-compensation plans and material revisions 
thereto, with limited exemptions. Under Section 303A.08, an equity-
compensation plan is defined as a plan or other arrangement that 
provides for the delivery of equity securities of the listed company 
to any employee, director or other service provider as compensation 
for services. The definition specifically states ``[E]ven a 
compensatory grant of options or other equity securities that is not 
made under a plan is, nonetheless, an `equity-compensation plan''' 
for purposes of the rule. Section 303A.08 also lists certain plans 
that would not be considered equity compensation plans under its 
definition, for example, plans that are made available to 
shareholders generally, such as a typical dividend reinvestment 
plan, and plans that merely allow employees, directors or other 
service providers to elect to buy shares on the open market or from 
the listed company for their current fair market value. The 
Commission notes that, in approving the equity compensation rules, 
it stated that the rules should have the effect of safeguarding the 
interests of shareholders, while placing certain restrictions on 
listed companies, and provide shareholders with greater protection 
from the potential dilutive effect of equity compensation plans. See 
Securities Exchange Act Release No. 48108 (June 30, 2003), 68 FR 
39995 (July 3, 2003) (SR-NYSE-2002-46 and SR-NASD-2002-140).

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[[Page 47980]]

    The Commission therefore believes that questions are raised as to 
whether the proposed rule change is consistent with the requirements of 
Section 6(b)(5) of the Act, including whether it would be designed to 
promote just and equitable principles of trade, and protect investors 
and the public interest.

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any others they may have with the 
proposal. In particular, the Commission invites the written views of 
interested persons concerning whether the proposed rule change is 
inconsistent with Section 6(b)(5) \23\ or any other provision of the 
Act, or the rules and regulation thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval which would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4, any request for 
an opportunity to make an oral presentation.\24\
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    \23\ 15 U.S.C. 78f(b)(5).
    \24\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be 
disapproved by August 31, 2015. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
September 14, 2015. The Commission asks that commenters address the 
sufficiency and merit of the Exchange's statements in support of the 
proposed rule change, in addition to any other comments they may wish 
to submit about the proposed rule change. In particular, the Commission 
seeks comment on the statements of the Exchange contained in the 
Notice,\25\ and any other issues raised by the proposed rule change.
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    \25\ See Notice, supra note 3.
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    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. 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 such 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 August 31, 2015. Rebuttal comments should be 
submitted by September 14, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Robert W. Errett,
Deputy Secretary.
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    \26\ 17 CFR 200.30-3(a)(57).
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[FR Doc. 2015-19536 Filed 8-7-15; 8:45 am]
 BILLING CODE 8011-01-P


