
[Federal Register Volume 83, Number 244 (Thursday, December 20, 2018)]
[Notices]
[Pages 65378-65381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27510]



[[Page 65378]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84821; File No. SR-NYSE-2018-54]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Amending Sections 312.03 and 
312.04 of the Listed Company Manual To Amend the Price Requirements for 
Certain Exceptions From the Shareholder Approval Rules

December 14, 2018.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that on December 3, 2018, New York Stock Exchange LLC (``NYSE'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Sections 312.03 and 312.04 of the 
Listed Company Manual (the ``Manual'') to amend the price requirements 
companies must meet in order to avail themselves of certain exceptions 
from the shareholder approval requirements set forth in Section 312.03. 
The proposed rule change is available on the Exchange's website at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Sections 312.03 and 312.04 of the 
Manual to modify the circumstances in which listed companies are exempt 
from obtaining shareholder approval for share issuances subject to 
those rules. The Exchange notes that the proposed amendments are 
substantially similar to amendments NASDAQ recently made to its own 
shareholder approval requirements.\4\
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    \4\ See footnote 4 [sic] infra.
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    Section 312.03(b) of the Manual provides that shareholder approval 
is required prior to the issuance of common stock, or of securities 
convertible into or exercisable for common stock, in any transaction or 
series of related transactions, to:
    (1) A director, officer or substantial security holder of the 
company (each a ``Related Party'');
    (2) a subsidiary, affiliate or other closely-related person of a 
Related Party; or
    (3) any company or entity in which a Related Party has a 
substantial direct or indirect interest;

if the number of shares of common stock to be issued, or if the number 
of shares of common stock into which the securities may be convertible 
or exercisable, exceeds either one percent of the number of shares of 
common stock or one percent of the voting power outstanding before the 
issuance. However, Section 312.03(b) sets forth exceptions to this 
shareholder approval requirement. One of these exceptions is applicable 
where the Related Party involved in the transaction is classified as 
such solely because such person 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 issuer's common 
stock. Where these conditions are met, shareholder approval will not be 
required unless the number of shares of common stock to be issued, or 
unless the number of shares of common stock into which the securities 
may be convertible or exercisable, exceeds either five percent of the 
number of shares of common stock or five percent of the voting power 
outstanding before the issuance.
    Section 312.03(c) generally requires shareholder approval prior to 
the issuance of common stock, or of securities convertible into or 
exercisable for common stock, in any transaction or series of related 
transactions if:
    (1) The common stock has, or will have upon issuance, voting power 
equal to or in excess of 20 percent of the voting power outstanding 
before the issuance of such stock or of securities convertible into or 
exercisable for common stock; or
    (2) the number of shares of common stock to be issued is, or will 
be upon issuance, equal to or in excess of 20 percent of the number of 
shares of common stock outstanding before the issuance of the common 
stock or of securities convertible into or exercisable for common 
stock.
    Among the exceptions to the shareholder approval requirements of 
Section 312.03(c) is one applicable to ``bona fide private 
financings,'' as such term is defined in Section 312.04(g). A bona fide 
private financing is exempt from the shareholder approval requirements 
of Section 312.03(c), if such financing involves a sale of:
     Common stock, for cash, at a price at least as great as 
each of the book and market value of the issuer's common stock; or
     securities convertible into or exercisable for common 
stock, for cash, if the conversion or exercise price is at least as 
great as each of the book and market value of the issuer's common 
stock.

Section 312.04(g) defines a bona fide private financing as a sale in 
which either:
     A registered broker-dealer purchases the securities from 
the issuer with a view to the private sale of such securities to one or 
more purchasers; or
     the issuer sells the securities to multiple purchasers, 
and no one such purchaser, or group of related purchasers, acquires, or 
has the right to acquire upon exercise or conversion of the securities, 
more than five percent of the shares of the issuer's common stock or 
more than five percent of the issuer's voting power before the sale.
    For purposes of the exceptions from the shareholder approval 
requirements of Sections 312.03(b) and (c) set forth above, the 
Exchange utilizes for the pricing test the definition of ``market 
value'' set forth in Section 312.04(i). Section 312.04(i) defines the 
``market value'' of an issuer's common stock as the official closing 
price on the Exchange as reported to the Consolidated Tape immediately 
preceding the entering into of a binding agreement to issue the 
securities.
    The Exchange proposes to replace the definition of market value in 
Section 312.04(i) with a new definition to be

[[Page 65379]]

known as the ``Minimum Price,'' which will be used as the pricing test 
for the exceptions in Sections 312.03(b) and (c) for which the market 
value definition in Section 312.04(i) is currently used. This proposed 
amendment is substantially similar to an amendment NASDAQ recently made 
to its own shareholder approval requirements.\5\ Minimum Price will be 
defined as a price that is the lower of: (i) The Official Closing Price 
immediately preceding the signing of the binding agreement; or (ii) the 
average Official Closing Price for the five trading days immediately 
preceding the signing of the binding agreement. ``Official Closing 
Price'' of an issuer's common stock will be defined in Section 312.04 
as meaning the official closing price on the Exchange as reported to 
the Consolidated Tape immediately preceding the signing of a binding 
agreement to issue the securities.\6\ Section 312.04(i) in its current 
form has a provision stating that ``[f]or example, if the transaction 
is entered into after the close of the regular session at 4:00 p.m. 
Eastern Standard Time on a Tuesday, then Tuesday's official closing 
price is used. If the transaction is entered into at any time between 
the close of the regular session on Monday and the close if the regular 
session on Tuesday, then Monday's official closing price is used.'' The 
Exchange proposes to retain this clarifying text as part of the 
proposed definition of the ''Official Closing Price.'' In addition, all 
references to ``entering into'' agreements in this text and elsewhere 
in the proposed definition will be replaced by references to 
``signing'' agreements.\7\ The Exchange also proposes to delete text 
from the current form of Section 312.04(i) which notes that an average 
price over a period of time is not acceptable as ``market value'' for 
purposes of Section 312.03, as it will no longer be accurate if the 
proposed amendment is approved.
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    \5\ See Exchange Act Release No. 34-84287 (September 26, 2018) 
(SR-NASDAQ-2018-008); 83 FR 49599 (October 2, 2018). NASDAQ does not 
have a provision in its rules which is comparable to the limitations 
on cash sales to related parties under Section 312.03(b) and the 
related exception available to related parties which have that 
status solely because they are substantial securityholders. However, 
the rationale NASDAQ applied in adjusting its pricing test where 
applicable is relevant to the application of the pricing test in 
Section 312.03(b).
    \6\ The manner in which the official closing price as reported 
to the Consolidated Tape is determined is set forth in NYSE Rule 
123C(1)(e). The proposed definition of ``Official Closing Price'' 
will be numbered as 312.04(j) and the current text of Sections 
312.04(j) and (k) will be redesignated as Sections 312.04(k) and (l) 
respectively.
    \7\ This proposed change is solely for the purpose of conforming 
the language used throughout the rule and does not have any 
substantive effect.
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    It is a widespread practice in commercial transactions involving 
the issuance of securities to use a five day average in determining the 
market price for purposes of calculating pricing provisions of 
agreements, as the use of a single day's closing price can result in 
unanticipated and inequitable results due to unexpected price 
volatility. There are also potential negative consequences to using a 
five-day average as the sole measure of whether shareholder approval is 
required. For example, in a declining market, the five day average 
price will always be above the current market price, thus making it 
difficult for companies to close transactions because investors could 
buy shares in the market at a price below the five-day average price 
rather than by buying shares from the company at the agreed-upon price. 
Conversely, in a rising market, the five day average price will be 
lower than the closing price. In addition, if material news is 
announced during the five-day period, the average could be 
significantly different from the market value of the securities as 
reflected by the closing price after the news is disclosed. 
Nonetheless, the Exchange believes that these risks are already 
accepted in the market, as evidenced by the use of an average price in 
transactions that do not require shareholder approval under the 
Exchange's rules, such as where less than 20% of the outstanding shares 
are issuable in the transaction, notwithstanding the risk of possible 
unfavorable price movements borne by both the issuer and the purchaser 
of the securities during the time between when the agreement is 
executed and the closing of the transaction. The Exchange believes 
these concerns about the appropriateness of using a five-day average 
are justified and as such, the Exchange's proposed Minimum Price 
definition utilizes the lower of the most recent closing price or the 
average of closing prices on the five most recent trading days.
    The Exchange also proposes to eliminate from Sections 312.03(b) and 
(c) the requirement that the price paid in any transaction qualifying 
for the exemptions under those rules must not be less than book value. 
Book value is an accounting measure and its calculation is based on the 
historic cost of assets, not their current value. As such, listed 
companies have argued to the Exchange on many occasions, and the 
Exchange agrees, that book value is not a meaningful measure to be used 
in determining whether a transaction is dilutive or should otherwise 
require shareholder approval. The Exchange has also observed that when 
the market price is below the book value, issuers are often extremely 
surprised when confronted with the effect it has on their proposed 
transactions. In that regard, the existing book value test can have 
anomalous effects in transactions that appear to be clearly 
commercially reasonable for the issuer and have a disproportionate 
impact on companies in certain industries and at certain times. For 
example, during the financial crisis in 2008 and 2009, many banks and 
finance-related companies temporarily traded below book value. 
Similarly, companies that make large investments in infrastructure may 
have a market capitalization that is significantly less than the 
accounting carrying value of those assets. In these situations, 
companies are precluded for purely technical accounting reasons from 
quickly raising capital on terms that are clearly at or above the 
market price. Furthermore, the Exchange is not aware of any evidence 
that shareholders consider book value to be a material factor when they 
are asked to vote to approve a proposed transaction.
    The Exchange notes that the existence of any exception from the 
shareholder approval requirements of any subsection of Section 312.03 
does not relieve listed companies of their obligation to comply with 
any separate shareholder approval requirement under Section 303A.08 \8\ 
or under other applicable subsections of Section 312.03.\9\ Section 
303A.08 provides that any issuance of common stock to any employee, 
director or other service provider of a listed company as compensation 
for services is generally treated as equity compensation for purposes 
of that rule and must either be approved by the shareholders or be 
drawn from a shareholder-approved equity compensation plan. Section 
303A.08 provides an exception from this requirement for 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. For purposes of that exception, the Exchange 
has always interpreted fair market value as identical to the Official 
Closing Price definition proposed to be adopted in Section 312.04. To 
avoid any potential confusion, the Exchange intends to submit a 
separate rule filing to amend Section 303A.08 to include

[[Page 65380]]

the definition of Official Closing Price in that rule solely for 
purposes of qualifying for the exemption under Section 303A.08 for cash 
sales for fair market value described above.
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    \8\ This is stated in Section 312.03(a).
    \9\ Section 312.04(a) states that ``[s]hareholder 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 one or more of the other subparagraphs.''
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Exchange Act,\10\ in general, and furthers the 
objectives of Section 6(b)(5) of the Exchange Act,\11\ in particular in 
that it is designed 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 is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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Definition of Market Value
    The proposed rule change will modify the minimum price for the 
relevant exceptions to the shareholder approval requirements of 
Sections 312.03(b) and (c) to the lower of: (i) The Official Closing 
Price immediately preceding the signing of the binding agreement; or 
(ii) the average Official Closing Price for the five trading days 
immediately preceding the signing of the binding agreement. Allowing 
share issuances to be priced at the five-day average of the closing 
price will better align the Exchange's requirements with how many 
transactions that are not designed to comply with the applicable 
exceptions in Sections 312.03(b) and (c) are structured, such as 
transactions not subject to Sections 312.03(b) and (c) because the 
issuance is for less than 20% of the common stock and the parties rely 
on the five day average for pricing to smooth out unusual fluctuations 
in price. In so doing, the proposed rule change will perfect the 
mechanism of a free and open market. Further, allowing a five day 
average price continues to protect investors and the public interest 
because it will allow companies and investors to price transactions in 
a manner designed to eliminate aberrant pricing resulting from unusual 
transactions on the day of a transaction. Limiting the allowable 
average to a five-day period also protects investors by ensuring the 
period is not too long, thereby avoiding any distortion of the average 
price by the inclusion in the average historical pricing data that 
reflects market factors that are no longer relevant. In a market that 
rises each day of the period, the five-day average will be less than 
the price at the end of the period, but would still be higher than the 
price at the start of such period. This protects investors by ensuring 
that the average price will at least partially reflect the benefits of 
the more favorable recent market price. Further, aside from Exchange 
requirements, when selecting the appropriate price for a transaction 
company officers and directors have to consider their state law 
requirements, including fiduciary responsibilities intended to protect 
shareholder interests.
    The Exchange believes that where two alternative measures of value 
exist that both reasonably approximate the value of listed securities, 
defining the Minimum Price as the lower of those values allows issuers 
the flexibility to use either measure because they can also sell 
securities at a price greater than the Minimum Price without needing 
shareholder approval. This flexibility, and the certainty that a 
transaction can be structured at either value in a manner that will not 
require shareholder approval, further perfects the mechanism of a free 
and open market without diminishing the existing investor protections 
of Sections 312.03(b) and (c).
Book Value
    The Exchange also believes that eliminating the requirement for 
shareholder approval of issuances at a price less than book value but 
greater than market value does not diminish the existing investor 
protections of Sections 312.03(b) and (c). Book value is primarily an 
accounting measure calculated based on historic cost and is generally 
perceived as not being a meaningful measure to use in analyzing the 
current value of a stock. The Exchange has also observed that the 
existing book value test can appear arbitrary and have a 
disproportionate impact on companies in certain industries and at 
certain times. For example, during the financial crisis in 2008 and 
2009, many banks and finance-related companies traded below book value. 
Similarly, companies that make large investments in infrastructure may 
have a market capitalization that is significantly less than the 
accounting carrying value of those assets. Because book value is not a 
meaningful measure of the current value of a stock, the elimination of 
the requirement for shareholder approval of issuances at a price less 
than book value but greater than market value will remove an impediment 
to, and perfect the mechanism of, a free and open market, which 
currently unfairly burdens companies in certain industries, without 
meaningfully diminishing investor protections of Sections 312.03(b) and 
(c).

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change 
would revise requirements that burden issuers by unnecessarily limiting 
the circumstances where they can sell securities without shareholder 
approval. All listed companies would be affected in the same manner by 
these changes. As such, these changes are neither intended to, nor 
expected to, impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or up to 90 days (i) as the Commission may designate 
if it finds such longer period to be appropriate and publishes its 
reasons for so finding or (ii) as to which the self-regulatory 
organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-2018-54 on the subject line.

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Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2018-54. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSE-2018-54, and should be submitted on 
or before January 10, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2018-27510 Filed 12-19-18; 8:45 am]
 BILLING CODE 8011-01-P


