
[Federal Register Volume 84, Number 58 (Tuesday, March 26, 2019)]
[Notices]
[Pages 11354-11357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05703]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85374; File No. SR-NYSE-2018-54]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Granting Approval of a 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

March 20, 2019.

I. Introduction

    On December 3, 2018, 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 amend Sections 312.03 and 312.04 of the NYSE 
Listed Company Manual (``Manual'') to modify the price requirements 
that companies must meet to avail themselves of certain exceptions from 
the shareholder approval requirements set forth in Section 312.03. The 
proposed rule change was published for comment in the Federal Register 
on December 20, 2018.\3\ On January 30, 2019, pursuant to Section 
19(b)(2) of the Act,\4\ the Commission designated March 20, 2019, as 
the date by which it should either approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change.\5\ The 
Commission has received no comment letters on the proposal. This order 
approves 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. 84821 (Dec. 14, 
2018), 83 FR 65378 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 85005 (Jan. 30, 
2019), 84 FR 1812 (Feb. 5, 2019).
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II. Description of the Proposal

    The Exchange has proposed to amend Sections 312.03 and 312.04 of 
the Manual to modify the price requirements that companies must meet

[[Page 11355]]

to avail themselves of certain exceptions from the shareholder approval 
requirements set forth in Section 312.03.
    Currently, under Section 312.03(b), the Exchange requires a NYSE-
listed company to obtain 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, to 
a director, officer or substantial security holder of the company (each 
a ``Related Party''); 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, 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 (``Related Party Transaction'').\6\ However, if the Related 
Party involved in the transaction is classified as such solely because 
such person is a substantial security holder (``Substantial Security 
Holder Transaction''), and if the issuance relates to a sale of stock 
for cash at a price at least as great as each of the book and market 
value of the issuer's common stock, then shareholder approval would 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.\7\
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    \6\ See Section 312.03(b) of the Manual.
    \7\ See id.
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    In addition, under Section 312.03(c), the Exchange currently 
requires a NYSE-listed company to obtain 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 (``20% Issuance''). 
However, shareholder approval would not be required for any 20% 
Issuance involving any bona fide private financing,\8\ 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 the sale of 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.\9\
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    \8\ ``Bona fide private financing'' is defined 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 not 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. See Section 312.04(g) of the 
Manual.
    \9\ See Section 312.03(c) of the Manual. Shareholder approval is 
also not required for any 20% Issuance involving any public offering 
for cash. See id.
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    ``Market value'' of the issuer's common stock is defined in Section 
312.04(i), for purposes of shareholder approval required under Section 
312.03, 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.\10\ The current rule 
provides that, for 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 of the regular session on 
Tuesday, then Monday's official closing price is used.\11\ The current 
rule also states that an average price over a period of time is not 
acceptable as ``market value'' for purposes of Section 312.03.\12\
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    \10\ See Section 312.04(i) of the Manual.
    \11\ See id.
    \12\ See id.
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    The Exchange has proposed a new measure of market value for 
purposes of Section 312.03, to be known as the ``Minimum Price,'' which 
will be defined as a price that is the lower of (1) the Official 
Closing Price immediately preceding the signing of the binding 
agreement to issue the securities or (2) the average Official Closing 
Price for the five trading days immediately preceding the signing of 
the binding agreement to issue the securities.\13\ The Exchange has 
proposed to define ``Official Closing Price'' of the issuer's common 
stock as the official closing price on the Exchange as reported to the 
Consolidated Tape \14\ immediately preceding the signing of a binding 
agreement to issue the securities.\15\ This definition is based on the 
current definition of ``Market Value'' in Section 312.04(i), which 
currently uses the official closing price as reported to the 
Consolidated Tape in its definition, with certain changes.\16\ Under 
the proposal, the exceptions to the shareholder approval requirements 
set forth in Sections 312.03(b) and (c) described above \17\ will only 
be available for issuances that are priced at least as great as the 
Minimum Price. In addition, while the new definition of ``Official 
Closing Price'' would retain the example in the current definition of 
``Market Value,'' the Exchange proposed to delete the statement that an 
average price over a period of time is not acceptable as ``market 
value'' for purposes of Section 312.03.\18\ The Exchange stated that 
this statement will no longer be accurate upon approval of the proposed 
rule change.\19\
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    \13\ See proposed Section 312.04(i) of the Manual.
    \14\ The Exchange states that 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). See Notice, supra note 3, at 
65379 n.6.
    \15\ See proposed Section 312.04(j) of the Manual. The Exchange 
proposes to renumber existing subsections (j) and (k) as subsections 
(k) and (l), respectively. See proposed Section 312.04(j)-(l) of the 
Manual.
    \16\ See supra notes 10-12 and accompanying text. The new 
definition of ``Official Closing Price'' would replace all 
references to ``entering into'' agreements and/or transactions with 
``signing'' agreements and/or transactions. The Exchange stated in 
its proposal that this change would conform the language used 
throughout the rule and does not have any substantive effect. See 
Notice, supra note 3, at 65379 n.7.
    \17\ See supra notes 7-9 and accompanying text.
    \18\ See proposed Section 312.04(j) of the Manual.
    \19\ See Notice, supra note 3, at 65379.
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    In proposing to use a five-day average closing price to determine 
if a shareholder vote is required under Sections 312.03(b) and (c), the 
Exchange stated that it is a widespread practice in commercial 
transactions involving the issuance of securities to use a five-day 
average when pricing transactions to avoid unanticipated and 
inequitable results that may occur with use of a single day's closing 
price if there is unexpected price volatility.\20\ While the Exchange 
noted that there are potential negative consequences to using a five-
day average as the sole measure of whether shareholder approval is 
required,\21\ the Exchange stated that it believes that the risks of 
using the five-day average closing price are already accepted by the 
market, as evidenced by

[[Page 11356]]

the use of an average price in transactions that do not require 
shareholder approval, such as those transactions where less than 20% of 
the outstanding shares are being issued.\22\ Thus, the Exchange 
proposed to define market value as the lower of the most recent closing 
price or five-day average closing price.\23\
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    \20\ See id.
    \21\ See id.
    \22\ See id.
    \23\ See id.
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    In conjunction with its proposal to redefine market value for 
purposes of determining whether an exception to the shareholder 
approval requirements of Sections 312.03(b) and (c) is available, the 
Exchange has also proposed to eliminate the current requirement that 
the price paid in a Substantial Security Holder Transaction or 20% 
Issuance qualifying for such exceptions must not be less than book 
value. Currently, as noted above, the Exchange's rules provide 
exceptions to the shareholder approval requirements in Sections 
312.03(b) and (c) for certain sales of common stock for cash at a price 
at least as great as market and book value. Under the proposal, 
Substantial Security Holder Transactions and 20% Issuances that 
otherwise qualify for the exceptions to the shareholder approval 
requirements in Sections 312.03(b) and (c) and are priced below book 
value but at or above market value, as defined by the Minimum Price, 
would no longer require shareholder approval. In its proposal, the 
Exchange stated that book value is an accounting measure that is based 
on the historic cost of assets rather than their current value, and 
that it believes it is not a meaningful measure of whether a 
transaction is dilutive or should otherwise require shareholder 
approval.\24\
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    \24\ See id.
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III. 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.\25\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\26\ 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 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.
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    \25\ 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).
    \26\ 15 U.S.C. 78f(b)(5).
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    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.\27\
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    \27\ See, e.g., Securities Exchange Act Release Nos. 84287 
(Sept. 26, 2018), 83 FR 49599 (Oct. 2, 2018) (SR-NASDAQ-2018-008) 
(approving amendments to change the definition of market value for 
purposes of the shareholder approval rule and eliminate the 
requirement for shareholder approval of issuances at a price less 
than book value but greater than market value); 76814 (Dec. 31, 
2015), 81 FR 0820 (Jan. 7, 2016) (SR-NYSE-2015-02) (approving 
amendments to the NYSE Listed Company Manual to exempt early stage 
companies from having to obtain shareholder approval in certain 
circumstances); 48108 (June 30, 2003), 68 FR 39995 (July 3, 2003) 
(SR-NYSE-2002-46 and SR-NASD-2002-140) (approving equity 
compensation shareholder approval rules of both the NYSE and the 
National Association of Securities Dealers, Inc. n/k/a NASDAQ); and 
58375 (Aug. 18, 2008), 73 FR 49498 (Aug. 21, 2008) (File No. 10-182) 
(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).
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    As discussed above, the proposal would, among other things, (i) 
change the definition of market value, for purposes of determining 
whether exceptions to the shareholder approval requirements under 
Sections 312.03(b) and (c) are met, by proposing to use the lower of 
the official closing price or five-day average closing price and, as a 
result, also remove the prohibition on an average price over a period 
of time being used as a measure of market value for purposes of Section 
312.03; and (ii) eliminate the requirement for shareholder approval 
under Sections 312.03(b) and (c) at a price that is less than book 
value but at least as great as market value. The Commission has 
carefully considered the proposal and finds that the proposed rule 
change is consistent with the Act.
    The Commission believes that the proposed change to the 
determination of market value (proposed to be defined as ``Minimum 
Price''), to use the lower of the official closing price or five-day 
average closing price, for determining whether certain exceptions to 
the shareholder approval provisions apply to Substantial Security 
Holder Transactions in Section 312.03(b) and to 20% Issuances in 
Section 312.03(c), is consistent with the Act.\28\ The Commission notes 
that, according to the Exchange, the five-day period for establishing 
the average closing price is related to the way transactions are 
actually structured, in situations where shareholder approval is not 
required, to help smooth out price fluctuations.\29\
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    \28\ See infra notes 31--35 and accompanying text for a 
discussion of other circumstances that may require shareholder 
approval.
    \29\ See Notice, supra note 3, at 65380. As noted above, the 
rule proposal would also remove an explicit provision in the 
Exchange's rules that states that an average price over a period of 
time is not acceptable as market value for purposes of the 
shareholder approval rules. The removal of this prohibition is 
necessary in order for the Exchange to adopt the same five-day 
average pricing period that Nasdaq currently uses in its shareholder 
approval rules. See infra note 36. In approving the removal of this 
prohibition, the Commission notes it is only doing so after finding 
that the five-day average pricing period is consistent with the Act. 
The deletion of the prohibition is not meant to imply any other 
period of time to calculate average pricing would be consistent with 
the Act, and any proposal to do so would have to be analyzed on its 
own merits pursuant to a proposed rule change under Section 19(b) of 
the Act.
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    The Commission believes that the proposal to eliminate the 
requirement for shareholder approval under Sections 312.03(b) and (c) 
at a price that is less than book value but at least as great as market 
value is also consistent with the Act. As noted by the Exchange,\30\ 
book value may not be an appropriate indicator of whether a transaction 
is dilutive for purposes of the Exchange's shareholder approval rule.
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    \30\ See Notice, supra note 3, at 65379.
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    The Commission notes, in approving the changes to measure market 
value as the lower of the closing price and five-day average closing 
price and eliminate the book value requirement, that the ability of 
listed companies to issue securities without shareholder approval 
continues to remain limited by other important Exchange rules.\31\ For

[[Page 11357]]

example, the Commission notes that any discounted issuance of stock to 
a company's employees, directors, or other service providers would 
require shareholder approval under the Exchange's equity compensation 
rules.\32\ In addition, shareholder approval would continue to be 
required if the issuance resulted in a change of control,\33\ as well 
as for certain issuances to Related Parties, such as officers, 
directors and their affiliates, among others.\34\ Finally, as discussed 
above, Sections 312.03(b) and (c) set forth circumstances under which 
shareholder approval would be required, and such approval would 
continue to be required under the proposal to the extent that an 
issuance would not qualify for the exceptions enumerated in those 
rules.\35\
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    \31\ See, e.g., Sections 312.03(a) and (d) of the Manual. The 
Commission notes that, under Exchange rules, if shareholder approval 
is not required under the requirements in Sections 312.03(b) or (c) 
it could still be required under one of the other shareholder 
approval provisions in Section 312.03 of the Manual since these 
provisions apply independently of each other. See Section 312.04(a) 
of the Manual (``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 one or more of the other subparagraphs.''). The 
Commission notes that the independent application of these 
provisions includes the provisions on shareholder approval for 
equity compensation plans as set forth in Section 303A.08, as 
referenced in Section 312.03(a) of the Manual.
    \32\ See Sections 312.03(a) and 303A.08 of the Manual. The 
Commission notes that Section 303A.08 uses the term ``fair market 
value'' for purposes of determining whether an issuance of stock 
would qualify for an exception from the shareholder approval 
requirement in Section 303A.08. The Exchange has represented that 
for purposes of qualifying for 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, 
and, to avoid any potential confusion, the Exchange will submit a 
proposed rule filing to amend Section 303A.08 to codify this 
interpretation. See Notice, supra note 3, at 65379-80. For any 
avoidance of doubt, the Commission notes that the term Minimum 
Price, as defined above by the Exchange in its current proposal, is 
not applicable to the equity compensation provisions in Section 
303A.08 or Section 312.03(a).
    \33\ See Section 312.03(d) of the Manual.
    \34\ See Section 312.03(b) of the Manual.
    \35\ See supra notes 6-9 and accompanying text.
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    The Commission further notes, in approving the changes to measure 
market value as the lower of the closing price and five-day average 
closing price and eliminate the book value requirement, that the 
proposed amendments are similar to the rules of another national 
securities exchange that the Commission found consistent with the 
Act.\36\
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    \36\ See Securities Exchange Act Release No. 84287 (Sept. 26, 
2018), 83 FR 49599 (Oct. 2, 2018) (SR-NASDAQ-2018-008). See also 
NASDAQ Rule 5635(d).
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    The Commission believes that the additional proposed amendments and 
clarifications to the rule, including to the definition of official 
closing price, will add transparency to the Exchange's rules and are 
therefore consistent with the Act.\37\
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    \37\ The Commission notes that the Exchange has indicated that 
the changes to the definition of Official Closing Price were made to 
conform the definition to the language used throughout the rule and 
does not have any substantive effect. See supra note 16.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\38\ that the proposed rule change (SR-NYSE-2018-54), be, and it 
hereby is, approved.
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    \38\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05703 Filed 3-25-19; 8:45 am]
BILLING CODE 8011-01-P


