On December 26, 2023, the Securities and Exchange Commission (“SEC”) approved an amended proposal submitted by the New York Stock Exchange (“NYSE”) that narrows the scope of the NYSE’s shareholder approval requirement for a transaction involving the sale of securities to a substantial securityholder.  NYSE Rule 312.03(b)(i) requires a listed company to obtain shareholder approval prior to the issuance of shares to a substantial securityholder if the number of shares to be issued exceeds 1% of the company’s outstanding shares prior to the issuance.  The rule provides a commonly used exception for issuances at a minimum price based upon the recent trading price of the shares on the NYSE. 

Existing shareholders are typically a company’s first and easiest source of capital as they already understand the company’s business and often have a positive view of its future prospects.  Due to the shareholder approval requirement, sales to substantial securityholders are frequently impractical unless the transaction is timed to coincide with a positive company public announcement that will allow the issuance to comply with the noted minimum price exception. The NYSE amendment now limits the application of the shareholder approval requirement to only those substantial securityholders whose interest in the company is not passive.  Covered parties are limited to directors, officers, controlling shareholders or members of a control group or any other substantial securityholder of the company that has an affiliated person who is an officer or director of the company.  As a result, below market sales over 1% to substantial securityholders who are not active related parties will be permitted without a requirement to seek shareholder approval under NYSE Rule 312.03(b)(i) but will continue to be subject to all the other applicable shareholder approval requirements under NYSE Rule 312.03.