Temporary waivers of related-party and 20% rules granted in light of COVID-19-related financing needs

Recognizing that many companies will have “urgent liquidity needs” in the coming months as a result of economic and market conditions related to the spread of COVID-19, on Monday the New York Stock Exchange announced temporary waivers to some of its stockholder-approval requirements for stock issuances. Importantly, however, the general requirement that stockholders of domestic companies approve any issuance of more than 20% of the outstanding stock in a private placement below the current market price will remain in place.

The waivers are effective immediately and will remain in place through June 30, 2020.

Modified Stockholder Approval Rules

The waivers apply to the stockholder approval requirements for certain stock issuances pursuant to Section 312.03 of NYSE’s Listed Company Manual.

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Key Takeways

• Direct listings to date have not permitted companies to raise capital, and have required 400 holders of company stock prior to listing.
• The proposed NYSE rule would address both of these limitations.
• Underwritten IPOs are still expected to remain attractive to most private companies.

The “traditional” IPO model has received a lot of criticism recently in the media and from venture capital investors for perceived “mispricings” that result in a pop in the opening trade. Recently, the media and investors have seized upon “direct listings,” where a company is listed on an exchange without a capital raising transaction, and instead files a registration statement to facilitate a listing and permit existing shareholders to sell into the market without a formal offering. While this structure has been utilized by three companies to date (full disclosure: this firm worked on two of them), the structure has two significant infirmities that the proposed NYSE rule change would address. These proposed changes are welcome and may facilitate more direct listings, but it is unclear whether this rule change will solve all concerns with direct listings and encourage a meaningful number of private companies to abandon the traditional underwritten IPO, which continues to work well for many companies.

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On May 3 the SEC proposed amendments to the financial disclosure requirements relating to acquisitions and dispositions of businesses. The proposed amendments are intended to reduce the costs and complexity of required financial disclosure and should reduce the circumstances under which financial statements for acquired businesses need to be filed. The SEC previously requested comment in 2015 on the effectiveness of financial disclosure requirements for entities other than the registrant, including for acquisitions and dispositions, as part of its ongoing disclosure effectiveness initiative pursuant to its mandate under the FAST Act of 2015 to modernize and simplify public- company reporting requirements. This proposal incorporates the SEC’s consideration of comments received from Davis Polk and others in response to that request.

We believe this proposal is a step in the right direction of easing the burden of complying with current financial disclosure requirements for acquisitions and dispositions without meaningfully impacting the flow of material information to investors. Significantly, the proposed amendments would:

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Despite a political agenda packed with important issues like tariffs, immigration and a Supreme Court nomination, there have been a number of recent federal and state legislative developments relating to public company corporate governance topics that are of interest. In particular, the Senate Banking Committee has recently considered bills relating to the role of proxy advisory firms and disclosure of cybersecurity experience at the board level; there have been calls by lawmakers for regulation of executive sales following announcement of stock buybacks; the Senate Committee on Appropriations is proposing to direct the SEC to report on the decline in public companies; a bill implementing gender quotas on boards progressed through the California State Senate; and Delaware adopted a voluntary sustainability certification and reporting regime. While a number of these topics have received the attention of lawmakers over the past few years, it remains to be seen whether they will gain traction in the current political environment.

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