With so many companies’ stock prices depressed, executive compensation professionals are talking about the possibility of stock option repricing. However, option repricing is difficult, costly, and despised by investors and proxy advisory firms. Therefore, it caught my eye when earlier this month the SEC essentially gave fast-track approval of the New York Stock Exchange’s request to provide temporary waivers of the shareholder approval requirements applicable to certain kinds of equity issuances under the NYSE’s Listed Company Manual. Although focused on capital raising, this waiver could provide an alternative to option repricing for officers and directors at some companies.
Section 312.03(b) of the NYSE Manual requires shareholder approval of any issuance to a director, officer or substantial security holder of the company (each a Related Party) or to an affiliate of a Related Party 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 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance. A limited exception permits cash sales to Related Parties that meet the “Minimum Price” test and that relate to no more than 5% of the company’s outstanding common stock. However, this exception may only be used if the Related Party in question has Related Party status solely because it is a substantial security holder of the company. Generally, the “Minimum Price” means 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.
The NYSE proposed and the SEC approved a partial waiver of the application of Section 312.03(b) for the period as of the date of this filing through and including June 30, 2020, with the waiver specifically limited to transactions that involve the sale of the company’s securities for cash at a price that meets the Minimum Price requirement. In addition, to qualify for this waiver, a transaction must be reviewed and approved by the company’s audit committee or a comparable committee of independent directors.
This approach is not suited to all companies, but some companies may determine that a sale of stock to executives and directors at an historically low price is similar to an award of a stock option at that price (Note that the specific limitations the NYSE proposed to waive do not exist in the applicable Nasdaq rules).
Ordinarily, a proposed rule change does not become operative prior to 30 days after the date of the filing. However, the SEC waived the normal delay, “because, in the Exchange’s view, the market and general economic disruption caused by the global spread of the COVID-19 virus may give rise to companies experiencing urgent liquidity needs which they may need to meet by undertaking transactions that would benefit from the proposed relief.” Accordingly, the proposal became effective immediately.