Advisories May 6, 2021

Securities Law Advisory: SEC Approves NYSE Amendments to Related Party Transactions Policies

Executive Summary
Minute Read

Our Securities Group investigates how NYSE-listed companies will need to adjust their approval processes for related party transactions in light of amendments to the NYSE Listed Company Manual.

  • A new definition reinterprets “related party transaction”
  • New responsibilities for the audit committee
  • Changes to shareholder approval requirement for related party issuances

On April 2, 2021, the Securities and Exchange Commission approved amendments to the NYSE Listed Company Manual to revise the requirements for related party transactions in Section 314.00 and the shareholder approval requirements in Sections 312.03 and 312.04. These changes will require heightened scrutiny and responsibility for related party transaction approvals and relax current requirements relating to obtaining shareholder approval before certain equity issuances.

Guidance on Review and Pre-Approval of Related Party Transactions

Definition of related party transaction

NYSE rules had not defined the term “related party transaction,” so companies had long interpreted it to have the meaning specified in Item 404 of Regulation S-K, which requires disclosure of transactions in which the transaction amount exceeds $120,000, the registrant was or is to be a participant, and the related party had or will have a direct or indirect material interest. The NYSE previously had not specified who should review these related party transactions. The amendments to Section 314.00 of the Manual provide some clarity, stating that the term “related party transaction” refers to transactions required to be disclosed pursuant to Item 404 of Regulation S-K but the transaction value threshold under Item 404 will not apply. 

Prior approval of all related party transactions is required

The amendments also specify that a company’s audit committee or another independent body of the board of directors shall conduct a reasonable prior review of related party transactions for potential conflicts of interest and prohibit a transaction only if it determines the transaction to be inconsistent with the interests of the company and its shareholders. Transactions required to be reviewed under Section 314.00 are those transactions in which a related party has or will have a direct or indirect material interest – the standard for disclosure under Item 404. Accordingly, small transactions, where there is no such material interest, will not require prior audit committee approval.

Changes to internal company processes

These new rules result in increased responsibility on the part of a company’s audit committee or other independent body in its review of related party transactions before entering a related party transaction (ratification will not suffice). Given these changes, companies should (1) consider whether any changes to internal processes are necessary to ensure any required audit committee approval is done in advance; and (2) consider whether amendments to related party transaction policies and audit committee charters are necessary to reflect the new review requirements under Section 314.00. 

Changes to Shareholder Approval Requirement for Related Party Issuances

The amendments to Section 312.03 of the Manual expand the circumstances under which a company may sell shares to a related party without first obtaining shareholder approval. Section 312.03(b) as amended requires prior shareholder approval for certain issuances of common stock to directors, officers, and substantial security holders of the company and no longer requires such approval for issuances to these parties’ subsidiaries, affiliates, or other closely related persons. 

In addition, Section 312.03(b) now requires shareholder approval of cash sales to related parties only if the price is less than the current market price. Issuances to related parties in non-cash transactions and cash sales to related parties for prices below the current market price relating to more than 1% of the issuer’s common stock or voting power outstanding will continue to be subject to shareholder approval. It is important to note that in accordance with Section 312.03(b)(ii), shareholder approval is required in any transaction if a related party has a 5% interest in the company or assets being acquired with the share issuance (or related parties collectively have a 10% interest) when the issuance could result in an increase of 5% or more in either the number of shares of common stock or voting power outstanding.

Other NYSE rules pertaining to shareholder approval for the issuance of shares remain unchanged.

Media Contact
Nicholas Clarke
Senior Communications Manager
Phone: 212.210.1222

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