Lynn blogged a few months ago about a change to Section 314.00 of the NYSE Listed Company Manual that was causing some hand-wringing. The new rule not only required advance approval by independent directors of “related party transactions” — it also defined that term to mean any transaction required to be disclosed pursuant to Item 404 of Regulation S-K, but without applying the $120,000 transaction value threshold of that Item. It wasn’t clear whether that meant that all transactions with related parties required advance approval, regardless of dollar value.
Late last week, the NYSE proposed an additional amendment to allow companies to continue to abide by the commonly accepted practice of applying the $120,000 transaction value from Item 404 of Reg S-K when determining whether a transaction requires review (or a lower dollar threshold, in some cases, for smaller reporting companies). While you still might need to amend your related party transactions policy to address the “pre-approval” part of the rule, the new amendment clarifies that it can stay largely aligned with the disclosure standard. A Gibson Dunn blog gives more detail:
In its latest proposal, the NYSE noted that the prior amendment had been intended to “provide greater clarity as to the types of transactions that were specifically subject to review and approval under the rule” but that “[i]n the period since the adoption of that amendment, it has become clear to the Exchange that the amended rule’s exclusion of the applicable transaction value and materiality thresholds is inconsistent with the historical practice of many listed companies, and has had unintended consequences.”
As such, the NYSE’s latest amendments to Section 314.00 “provide that the review and approval requirement of that rule will be applicable only to transactions that are required to be disclosed after taking into account the transaction value and materiality thresholds set forth in Item 404 of Regulation S-K or Item 7.B of Form 20-F, respectively, as applicable.” Notably, Item 404 of Regulation S-K only requires disclosure of transactions where the amount involved is greater than $120,000 and in which the related person “had or will have a direct or indirect material interest” in the transaction. The notes to Item 404 also contain various other exclusions.
The text of the NYSE’s latest amendment to Section 314.00 of the NYSE Manual follows (with deleted text shown in strikethrough):
A company’s audit committee or another independent body of the board of directors, shall conduct a reasonable prior review and oversight of all related party transactions for potential conflicts of interest and will prohibit such a transaction if it determines it to be inconsistent with the interests of the company and its shareholders. For purposes of this rule, the term “related party transaction” refers to transactions required to be disclosed pursuant to Item 404 of Regulation S-K under the Securities Exchange Act (but without applying the transaction value threshold of that provision). In the case of foreign private issuers, the term “related party transactions” refers to transactions required to be disclosed pursuant to Form 20-F, Item 7.B (but without regard to the materiality threshold of that provision).
The proposed rule took effect immediately, but can be suspended by the SEC within 60 days of the filing, and is open for comment for interested persons to submit written data, views, and arguments concerning the amendment. As a result of this latest proposal, NYSE-listed companies may still need to amend their related person transaction approval polices to address the “reasonable prior review” standard, but can otherwise more easily integrate the NYSE’s standards with those utilized for transactions under Item 404 of the SEC’s Regulation S-K, and have greater flexibility to establish reasonable processes for identifying and reviewing potentially disclosable transactions.
-Liz Dunshee, TheCorporateCounsel.net August 24, 2021