A few weeks ago, I blogged about amendments to the NYSE Listed Company Manual relating to shareholder approval requirements. While that blog focused on amendments relating to equity issuances in private placement transactions, the amendments also tweaked NYSE Listed Company Manual Section 314.00, which requires related party transactions to be approved by an independent board committee. The tweaks to Section 314.00 are important to note before they completely slip under the radar.
Over the years, many have interpreted the NYSE Rule about related parties as being consistent with the disclosure requirement in Reg S-K Item 404. As amended, NYSE Section 314.00 clarifies that for purposes of this rule, the term “related party transaction” refers to transactions required to be disclosed pursuant to Item 404 – but without regard to the transaction value threshold of that provision. The amended rule also requires “prior” review of related party transactions to make sure they’re not inconsistent with interests of the company and its shareholders.
So does the removal of the $120,000 threshold from this rule mean that NYSE-listed companies need to have their audit committee (or whichever independent body of the board that reviews related party transactions) review and approve nearly all potential related party transaction regardless of dollar value? Maybe not. A Davis Polk memo explains how you might be able to get comfortable without it:
The revisions raise the question of whether the audit committee should review and approve even de minimis transactions involving directors, officers and other related parties. Because Item 404 specifies that the related party must have a “material interest” in the transaction—in addition to the transaction value threshold of $120,000—we believe companies may conclude that for many small transactions, there is no such material interest and so prior audit committee approval is not necessary. Depending on the relevant industry and a company’s ordinary business operations, companies may wish to review the types of transactions they regularly engage in with related parties in order to ensure continuing compliance with NYSE’s rules.
For companies that take a more conservative approach to pre-approval, it’s probably worth revisiting your related party transaction policy to consider whether to expand the list of pre-approved transactions. If some common arrangements are omitted only because of their low dollar amount, you would want to consider adding those.
-Lynn Jokela, TheCorporateCounsel.net May 3, 2021