May 18, 2006

NYSE Proposes to Eliminate Treasury Share Exception

A few weeks back, the NYSE submitted a proposal to the SEC that would eliminate the “treasury share exception” from the requirement for shareholder approval under Section 312.03 of the NYSE Listed Company Manual. From reading this blog, it’s clear what the history is on this. The proposal has not yet been published for comment by the SEC and could still be changed.

Although Section 312.03 requires that companies obtain shareholder approval before issuing stock in certain situations or in significant amounts, the calculation of whether the amount of shares issued triggers the shareholder approval requirement doesn’t apply to the reissuance of treasury stock in some cases (i.e., previously issued and listed shares that previously were reacquired by the company). In particular, the NYSE proposal would:

– Eliminate the treasury share exception entirely
– Require that companies notify the NYSE regarding issuances of treasury shares; and
– Clarify that the shareholder approval requirements for issuances to related parties cover a “series of related transactions”

In its proposal, the NYSE clarifies that companies may continue to rely on the treasury share exception until the SEC approves the rule change. But note on page 5 of the proposal: “Issuances effective on or after that date will be unable to utilize the treasury share exception, even if the issuer had contracted for the issuance prior to that effective date.” In other words, the NYSE states that once the SEC approves the rule change, the treasury share exception is not available for any transaction – even if contracted for prior to the rule change.

This could hurt those companies that may have contacted the NYSE and obtained their blessing that shareholder approval isn’t necessary, contracted for the arrangement, and then the arrangement is effected after the SEC approves the rule proposal; in this situation, shareholder approval would still be necessary despite the NYSE’s prior acquiescence.