NYSE to Re-Amend its “Related Party Transaction” Review Rule to Align More Closely with SEC Disclosure Requirements
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On August 19, 2021, the New York Stock Exchange ("NYSE") filed a proposal to amend its related party transaction rule for a second time in 2021. Below is a summary of the key developments regarding this rule change.
What happened initially?
Earlier this year, on April 2, 2021, the NYSE amended Section 314.00 of its Listed Company Manual to require a company's audit committee or another independent body of the board of directors to "conduct a reasonable prior review and oversight" of all "related party transactions" ("RPTs") for potential conflicts of interest and to prohibit any transaction that it determined to be inconsistent with the interests of the company and its shareholders.
The amendment also defined RPTs as (i) for domestic companies, any transaction required to be disclosed pursuant to Item 404 of Regulation S-K, but without applying the $120,000 transaction value threshold of Item 404; and (ii) for foreign private issuers ("FPIs"), any transaction required to be disclosed pursuant to Form 20-F, Item 7.B, but without regard to the materiality threshold of that provision.
In the period since the adoption of this amendment, it became clear to the NYSE that the amended rule's exclusion of the applicable transaction value and materiality thresholds was inconsistent with the historical practice of many listed companies and had unintended consequences, including by requiring companies to adopt for the first time two separate standards for related party transactions – one for disclosure and another for review and approval.
What changes with the new amendment?
On August 19, 2021, the NYSE filed a rule proposal with the SEC to conform the related party transactions subject to the prior review and approval requirements of NYSE rules to those transactions subject to the applicable disclosure requirements of SEC rules.1
Accordingly, under the amended NYSE rule, the term "related party transaction" will apply the same thresholds currently included in SEC rules (i.e., the $120,000 transaction value from Item 404 for domestic companies and the materiality threshold of Item 7.B of Form 20-F for FPIs).
The new amendment does not change the requirement that the audit committee or another independent body "conduct a reasonable prior review and oversight" of all RPTs. However, note that SEC rules (under Item 404(b) covering domestic companies) still specifically allow for a company to disclose a policy that permits the "ratification" of an RPT and further require a company to "identify" any RPT where a company did not follow its own policy (including via ratification of such an RPT). Accordingly, given the NYSE's emphasis on the "reasonable prior review and oversight" of all RPTs for potential conflicts of interest, each company should determine whether this new NYSE standard qualified by reasonableness may be met, while still allowing for the specific "ratification" of any RPT in accordance with SEC rules.
The new text of the amendment to Section 314.00 is as follows (with deleted text shown as stricken):
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).
When is the amendment effective?
The proposed rule change will take effect on September 18, 2021, unless the SEC designates an earlier operative date. Accordingly, the NYSE listed company manual will only be updated once the rule change has become operative.
In addition, at any time within 60 days of the filing date (or before October 19, 2021), the SEC may temporarily suspend the rule change if it seems necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. Comments may be submitted on the rule change no later than 21 days after publication in the Federal Register.
1 The proposed amendment is available here.
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