When a company agrees to list its securities on the New York Stock Exchange (NYSE), it agrees to comply with exchange listing standards and rules designed to achieve a high standard of corporate governance and disclosure. While some of these requirements mirror those imposed by the SEC, these requirements are in fact independent obligations with separate ramifications if not met. An NYSE company and its counsel must ensure that the company satisfies both SEC and NYSE requirements.
This chapter reviews listing standards and rules applicable to companies listed on the NYSE, including:
- Initial and continued listing standards, including mandated corporate governance practices;
- Rules requiring shareholder approval for certain corporate actions and events;
- Rules requiring NYSE notification regarding certain corporate actions and events; and
- Requirements to publicly disclose specified information in connection with material (or otherwise specified) corporate actions and events.
The NYSE requires its listed companies to meet quantitative and qualitative standards, both initially and on a continuing basis. Quantitative standards require companies to meet objective financial and share distribution criteria. Qualitative standards relate to companies’ corporate governance and ongoing status.
Initial Listing Standards
A company seeking to list its securities with the NYSE must comply with a set of initial quantitative and qualitative listing standards as a precondition to listing. As set forth in Appendix 4, the NYSE provides some alternatives for meeting the initial quantitative listing standards. An NYSE company must also comply with qualitative standards and company-specific considerations, which the company will work through with the NYSE during the initial listing process.
Trap for the Unwary
Heightened Requirements for Companies Going Public Through Reverse Mergers
Under applicable standards, companies formed through a reverse merger with a public shell company generally are eligible for initial NYSE listing only if the combined company has, in addition to satisfying all of the NYSE’s other relevant initial listing standards, immediately prior to applying:
• Traded for at least one year on the U.S. over-the-counter market, another national securities exchange or a regulated foreign exchange;
• Timely filed with the SEC all required reports since the reverse merger, including at least one annual report containing audited financial statements for a full fiscal year; and
• Maintained a closing price of $4 per share or higher for a sustained period of time, but in no event for less than 30 of the most recent 60 trading days prior to both the filing of its listing application and the date of the company’s listing.
There are some limited exceptions to these additional requirements that you can discuss with your counsel and an NYSE representative if needed.
Continued Listing Standards
The NYSE requires that its listed companies continue to meet minimum quantitative and qualitative standards to remain listed.
These quantitative and qualitative continued listing standards are set forth in Appendix 4. A company’s failure to maintain these standards usually triggers NYSE action, which could include initiation of suspension and delisting procedures that may ultimately result in the removal of the company’s securities from trading on the NYSE.
“Welcome to the Big Board” – Grace Periods if You Are a Newly Listed Company
If you are a company listing with the NYSE at the time of your IPO, you have one year from the listing date to satisfy the requirement that a majority of your Board members be independent. A newly public NYSE company will also be allowed to “phase-in” independent directors on the Audit, Compensation and Nominating & Governance Committees over a 12-month period as follows:
As a practical matter, however, most IPO companies want to have a majority of independent directors and at least a substantially, if not fully, independent Audit Committee around the time of the IPO in order to meet investor expectations.
For special situations, the NYSE has other rules governing phase-in periods for its corporate governance requirements, including for:
Companies in these circumstances should review with counsel and the NYSE whether phase-in periods are available.
NYSE Corporate Governance Standards
The NYSE has established corporate governance standards for its listed companies. These governance standards are designed to bolster public confidence in listed companies, promote prompt public disclosure of material events and enhance corporate ethics and democracy. Compliance with these corporate governance standards is an ongoing condition to listing.
A Majority of Directors Must Be Independent
The NYSE requires a majority of Board members of a listed company to be independent directors. For a director to qualify as independent under NYSE standards, a company’s Board must affirmatively determine that the director has no material relationship with the listed company (including any parent or subsidiary in a consolidated group). The Board must consider the materiality of the director’s direct and indirect relationships as a partner, shareholder or officer of any organization with links to the company (including with its senior management). A material relationship can come in many forms, including commercial, industry-related, banking, consulting, legal, accounting, charitable, private or familial.
Listed companies must report determinations of director independence in their annual meeting proxy statements, together with a description of any direct and indirect transactions, relationships and arrangements between directors and the company considered by the Board in making its independence determinations. Some companies use various general categories of relationships to help determine director independence and disclose in the proxy statement whether a director had a relationship that fell into one of the categories without going into much additional detail. We discuss general categories of relationships relating to director independence in Chapter 7.
A “Controlled Company” Is Exempt From Independence and Certain Committee Requirements
Are you a controlled company – one where an individual, group or another company holds more than 50% of the voting power for the election of directors? If so, you may choose to be exempted from various NYSE standards relating to director independence and the existence, composition and duties of your Compensation and Nominating & Governance Committees.
If you opt to use the controlled company exemption, you will need to include in appropriate SEC filings a description of your controlled company status and a statement that you are relying on the controlled company exemption. A controlled company must continue to comply with the NYSE’s other corporate governance standards, including the requirements relating to an independent Audit Committee and regular executive sessions of non-management (or independent, as the case may be) directors.
What Is Independence? The NYSE Describes What It Is Not
A director who has any of the following relationships is not independent under NYSE standards:
- Employment Relationship. A director who is or was an employee of the listed company within the past three years, or who has an immediate family member who is or was an executive officer of the company within the past three years, will not be independent. Employment as an interim chairman, CEO or other executive officer will not by itself disqualify the director from being considered independent following employment.
- Compensation in Excess of $120,000. A director who has, or whose immediate family member has, received more than $120,000 of direct compensation from the company in any 12-month period within the past three years, other than Board and committee fees and pension or other deferred compensation for prior service (provided the compensation is not contingent on continued service), will not be independent. Compensation that a director receives for past service as an interim chairman, CEO or other executive officer and compensation that an immediate family member receives for service as a nonexecutive officer of the company do not necessarily disqualify the director from being considered independent.
- Relationships with the Company’s Internal or Outside Auditor. Any of the following auditor relationships will make a director not independent:
- Being a current partner or employee of the company’s internal or outside auditor;
- Having an immediate family member who is a current partner of the company’s internal or outside auditor;
- Having an immediate family member who is a current employee of the company’s internal or outside auditor and personally works on the listed company’s audit; or
- Having been, or having an immediate family member who was, a partner or employee of the company’s internal or outside auditor personally working on the company’s audit within the past three years.
- Interlocking Directorate. A director will not be independent if the director or an immediate family member is or was employed within the past three years as an executive officer of another company (including a charitable organization) at the same time that a current executive officer of the company served on the other company’s Compensation Committee.
- Significant Business Relationship. A director will not be independent if the director is a current employee or an immediate family member is a current executive officer of another company that made payments to or received payments from the listed company that exceeded, in any of the past three fiscal years, the greater of $1 million or 2% of the other company’s consolidated gross revenues in the last completed fiscal year.
Trap for the Unwary
Watch Those Charitable Contributions!
Boards must evaluate contributions to charitable organizations as part of the director independence determination process. In addition, a listed company must publicly disclose contributions the company made to any charitable organization in which an independent director serves as an executive officer if, within the past three years, contributions in any single fiscal year exceeded the greater of $1 million or 2% of the charitable organization’s consolidated gross revenues. Some companies adopt a general category of relationships relating to director independence establishing that charitable contributions below a certain dollar amount do not constitute a material relationship for director independence purposes.
Listed companies are required to schedule “regular” executive sessions in which non-management directors meet without management participation. Non-management directors exclude company executive officers, but may include other directors who may not be independent because of a material relationship or another reason. A listed company may satisfy this requirement by holding regular executive sessions of only its independent directors. However, if a company regularly holds meetings of all non-management directors (and if that group includes any non-independent directors), then it should also hold an executive session of only independent directors at least once a year. We provide practical tips for organizing executive director sessions in Chapter 7.
The non-management (or independent, as the case may be) directors should either appoint a single presiding director for all executive sessions or rotate the presiding director position following a set procedure. Listed companies that have either an independent chair or a lead independent director usually name this person as the presiding director. Companies are required to publicly disclose the presiding director’s name or the procedure used to select the presiding director for executive sessions, as well as a method for all interested parties (not just shareholders) to communicate directly with the presiding director or with the non-management (or independent) directors as a group.
Composition and Independence. NYSE listing standards generally require that listed companies have an Audit Committee consisting of at least three independent directors that meets SEC requirements. All Audit Committee members must meet two somewhat overlapping independence standards, one established by Sarbanes-Oxley and the other by the NYSE:
- Sarbanes-Oxley Criteria. An Audit Committee member cannot receive any payment from the company other than for Board or Committee service and cannot be an affiliated person of the company or any of its subsidiaries. (We discuss these Sarbanes-Oxley independence requirements in detail in Chapter 7.)
- NYSE Criteria. An Audit Committee member must be independent under NYSE director independence standards and meet the Sarbanes-Oxley criteria for Audit Committee independence to meet NYSE requirements for Audit Committee independence.
Financial Literacy and Expertise. Each member of the Audit Committee must be, or within a reasonable period of time following appointment must become, financially literate. In addition, at least one member must have accounting or related financial management expertise. The NYSE does not provide detailed definitions for these concepts. A listed company’s Board is expected to use its business judgment in interpreting these requirements. For example, the Board can presume that a person who meets the SEC’s Audit Committee financial expert standard has the requisite financial expertise to meet this NYSE standard. (We discuss the SEC’s Audit Committee financial expert standard in Chapter 7.)
Have Four Qualified Audit Committee Members to Ensure Continued Listing Standards Compliance
As described above, the NYSE requires a company to have at least three qualified independent directors on the Audit Committee. Consider whether it makes sense for your company’s Audit Committee to have a fourth independent Audit Committee member so that your company remains compliant with this NYSE listing standard even when a member unexpectedly resigns (or is removed), without having to scramble to appoint a new member on short notice.
Audit Committee Charter. The NYSE requires a listed company to have a written Audit Committee charter that addresses:
- Purpose. The core role of an Audit Committee is to help the Board fulfill its duty of overseeing the company’s financial compliance and reporting. It reports on this role in the Audit Committee report in the annual proxy statement. The Audit Committee’s oversight functions cover:
- The integrity of the company’s financial statements;
- The company’s legal and regulatory compliance;
- The independent auditor’s qualifications and independence;
- The performance of both the internal audit function and the independent auditor; and
- The preparation of disclosures related to Audit Committee interactions with senior management, the Board and the independent auditors.
- Duties and Responsibilities. These include, among others (some of which are discussed in Chapter 7):
- Review of the Independent Auditor. Annually reviewing the independent auditor’s performance (including that of the lead partner and the need for rotation of auditor personnel), qualifications, independence and internal control procedures.
- Review of Financial Statements and Earnings Releases. Reviewing and meeting to discuss quarterly and annual financial statements and disclosures with management and the independent auditor, including MD&A. Reviewing and discussing earnings releases or guidance to analysts and rating agencies. (The NYSE does not specifically require a pre-release review, instead permitting general guidance regarding releases. However, most Audit Committees, or key members, do preview earnings releases and guidance prior to public release.)
- Oversight of Risk Exposure Policies. Discussing the company’s process for setting policies to govern risk assessment and management, including guidelines, policies and major financial risk exposure.
- Holding Executive Sessions. Holding separate and periodic meetings with management, the internal auditor and the independent auditor.
- Review of the Audit Process. Reviewing audit-related problems or difficulties (and management’s responses) with the independent auditor.
- Hiring Policies. Setting clear hiring policies for employees or former employees of the independent auditor.
- Informing the Board. Regularly reporting to the Board on financial statements, compliance with laws and regulations, independent auditors’ performance and audit procedures.
- Annual Self-Evaluation. The Audit Committee must annually assess its performance.
Audit Committee Should Schedule Additional Meetings or Meet Later in the MD&A Review Process
To comply with NYSE listing standards and governance expectations generally, the Audit Committee must review and discuss a relatively advanced draft of the MD&A to be included in a listed company’s SEC filing, instead of simply discussing the MD&A disclosure in general. Accordingly, you should have the Audit Committee schedule meetings to allow it to review the MD&A disclosure in a form that is almost final. Meetings can be telephonic or in person.
Board Must Evaluate Effectiveness of Director’s Service on Multiple Audit Committees. Does an Audit Committee member serve on more than three public company Audit Committees? If so, the Board must decide whether these commitments impair the director’s ability to serve as an effective Audit Committee member, and the listed company must publicly disclose the determination. (Many companies’ corporate governance guidelines specifically restrict a director from simultaneously serving on more than three public company Audit Committees.)
Internal Audit Function. The NYSE requires each listed company to have an internal audit function. A company may outsource this function to a third party other than its independent auditor.
Composition and Independence. NYSE listing standards generally require that listed companies have a Compensation Committee composed entirely of independent directors, but does not prescribe a minimum number of members. However, when determining a director’s independence for service on an NYSE company’s Compensation Committee, the Board must specifically consider all factors relevant to determining whether the director has a relationship to the listed company that is material to the director’s ability to be independent from management with regard to Compensation Committee service, including:
- The source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the listed company to the director; and
- Whether the director is affiliated with the listed company, a subsidiary of the listed company or an affiliate of a subsidiary of the listed company.
Compensation Committee Charter. The NYSE requires a listed company to have a written Compensation Committee charter that addresses:
- Purpose and Responsibilities. Each Compensation Committee must at least oversee:
- CEO Goals, Performance and Compensation. The Compensation Committee reviews and approves corporate goals and objectives relevant to the CEO’s compensation, evaluates the CEO’s performance in light of those goals and objectives, and determines and sets the CEO’s compensation level based on its evaluation (either as a Committee or with other independent directors as directed by the Board).
- Non-CEO Executive Compensation. The Compensation Committee recommends to the Board non-CEO executive compensation, incentive compensation plans and equity-based plans that are subject to Board approval.
- Prepare Disclosure. The Compensation Committee oversees the preparation of the Compensation Committee report, the CD&A and other related disclosure. (We discuss other duties and responsibilities of the Compensation Committee in Chapter 7.)
- Annual Self-Evaluation. The Compensation Committee must annually assess its performance.
Nominating & Governance Committee
NYSE listing standards generally require that listed companies have a Nominating & Governance Committee composed entirely of independent directors, but does not prescribe a minimum number of members. The Nominating & Governance Committee must have a written charter that addresses:
- Purpose and Responsibilities. The Nominating & Governance Committee’s principal function is to oversee corporate governance, including, at a minimum:
- Identifying qualified director candidates consistent with criteria approved by the Board;
- Selecting, or recommending that the Board select, director nominees for the annual shareholders’ meeting;
- Developing and recommending to the Board a set of corporate governance guidelines; and
- Overseeing the evaluation of the Board and management. (We discuss other duties and responsibilities of the Nominating & Governance Committee in Chapter 7.)
- Annual Self-Evaluation. The Nominating & Governance Committee must annually assess its performance.
Corporate Governance Guidelines
The corporate governance guidelines required of each listed company allow the Board and senior management to publicly set out the key tenets of their company’s governance values. Accessible on the corporate governance page of an NYSE company’s website, the guidelines should address:
- Director independence standards, qualifications, tenure, resignation, succession, responsibilities and compensation;
- Director access to management and independent advisors;
- Director orientation and continuing education;
- Management succession (including selection and contingency policies); and
- Annual evaluation of Board and Committee functioning and performance.
The NYSE calls for website posting of a listed company’s corporate governance guidelines, code of business conduct and ethics and core committee charters. A listed company must disclose the availability of these materials and the website on which the materials are located in its annual proxy statement (and other SEC filings). Companies use website postings both as a way to publicly communicate the “tone at the top” from the CEO and the Board and as a ready reference for employees, directors and shareholders.
Code of Business Conduct and Ethics
Paired with the corporate governance guidelines is the NYSE-required code of business conduct and ethics – a practical set of ethical requirements for a listed company’s officers, directors and employees. Only the Board or a Committee can waive violations of the code by directors or executive officers, and the company must disclose any of these waivers to its shareholders within four business days of the waiver.
An NYSE-compliant code of business conduct and ethics will address, at a minimum:
- Conflicts of interest, corporate opportunities and fair dealing;
- Confidentiality and protection and proper use of company assets;
- Compliance with laws, rules and regulations (including insider trading laws); and
- Proactive reporting of any illegal or unethical behavior (with protections against retaliation).
In reviewing a code of business conduct and ethics, the Board should consider whether the code provides for sufficiently practical and general compliance standards so that the Board or a Committee is not put in a position of regularly considering waivers.
Annual CEO Certification of Compliance With Corporate Governance Standards
A listed company’s CEO must annually certify to the NYSE that he or she is unaware of any (not only material) violation of the NYSE’s corporate governance standards, or detail any known violation. On an ongoing basis, the CEO must promptly notify the NYSE in writing if any executive officer of the company becomes aware of any noncompliance with the NYSE’s corporate governance standards, even if the noncompliance is not material.
NYSE May Issue Public Reprimand Letters
The NYSE may issue a public reprimand letter to a listed company that it determines has violated any NYSE listing standard. For companies that repeatedly or flagrantly violate NYSE standards, the reprimand could lead to trading suspension or delisting.
Listed companies are required to have and maintain a publicly accessible website. To the extent that the NYSE requires a listed company to make documents available on or through its website, such website must clearly indicate in the English language the location of such documents on the website. Any such documents must be available in printable versions in the English language. A company that becomes listed on the NYSE in connection with its IPO must satisfy NYSE-specified website posting requirements by the completion of the IPO process.
The NYSE believes that good business practice calls for a listed company’s management to consider submitting to shareholders those matters that may be important to shareholders but not necessarily required by law or governing documents to be submitted. If a listed company has questions about submitting a matter to its shareholders, the NYSE urges the company to reach out and discuss the matter with its NYSE representative as appropriate. For the following key corporate actions, however, the NYSE specifically requires shareholder approval:
Equity Compensation Plans
Shareholders must approve any new equity-based compensation plan (or arrangement), whether or not officers and directors can participate in the plan. Shareholders must also approve any material revision to an existing plan.
The NYSE’s definition of material revision is general, but specifically includes:
- Materially increasing the number of shares available under a plan;
- Expanding the types of awards available under a plan;
- Materially expanding the class of persons eligible to participate in a plan;
- Materially extending a plan’s term;
- Materially changing the method of determining the exercise price of options under a plan;
- Repricing options, including where a plan does not permit repricing or changing a plan to permit repricing or lowering the exercise price after grant; and
- Cancelling options as part of an exchange when the exercise price exceeds the fair value of the underlying security.
The limited number of exemptions from the NYSE’s shareholder approval requirements regarding plan approval include dividend reinvestment or other plans offered to all shareholders, some issuances in connection with mergers and acquisitions, 401(k) and stock purchase plans or similar tax-qualified and parallel nonqualified plans, and equity grants made as a material inducement to a person being newly hired.
If a grant, plan or amendment is exempt from the NYSE’s shareholder approval requirements, the Compensation Committee (or a majority of the independent directors) must approve the grant, plan or amendment. In addition, the company must notify the NYSE in writing of the use of an exemption and, for any hiring inducement grant, issue a press release to disclose the material terms of the grant.
Be Timely – Apply for Listing of Equity Compensation Plan Shares
It is good practice to file an application with the NYSE for listing of reserved, unissued shares in connection with a stock option, stock repurchase or other remuneration plan prior to securities under those plans being issued.
20% Stock Issuance
Shareholders must approve a listed company’s new issuance of common stock (or securities convertible into, or exercisable for, common stock) that would equal or exceed 20% of the outstanding common stock or 20% of the outstanding voting power before the new issuance. A public offering for cash (even if over these 20% limits), however, generally does not require shareholder approval, nor does a private sale of common stock for cash at a price at or above the common stock’s book and market values.
Transactions (Including Issuances) With Related Parties
The NYSE generally requires shareholder approval prior to the issuance of common stock (or securities convertible into, or exercisable for, common stock) of over 1% of the outstanding preissuance shares or voting power to:
- Directors, officers or substantial securities holders, or people closely related to these insiders; or
- These insiders’ subsidiaries or affiliates, or entities in which these insiders hold substantial direct or indirect interests.
In addition, the NYSE considers related party transactions to include many listed company transactions with officers, directors or principal shareholders. The NYSE requires appropriate review of related party transactions and recommends, but unlike Nasdaq, does not mandate, that the Audit Committee (or a comparable committee) review these transactions. Following this type of review, the listed company should determine whether a particular relationship serves the best interests of the company and its shareholders and whether the relationship should be continued or eliminated.
The NYSE reviews proxy statements and other public filings disclosing related party transactions, and where such situations continue for several years, the NYSE may remind the listed company of its obligation, on a continuing basis, to evaluate each related party transaction and determine whether it should be permitted to continue.
The NYSE generally requires shareholder approval prior to an issuance of securities that would result in a change of control of the listed company.
Trap for the Unwary
Shareholder Voting Rights – Keep It Proportional (Usually Anyway)!
In general, the voting rights of an NYSE company’s current common shareholders cannot be disproportionately reduced or restricted through any corporate action or issuance, such as through capped or time-phased voting plans, issuance of super-voting stock or exchange of common stock for common stock with fewer voting rights per share. It is important to note, however, with regard to issuance of super-voting stock, that this restriction is primarily intended to apply to issuance of new classes of stock, so companies with existing dual-class capital structures generally are permitted to continue to issue any existing super-voting stock without conflict.
That said, an NYSE company (whether dual-class or not) that wishes to enter into an arrangement that may disproportionately affect the voting rights of its current common shareholders (through stock issuance or otherwise) should carefully consider consulting with its NYSE representative early in the proposed transaction process, because even shareholder approval of the proposed transaction does not make it permissible without a prior “green light” from the NYSE.
Additional NYSE Standards
Other critical NYSE standards include:
- Annual Shareholders’ Meetings and Proxy Materials. Listed companies must hold an annual shareholders’ meeting during each fiscal year and solicit proxies and provide proxy materials for all shareholders’ meetings.
- Staggered Boards. If a listed company has a staggered Board, it may be divided into no more than three classes, with each class being approximately the same in number and serving approximately equal terms of no more than three years. (We discuss staggered Boards in Chapter 7.)
- Quorum for Shareholders’ Meetings. Generally, a listed company will be expected to have a quorum requirement of a majority of outstanding shares for any meeting of shareholders. Nevertheless, the NYSE may permit quorum provisions of reasonably less than a majority of outstanding shares of common stock if the company agrees to make general proxy solicitations for shareholders’ meetings.
NYSE to Adopt Listing Standards That Mandate “Clawback” Policies
The Dodd-Frank Act requires the SEC to adopt rules requiring the NYSE and other national securities exchanges to establish rules requiring listed companies to adopt and implement “clawback” policies to recover certain incentive-based compensation paid to current and former executives in the three years preceding a financial restatement that was made due to material noncompliance with financial reporting requirements. The clawback would apply even in the absence of misconduct on the part of the executive. As of September 2015, the SEC had not taken final action regarding adoption of these rules, and the NYSE had not adopted any related rules.
Communicate! NYSE Notices and Forms
A listed company’s IRO or corporate secretary should maintain close contact with the company’s NYSE representative. At a minimum, the company will need to notify and provide supporting documentation to the NYSE prior to, or at the time of, a number of corporate actions (in addition to those already mentioned), including:
- The listing of additional shares (including potentially through exercise or conversion of nonlisted securities) or a new class of securities;
- Cash dividends or distributions, or stock splits or stock dividends;
- Redemption, retirement or cancellation of a listed security (15 days’ advance notice prior to redemption date required);
- A material disposition of assets;
- Rights offerings or changes relating to existing shareholders;
- A change in corporate name (20 days’ advance notice of the date set for mailing of shareholders’ proxy materials dealing with the matter required);
- A change relating to the nature of the business;
- A change in directors or executive officers;
- Record date notice (10 days’ advance notice prior to the record date required);
- The failure to pay interest on a listed security;
- A change in auditor; and
- A change in transfer agent, trustee, fiscal agent or registrar for listed securities (5 business days’ advance notice required).
Disclosure of Material News
In making the disclosure decisions discussed in Chapter 3, a listed company must consider the NYSE’s requirement calling for prompt release to the public of any material news that might affect the market for its securities. This obligation exists side by side with those imposed by securities laws and the SEC and results in an affirmative disclosure obligation for NYSE companies that may not otherwise exist.
Material news includes news or information that might reasonably be expected to have a material effect – favorable or unfavorable – on the market of a listed company’s securities as well as information that might affect the value of the company’s securities or influence an investor’s decision to trade in the company’s securities. Material news may include earnings announcements, dividend declarations, mergers and acquisitions, tender offers, major management changes and significant new products or contracts. Chapter 3 provides a more detailed list of factors that will help in deciding when news or information merits public release.
Exceptions to Required Public Disclosure
The NYSE permits a listed company to refrain from announcing even material news if it is necessary and possible for the company to maintain its confidentiality while still keeping all investors on equal footing and allowing no unfair information advantage. However, a company must take extreme care to keep the information confidential and to remind persons who possess the information of their obligation to refrain from trading on insider information.
If a decision is made not to disclose material news, a listed company’s IRO and general counsel’s office should closely monitor the price and trading patterns in the company’s securities and be prepared to make a public announcement if it becomes clear that the information has leaked to outsiders. If the NYSE detects unusual or suspicious trading activity in a company’s securities, the NYSE may contact the company, require that the company make the information public immediately or possibly halt trading in the company’s securities until the public has time to absorb the information.
Those Pesky Rumors – What to Do?
When seeking to maintain the confidentiality of material news, perhaps the greatest threat is a rumor that indicates that the market is aware of the confidential information. In the event of unusual market activity or rumors indicating that investors already are aware of impending company events – for example, a possible acquisition – your company may be required to make a clear public announcement regarding the state of negotiations or the development of corporate plans relating to the rumored information. This may be required even if the Board has not yet considered the matter.
If rumors arise, you should first seek to confirm that the rumor did not originate with the company and, subject to conversations with the NYSE and if considered appropriate, issue the sort of release that we discuss in Chapter 3 (i.e., a release stating that the company’s policy is not to comment on transactional rumors). If the rumors are false, you may need to issue a press release publicly denying or clarifying the false or inaccurate rumors. It is critical, of course, that you not deny negotiations that are in fact occurring and that the statement be otherwise truthful and comply with antifraud laws.
Procedures for Public Disclosure of Material News
The NYSE outlines the following steps a listed company should take when publicly releasing material news (including responding to rumors):
- If the announcement is to be made between 7 a.m. and 4 p.m. Eastern time (4 a.m. and 1 p.m. Pacific time), the company must telephone the NYSE’s MarketWatch Group at least ten minutes prior to public announcement and inform the NYSE of the substance and method of distribution of the announcement (when the announcement is in written form, the company must also provide a copy of the text of the announcement to the NYSE via specified web-based means at least ten minutes prior to release of the announcement). If the announcement is to be made after the closing of trading, the NYSE requests that a company wait to make the announcement until the earlier of publication of the day’s official NYSE closing price or 15 minutes after the closing of trading;
- Broadly disseminate the news by a Regulation FD-compliant method (or combination of methods), and if the information should be immediately publicized then by the fastest available means. According to the NYSE, this typically requires that the company either (i) include the news in a Form 8-K or other SEC filing, or (ii) issue the news in a press release to the major news wire services, including, at a minimum, Dow Jones & Company, Inc. and Bloomberg Business;
- Prepare an internal question-and-answer script and have someone at the company ready to respond to questions about the material news; and
- Promptly send via email any press release that may significantly impact trading to the company’s NYSE representative.
Trading Halts or Delays
The NYSE requires advance notice of potentially material news in part to determine whether the news would justify a trading halt or delay in the listed company’s securities. Companies generally may avoid temporary trading halts or delays related to the release of new material news by fully disseminating the information to the public well before trading begins. If the company believes that it may request a trading halt prior to 9:30 a.m. Eastern time (6:30 a.m. Pacific time) in connection with the announcement of material news, the company should coordinate closely with the NYSE. Whenever the NYSE decides to halt or delay trading due to pending material news, it will make an announcement to the market to that effect. Once the company releases the material news, the NYSE will monitor the situation and commence trading pursuant to its normal trading procedures. If the pending material news is not released, the NYSE will monitor the situation and may reopen trading (often within 30 minutes of the trading halt or delay) and signal that material news is still pending. Additionally, when the NYSE believes it is necessary to request from a company information relating to material news, the NYSE may halt trading until it has received and evaluated the information.