March 26, 2009
The staff of the New York Stock Exchange (NYSE) has corrected its advice that was the basis for our earlier client alert on this subject, so we are reissuing this alert to reflect the NYSE’s corrected advice.
Many publicly-traded companies in financial distress today are struggling with issues arising from outstanding convertible debt due to a variety of factors including imminent maturity dates and covenant breaches. One potential restructuring option available to issuers is an exchange offer for new convertible debt with revised terms, such as extended maturity dates, reduced principal amounts, lower conversion prices into common stock and more lenient covenants. The prospect of lowering the conversion price frequently creates an obstacle imposed by the stock exchange on which the company’s stock is traded: the requirement of stockholder approval for certain stock issuances (whether absolute or contingent) if the number of shares to be issued equals or exceeds 20% of the shares actually outstanding (20% Test).
NYSE Rule 312.03 requires stockholder approval for any issuance by a listed company of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if the number of shares or the voting power of the common stock subject to the issuance equals or exceeds 20% of the shares or voting power outstanding before the issuance, subject to certain exceptions. Those exceptions include:
Furthermore, under Rule 312.05, the NYSE can grant an exception to the stockholder approval requirement if the delay necessary to secure the stockholder approval would seriously jeopardize the financial viability of the company and reliance by the company on this exception is expressly approved by the Audit Committee of the Board of Directors. However, most companies cannot meet this standard.
NYSE Corrected Position
In the context of an exchange offer of new convertible debt for previously outstanding convertible debt, the NYSE staff has taken the position that the 20% Test only applies to any increase in the number of shares issuable under the new debt as compared to the old debt; the calculation is not made on the total number of shares issuable under the new debt. In other words, the NYSE only looks at the net increase in the number of shares potentially issuable upon conversion as a result of the exchange. The NYSE staff had previously provided guidance that, when calculating whether an issuance of securities meets the 20% Test, the NYSE would take into account the number of shares issuable upon the original convertible debt, in addition to the actual amount outstanding, for purposes of calculating the number of shares outstanding on the date of measurement. The NYSE, however, has since corrected that guidance and has advised us that, pursuant to NYSE Rule 312.04, when calculating whether the 20% limit has been reached, the net increase in shares issuable upon conversion (the numerator in the calculation) will be compared only to the number of shares actually outstanding on the date of the listing application without giving effect to the number of shares then issuable upon conversion of the old convertible debt.
- An issuer has 180 million shares outstanding;
- The issuer also has outstanding debt that is convertible into 20 million shares; and
- The issuer wants to exchange all of the old convertible debt for new debt with a lower conversion price that could potentially convert into 57 million shares.
The NYSE views the additional listing as being for 37 million shares, the net increase in the number of shares issuable as a result of the conversion, not the full 57 million shares issuable under the new debt. For purposes of calculating the percentage this amount represents of the outstanding shares, however, the NYSE will only look at the actual number of shares outstanding (180 million) and will not take into account the 20 million shares issuable upon conversion of the previously outstanding debt. Therefore, in this example, stockholder approval would be required for the issuance of these new convertible securities.
If, on the other hand, the new debt in this example potentially converted into only 55 million shares, the net increase in the number of shares issuable as a result of the conversion would be 35 million shares. Since 35 million shares are less than 20% of the 180 million shares currently outstanding, the additional listing would not require stockholder approval under the 20% Test.
Cautionary Note: A contemplated exchange offer for convertible debt could also require stockholder approval under other NYSE tests.
Regardless of the situation, it is imperative for issuers to involve their NYSE representatives as early in the transaction process as possible in order to ensure a smooth process with respect to the NYSE, any required stockholder approval and compliance with any other formal or informal NYSE rules.
 Although not in the rule, the NYSE requires the public offering for cash to be a firm commitment underwritten offering. NASDAQ Stock Market Rule 4350(i)(D) contains a stockholder approval requirement similar to the 20% Test, with a slightly different standard that does not require the offering to be for cash.
 To date, the NASDAQ staff has not taken the same position as the NYSE staff in applying the 20% Test only to net increases in shares issuable upon conversion in an exchange offer of convertible securities.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or the following:
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