By:  Cydney Posner

The NYSE has filed with the SEC a proposal to eliminate the treasury share exception from certain NYSE shareholder approval requirements.

Section 312.03 of the Listed Company Manual requires that companies obtain shareholder approval before issuing stock in certain situations or in significantly large amounts, such as an issuance of more than 1% of the current outstanding common stock to an insider, more than 5% of the current outstanding to a 5% or greater shareholder or an affiliate of the shareholder or more than 20% of the current outstanding in any transaction other than a public offering or "bona fide private financing." Approval is also required when an issuance will result in a "change of control of the issuer."

Because of the manner in which the rule was drafted (requiring shareholder approval as a "prerequisite to listing"), the rule has historically not been applied to any issuance by a company of shares from treasury (as treasury shares have already been listed). However, the treasury share exception has been criticized because it could allow companies, through an accumulation of treasury shares, to substantially dilute existing shareholders without their approval. As a result, the NYSE has proposed to amend Section 312.03 and Section 312.04 to eliminate the treasury stock exception, as well as Section 703.01(A) to require companies to notify the NYSE of issuances from treasury, to enable the NYSE to determine whether shareholder approval is required. The treasury share exception would cease to be available as of the date of SEC approval of the proposed rule change.

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