On August 19, 2021, the New York Stock Exchange amended its rules that require approval of related party transactions for NYSE-listed companies. This amendment, which is effective immediately, modifies an earlier amendment to these rules approved by the U.S. Securities and Exchange Commission in April 2021, which required a listed company’s audit committee or another independent body of the company’s board of directors to approve any related party transaction that would be subject to Item 404 of Regulation S-K “without applying the transaction threshold of that provision.” The SEC has approved the August amendments, although the SEC may temporarily suspend these amendments until October 7, 2021 based on various grounds.
As the NYSE states in the most recent amendment, the April amendments had the unintended result that many companies were forced to amend their corporate governance documents, such as their related party transaction policies, codes of ethics, and committee charters, to separate review and approval of related party transactions involving even immaterial amounts or interests from related party transactions that exceeded the materiality thresholds of Item 404 of Regulation S-K and were therefore subject to the disclosure requirements of SEC rules.
As a result of the most recent amendments, the prior review and approval of related party transactions required by NYSE rules will apply only to transactions that Item 404 would require the company to disclose after applying the materiality and value thresholds of Item 404, including the exceptions provided in the instructions to Item 404. NYSE-listed companies should review their corporate governance documents, which may include the audit committee charter, related party transaction policy, or code of business conduct and ethics or equivalent document, to determine what action may be required now to comply with the NYSE rules that require approval of related party transactions, as most recently amended.
What Companies Should Do Now
NYSE-listed companies should review the provisions of their corporate governance documents that provide for approval of related party transactions under the requirements of Section 314.00 of the NYSE rules. In many cases, this will include the charter of the audit committee of the board of directors (NYSE Listed Company Manual Section 303A.07(b)) and the company’s code of business conduct and ethics (Section 303A.10). Many companies also have a separate related party transaction approval policy. The principal requirements of Rule 314.00 after the most recent amendments include the following:
- Related party transactions require reasonable prior review for potential conflicts of interest.
- This review must be performed by the company’s audit committee or “another independent body of the board of directors,” in contrast to Rule 314.00 before the April 2021 amendments, which provided that the NYSE “does not specify who should review related party transactions.”
- “Related party transaction” as defined continues to refer to Item 404 of Regulation S-K, but the requirement to apply the standards of Item 404 “without applying the transaction value threshold” of Item 404 has been deleted by the most recent amendments.
In the case of foreign private issuers, Section 314.00 refers to Item 7.B of Form 20-F. Rule 314.00, as mostly recently amended, now reads as follows, with deletions shown in strikethrough text:
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).