In April, the NYSE filed a proposed rule change with the SEC that would allow the NYSE to commence immediate suspension and delisting procedures for a listed company if that company has “changed its primary business focus to a new area of business that is substantially different from the business it was engaged in at the time of its original listing or which was immaterial to its operations at the time of its original listing.” In July, the NYSE amended the proposal to make several changes, including a new requirement to provide prompt written notice to the NYSE if a listed company undertakes a change in its primary business focus. The SEC has now issued an Order granting accelerated approval of the amended proposal.
Why this rule? The NYSE explains that sometimes listed companies “change the focus of their operations from the business they were engaged in at the time of initial listing to a business line that is completely unrelated or that was not material at the time of its original listing.” The NYSE is concerned that, in that event, investors who previously made their decisions to invest in the company’s stock (often in the IPO) on the basis of information about the company’s original business “might not have made their investment if they had been aware of how the company would change.” In addition, the NYSE indicates, concerns may arise about continued suitability of the company for listing; there have been occasions where there have been significant price declines after changes in business focus, resulting in “significant investor losses and an inability to meet exchange continued listing standards.”
To address this issue, the NYSE proposed to amend Section 802.01D of the NYSE Listed Company Manual, “Continued Listing Criteria—Other Criteria,” to add a new paragraph, “Change in Primary Business Focus.” The new paragraph will allow the NYSE, in its sole discretion, to commence immediate procedures to suspend and delist a listed company, in accordance with the NYSE’s delisting procedures, if that listed company has “changed its primary business focus to a new area of business that is substantially different from the business it was engaged in at the time of its original listing or which was immaterial to its operations at the time of its original listing.” In an amendment to the original proposal, the rule would now require that “[a]ny company that undertakes such a change in its primary business focus must promptly provide notice of such change in writing to the Exchange.” Note, however, dodging the notification requirement will not save you: the NYSE “will undertake the continued listing analysis and potentially take delisting action under the proposed provision regardless of whether the listed company complies with its obligation to provide written notification to the Exchange.” The SEC observed that listed companies that “would meet the requirements to provide written notification to the Exchange under the new provision but do not do so would be considered non-compliant with the notification requirement.”
What constitutes a “change in primary business focus” to a “substantially different” area of business? Not much guidance there, but the release does employ some potentially instructive phrases like “wholesale change in business operations” and “business line that is completely unrelated or that was not material” at the time of original listing. And the NYSE does note as an example of a company (ultimately delisted) that “experienced significant downward price movement subsequent to such a change in business focus” a company that “initially focused on selling tea products but ultimately changed its business line to crypto.” Whether the NYSE might consider more ambiguous changes in business focus to fall within definition remains to be seen.
If the NYSE becomes aware of a change in the company’s primary business focus (whether by notification or otherwise, i.e., irrespective of how the change came to its attention), the staff will conduct a thorough assessment of the company’s suitability for continued listing in light of the change, focusing on the qualitative, not quantitative, aspects of the company’s suitability for listing. The assessment will take into account “other changes that may have occurred in connection with the change in the company’s primary business focus, including, but not limited to, changes in the management, board of directors, voting power, ownership, and financial structure of the company. The Exchange will focus its analysis of the company’s suitability for continued listing on whether it would have accepted the listed company for initial listing if it had been engaged in its modified business at the time of original listing”; the factors to be considered “are consistent with areas that would be part of any initial listing review.”
Under the new rule, if the NYSE determines that the company is unsuitable for continued listing due to the change in its primary business focus, it “will be subject to immediate suspension and delisting in accordance with the procedures set out in Section 804.00.” Note that the NYSE is adding a parenthetical to the current lead-in to Section 802.01D (which would otherwise allow noncompliant companies to attempt to cure their deficiencies), to make clear that the NYSE “will instead commence immediate suspension and delisting procedures if the individual paragraph of Section 802.01D so specifies,” i.e., if the company is “deemed to be unsuitable for continued listing.” Listed companies that find this new rule disquieting may take some comfort in the NYSE’s acknowledgement that “seeking to suspend and delist a company’s stock under this revised rule would be an extraordinary action,” and that the NYSE “anticipates seldom relying on this new discretionary authority, and only after thorough analysis of all relevant facts and circumstances.”
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