On July 24, 2024, the U.S. Securities and Exchange Commission (SEC) approved a new rule proposed by the New York Stock Exchange (NYSE), which enables the delisting of companies that significantly change their primary business focus after their initial public offering (IPO). This rule change represents an important update to the NYSE’s existing continued listing standards and highlights the Exchange's efforts to maintain the integrity of its listed companies.

The rule amendment requires that companies notify the NYSE in writing if they change their primary business focus from what was originally disclosed when they first listed on the exchange. After receiving the notification, the NYSE will conduct a thorough review to determine whether the company should remain listed based on the new business activities. This new delisting rule adds a layer of scrutiny aimed at ensuring that companies remain in line with the criteria that qualified them for listing in the first place.

BACKGROUND: NYSE CONTINUED LISTING STANDARDS

The NYSE has always had rigorous standards for listing and maintaining listing status on the exchange. These standards are designed to protect investors and maintain the quality and integrity of the market. According to Section 802.01 of the NYSE Listed Company Manual, companies must meet a variety of financial and operational benchmarks, such as having a certain number of shareholders, meeting market capitalization thresholds, and complying with asset and equity requirements.

Prior to the rule change, the NYSE could already take action to delist companies under certain conditions, including but not limited to:

1. Distribution of Capital Stock: The company must maintain a minimum number of stockholders and adequate liquidity in its shares. This includes either 400 total stockholders or at least 1,200 stockholders and a monthly trading volume of less than 100,000 shares.
2. Market Value: The company must meet a minimum market value. For example, if a company's average global market capitalization drops below $50 million and its stockholders' equity falls below $50 million for 30 consecutive trading days, the company could face delisting.
3. Disposal of Assets or Ceasing Operations: If a company sells its principal operating assets, ceases to operate as a functional business, or enters bankruptcy or liquidation, the NYSE has the authority to delist the company.
4. Failure to Comply with Listing Agreement or SEC Rules: This includes non-compliance with rules requiring timely financial reporting, hosting annual shareholder meetings, and maintaining proxy solicitation standards. Companies failing to file reports with the SEC or facing allegations of fraud could be delisted.
5. Other Events: The NYSE can also delist a company due to other events, such as a company's stock trading at a low price for an extended period without implementing a reverse stock split, failure to pay listing fees, or the company no longer meeting executive compensation clawback rules.

The newly approved rule supplements these existing listing standards by focusing on companies that change their core business model after becoming publicly traded.

NEW RULE: DELISTING FOR CHANGE IN PRIMARY BUSINESS FOCUS

The key component of the new rule is that companies that undertake a change in their primary business focus must promptly notify the NYSE of this change. The NYSE will then perform a comprehensive review of the company’s operations and assess whether the company’s new business direction would have been sufficient for initial listing. This review process is largely qualitative and involves examining the nature of the company’s new business operations, management structure, board composition, voting power, and financial framework.

Factors the NYSE Will Consider:

1. New Business Suitability: The Exchange will evaluate whether the company’s newly adopted business would have met the qualitative and quantitative standards required for initial listing had it been the company’s primary business at the time of listing.
2. Management and Governance Changes: Any shifts in management, changes to the board of directors, or alterations in voting power and ownership structure will be reviewed as part of the assessment.
3. Financial Structure: The NYSE will also take into account any material changes in the company’s financial structure, including shifts in capital allocation, significant new liabilities, or changes in equity holdings.
4. Qualitative Considerations: While the NYSE has established quantitative standards for listing, such as minimum shareholder counts and market capitalization, this new rule emphasizes qualitative factors, including whether the new business strategy aligns with the standards of corporate governance and operational transparency expected from publicly listed companies.

Although the rule introduces an avenue for the delisting of companies that change their primary business focus, it is important to note that the NYSE considers this a last-resort option. The Exchange has stated that it does not expect delisting due to business changes to be routine. Instead, delisting would only occur in "extraordinary circumstances" where the new business model does not meet the Exchange's standards.

TIMING AND IMPLEMENTATION: A LOOK AT THE PHASE-IN PERIOD

Under the new rule, any company that has already filed for an IPO or is actively listed on the NYSE must act quickly if it undergoes a major business shift. The company must notify the NYSE of the change as soon as practicable to allow the Exchange sufficient time to conduct its continued listing analysis. Failure to do so may result in immediate suspension and eventual delisting.

Importantly, the NYSE will not apply this rule retroactively to companies that have already significantly changed their business focus prior to the rule change, unless new changes occur post-July 24, 2024. Companies that are currently planning or undergoing changes in their business model should be especially mindful of this new rule, as it could impact their listing status if not properly navigated.

WHAT DOES THIS MEAN FOR COMPANIES CONSIDERING A SHIFT IN FOCUS?

For companies considering changing their core business model, the new rule presents both challenges and opportunities. The prospect of delisting could deter some companies from pivoting into new markets or industries. However, for others, the rule provides clarity on the expectations of continued listing, allowing for better strategic planning and governance adjustments.

Key Takeaways for Companies:

1. Prepare for NYSE Scrutiny: Companies that are planning to change their primary business model must be prepared for heightened scrutiny from the NYSE. A failure to notify the NYSE or adequately address its concerns could lead to suspension or delisting.
2. Re-Evaluate Initial Listing Requirements: Companies considering a shift in their business focus should review the original standards under which they were listed. Would the new business model have qualified for an IPO if it had been the company's focus at the time of listing? If not, the company should be prepared to address this issue with the NYSE.
3. Governance and Management Adjustments: Companies should assess whether any changes to their management structure, board of directors, or financial framework are necessary to align with NYSE requirements. Making proactive adjustments could mitigate the risk of delisting.
4. Timing is Critical: Companies must notify the NYSE as soon as a change in their business focus is decided. Delays in notification could cause the company to fall out of compliance with NYSE requirements, leaving little room for remediation.

WHAT ABOUT OTHER EXCHANGES?

Although the new NYSE rule applies only to companies listed on the NYSE, this change could signal a broader trend among stock exchanges. As the NYSE seeks to maintain the quality and integrity of its listed companies, other major exchanges, such as Nasdaq, may implement similar rules in the near future. Companies considering a listing on any U.S. exchange should stay informed of potential regulatory changes and consult with legal and financial advisors when making business decisions that could impact their compliance with exchange rules.

CONCLUSION

The SEC's approval of the NYSE's new rule permitting the delisting of companies that significantly change their primary business focus marks an important development in corporate governance and securities law. While the new rule introduces potential risks for companies undergoing a significant transformation, it also provides a clearer framework for how the NYSE will assess the suitability of listed companies in the event of a major business shift.

Companies that are contemplating changes in their primary business focus must take this rule seriously and plan accordingly to avoid the risk of suspension or delisting. Proactive governance measures, early engagement with the NYSE, and adherence to transparency standards will be critical for companies seeking to navigate this new regulatory landscape.