[Federal Register Volume 63, Number 223 (Thursday, November 19, 1998)]
[Notices]
[Pages 64304-64307]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30948]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40679; File No. SR-NYSE-98-32]
November 13, 1998.
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the New York Stock Exchange, Inc. Relating to Shareholder
Approval of Stock Option Plans
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on October 13, 1998, the New York Stock Exchange, Inc. (the
``Exchange'' or the ``NYSE'') filed with the Securities and Exchange
Commission (the ``Commission'' or the ``SEC'') the proposed rule change
as described in Items I, II, and III below, which Items have been
prepared by the self-regulatory organization. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange is proposing to amend Paragraphs 312.01, 312.03 and
312.04 of its Listed Company Manual (the ``Manual''). The proposed rule
change amends the Exchange's shareholder approval policy (the
``Policy'') with respect to stock option and similar plans (``Plans'').
The text of the proposed rule change is as follows:
Text of the Proposed Rule Change
Italics indicates additions; [brackets] indicate deletions.
312.00 Shareholder Approval Policy
312.01 Shareholders' interest and participation in corporate
affairs has greatly increased. Management has responded by providing
more extensive and frequent reports on matters of interest to
investors. In addition, an increasing number of important corporate
decisions are being referred to shareholders for their approval. This
is
[[Page 64305]]
especially true of transactions involving the issuance of additional
securities.
Good business practice is frequently the controlling factor in the
determination of management to submit a matter to shareholders for
approval even though neither the law nor the company's charter makes
such approvals necessary.The Exchange encourages this growth in
corporate democracy. For example, due to the recent growth of officer
and director equity-based compensation arrangements and the increased
interest of shareholders in this area, companies may determine to
submit stock option and similar plans to shareholders for approval,
whether or not the Exchange requires such approval.
* * * * *
312.03 Shareholder approval is a prerequisite to listing in four
situations: (a) Shareholder approval is required with respect to a
stock option or purchase plan, or any other arrangement, pursuant to
which officers or directors may acquire stock (collectively, a
``Plan'') except:
(1) for warrants or rights issued generally to security holders of
the company;
(2) pursuant to a broadly-based Plan [that includes other employees
(e.g. ESOPs)];
(3) where options or shares are to be issued to a person not
previously employed by the company, as a material inducement to such
person's entering into an employment contract with the company; or
(4) pursuant to a Plan that provides that (i) no single officer or
director may acquire under the Plan more than one percent of the shares
of the issuer's common stock outstanding at the time the Plan is
adopted, and (ii) together with all Plans of the issuer (other than
Plans for which shareholder approval is not required under subsections
(1) to (3) above), does not authorize the issuance of more than five
percent of the issuer's common stock outstanding at the time the Plan
is adopted.
* * * * *
312.04 For the purpose of Para. 312.03:
* * * * *
[(g) Whether a Plan is ``broadly-based'' depends on a variety of
factors, including, but not limited to the number of officers,
directors and other employees covered by the Plan and whether there are
separate compensation arrangements for salaried employees and hourly
employees. The Exchange will deem a Plan to be ``broadly-based'' if at
least 20 percent of the company's employees are eligible to receive
stock or options under the Plan and at least half of those eligible are
neither officers nor directors (the ``20 percent test''). However, this
is a non-exclusive safe harbor and the fact that a Plan does not meet
the 20 percent test does not mean that the Exchange will consider the
Plan to be narrowly-based. The Exchange encourages a listed company
adopting a Plan that does not meet the 20 percent test, but that the
company believes is ``broadly-based,'' to discuss the matter with the
Exchange staff prior to filing a listing application covering the
shares to be issued under the Plan.]
(g) ``Officer'' has the same meaning as defined by the Securities
and Exchange Commission in Rule 16a-1(f) under the Securities Exchange
Act of 1934, or any successor rule.
(h) A Plan is ``broadly-based'' if, pursuant to the terms of the
Plan:
at least a majority of the company's full-time employees in the
United States, who are ``exempt employees,'' as defined under Fair
Labor Standards Act of 1938, are eligible to receive stock or options
under the Plan; and
at least a majority of the shares of stock or shares of stock
underlying options awarded under the Plan, during the shorter of the
three-year period commencing on the date the Plan is adopted by the
company or the term of the Plan, must be awarded to employees who are
not officers or directors of the company.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
section A, B and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
As a prerequisite to listing, the Policy requires shareholder
approval of stock option or purchase plans or any other arrangement
pursuant to which either officers or directors acquire stock. The
Policy also contains, however, four exemptions from this requirement,
including an exemption for ``broadly-based'' Plans. The purpose of the
proposed rule change is to amend the provisions in the mutual governing
shareholder approval of Plans, including the definition of what
constitutes a ``broadly-based'' Plan.
The Exchange historically had not provided a definition of what
constitutes a ``broadly-based'' Plan other than to state that such a
Plan must include employees other than officers and directors. The one
example in the policy of such a Plan was an employee stock option plan,
or ``ESOP.'' In December of 1997, the Exchange filed a proposed rule
change amending the Policy which was published for public comment \3\
by the Commission as required under Section 19(b)(1) of the Act.\4\ The
Commission received no comments on the proposed rule change, which was
subsequently approved on April 8, 1998.\5\ Among other things, the
Original Proposal codified existing Exchange interpretations regarding
``broadly-based'' plans. Specifically, that proposal stated that the
definition of ``broadly-based'' required a review of a number of
factors, including the number of persons included in the Plan, and the
nature of the company's employees. The Exchange also codified a non-
exclusive safe harbor for Plans in which at least 20 percent of a
company's employees were eligible, provided that the majority of those
eligible were neither officers nor directors.
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\3\ Exchange Act Release No. 39659 (February 12, 1998), 63 FR
9036 (February 23, 1998).
\4\ 15 U.S.C. 78s(b)(1).
\5\ Exchange Act Release No. 39839 (April 8, 1998), 63 FR 18481
(April 15, 1998) (the ``Original Proposal'').
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Following the approval and effectiveness of the Original Proposal,
the Exchange and the Commission received a significant number of
inquiries and comments regarding the proposal. These originated
primarily from the institutional investor community and focused on the
definition of ``broadly-based.'' Many commentators were concerned that
the Original Proposal could be a ``loop-hole'' pursuant to which
companies could establish Plans of significant size that included
officers and directors without the need for shareholder approval.
Commentators also expressed general concern regarding the potential
dilutive effects of Plans.
In response to the inquiries and comments, the Exchange issued a
Request for Comment on the definition of ``broadly-based'' Plans. The
Exchange received 166 comments in response to that request. These
comments are discussed in Section II.C., below. The
[[Page 64306]]
Request for Comment indicated the Exchange's intention to establish a
task force (the ``Task Force'') to review the comments and to make
recommendations regarding potential changes to the definition of
``broadly-based'' Plan.
The Exchange thereafter established the Task Force to review the
comments. The Task Force was composed of representatives of the
Exchange's Legal Advisory Committee, Individual Investors Advisory
Committee, Pension Managers Advisory Committee, and Listed Company
Advisory Committee. In addition, members of the Task Force included
representatives of other Exchange constituencies, including a
representative from the Council of Institutional Investors. Following
its deliberations, the Task Force recommended the following:
(1) Retain, but modify the definition of a ``broadly-based'' Plan.
The new definition would classify a Plan as ``broadly-based'' if,
pursuant to the terms of the Plan:
(a) At least a majority of the issuer's full-time, exempt U.S.
employees \6\ are eligible to participate under the plan; and
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\6\ See 29 U.S.C. 213(a) for the definition of ``exempt
employees.''
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(b) At least a majority of the shares awarded under the Plan (or
shares of stock underlying options awarded under the Plan) during the
shorter of the three year period commencing on the date the Plan is
adopted by the issuer, or the term of the Plan itself, are made to
employees \7\ who are not officers or directors of the issuer.\8\
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\7\ The Exchange proposes a two part test for determining
whether a plan is broadly-based. In the first prong, a majority of
the company's full-time employees who are ``exempt employees'' must
be eligible to receive stock. As a general matter, ``exempt
employees'' are salaried employees in an executive, administrative
or professional capacity. The Task Force recommended limiting this
prong of the definition to ``exempt employees'' since non-exempt
employees often are covered by compensation arrangements that do not
include stock options.
The second part of the test requires that at least a majority of
the shares awarded under a Plan be awarded to employees who are not
officers or directors of a company. This part of the test is not
limited to ``exempt employees,'' allowing the calculation of the
``majority of shares awarded'' to include both ``exempt employees''
and non-exempt employees who are not officers or directors. The
focus of this requirement is to ensure that a company actually
implements a Plan in a broadly-based fashion. In this regard, it
does not matter whether the awards to persons other than officers or
directors are to ``exempt'' or non-exempt employees. Telephone call
between Michael Simon, Milbank, Tweed, Hadley & McCloy, and Kelly
McCormick, Attorney, Division of Market Regulation, Commission,
dated November 12, 1998.
\8\ In this regard, the Exchange proposes to use the definition
of ``officer'' contained in Commission Rule 16a-1(f) under the Act.
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(2) Establish the definition of a ``broadly-based'' Plan as an
exclusive test, not a safe harbor.
(3) Revise the Exchange's general policy on shareholder approval
issues to recognize the increased use of Plans as means to compensate
officers and directors and state the Exchange's view that companies
should consider submitting Plans to shareholder whether or not required
by Exchange policy.
(4) Direct the Task Force or other appropriate group to immediately
commence a study to establish a maximum overall dilution listing
standard for all non-tax-qualified Plans that otherwise would be exempt
from shareholder approval. The goal would be to complete this study in
time for Exchange review prior to the year 2000 proxy statement season.
The rule amendments being proposed in this filing implement the
first three Task Force recommendations. In addition, the Exchange has
adopted the fourth recommendation and will direct the Task Force to
consider a possible listing standard regarding a dilution test.
The Exchange believes that the Task Force's recommendations
represent an effective and workable compromise regarding shareholder
approval of Plans. The proposal blends tests based both on Plan
eligibility and Plan awards. In addition, while providing certainty
through the use of an exclusive test, the Exchange believes the
proposed amendments also state a general Exchange policy recognizing
the increased use of Plans by companies and the Exchange's view that
companies should consider submitting Plans to shareholders, whether or
not required under the Policy. The Exchange believes the amendments
also provide consistency in coverage by adopting the Commission's
definition of ``officer,'' as contained in Rule 16a-1(f) under the Act.
Finally, the Task Force recognizes that this proposal may only be an
interim step in addressing this issue, and recommends that the Exchange
consider an overall dilution test. Since the Exchange did not request
comment on this issue in its original Request for Comment, the Exchange
believes that further study of such a test is prudent.
2. Statutory Basis
The NYSE believes that the basis under the Act for this proposed
rule change is the requirement under Section 6(b)(5) \9\ that an
exchange have rules that are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden Competition
The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
As discussed, the Exchange issued a Request for Comment on the
definition of a ``broadly-based'' plan. The Exchange received 166
comment letters in response to that solicitation.\10\ As a general
matter, the listed company community favored retaining the current
shareholder approval policy with respect to stock option plans. In
contrast, the institutional investor community generally favored a
narrower definition of what constitutes a ``broadly-based'' plan, and
suggested that such a definition be an exclusive test, not a non-
exclusive safe harbor. The Task Force considered these comments in
proposing the compromise position the Exchange is proposing in this
filing.
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\10\ Interested persons are directed to the public file, located
at the places specified in Item IV below, to review the comments
received by the NYSE. The public file contains: (1) a Summary of the
Comment Letters (Exhibit B); (2) the NYSE Request for Comment
(Exhibit 2A); (3) the Comment Letters in Response to the Request
(Exhibit 2B); and (4) the Report of the NYSE Task Force (Exhibit
2C).
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III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
[[Page 64307]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. In particular, the Commission
requests comment on whether the ``actual participation'' standard of
paragraph 312.03(h) of the Manual (which states that at least a
majority of the shares of stock or shares underlying options awarded
under the Plan, during the shorter of the three-year period commencing
on the date the Plan was adopted by the company or the term of the
plan, must be awarded to employees who are not officers or directors),
in conjunction with the ``eligibility'' portion of proposed paragraph
312.03(h), adequately addresses commenters' concerns regarding non-
executive participation, as well as eligibility, in a Plan. The
Commission requests comment on whether a company could meet the
definition of a broadly-based plan by nominally complying with the
participation prong and the thereby avoid the shareholder approval
requirements. In particular, could a company either issue grants to
non-executive employees in the first three years of the Plan but
reserve a majority of the shares actually available under a Plan for
executives and directors once the three years has elapsed?
Alternatively, could a company not issue any grants during the first
three years of the Plan but reserve all shares available under the Plan
for grants only to executives and directors once the three years has
elapsed? The Commission also requests comment on whether Section 162(m)
of the Internal Revenue Code,\11\ (which requires shareholder approval
of applicable employee remuneration in excess of one million dollars
for covered employees for the remuneration to be eligible for deduction
as a trade or business expense) provides shareholders with additional
protection by affording shareholders an adequate opportunity to vote on
certain stock option plans.
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\11\ 26 U.S.C. 162(m).
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Persons making written submissions should file six copies thereof
with the Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of the submission, all
subsequent amendments, all written statements with respect to the
proposed rule change that are filed with the Commission, and all
written communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying in the Commission's Public
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies
of such filing will also be available for inspection and copying at the
principal office of the NYSE. All submissions should refer to File No.
SR-NYSE-98-32 and should be submitted by December 10, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-30948 Filed 11-18-98; 8:45 am]
BILLING CODE 8010-01-M
