[Federal Register Volume 63, Number 35 (Monday, February 23, 1998)]
[Notices]
[Pages 9036-9037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4402]
[[Page 9036]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39659; File No. SR-NYSE-97-37]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the New York Stock Exchange, Inc. Relating to Shareholder
Approval Policy
February 12, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December
23, 1997, as amended on January 30, 1998,\1\ the New York Stock
Exchange, Inc. (``NYSE'' or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission'') 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\ The Exchange filed a letter supplementing and amending the
proposed rule filing on January 30, 1998, the substance of which is
incorporated into this notice. See letter from James E. Buck, Senior
Vice President and Secretary, NYSE, to Heather Seidel, Attorney,
Market Regulation, Commission, dated January 28, 1998 (``Amendment
No. 1'').
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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 modify its shareholder approval policy
(the ``Policy''), contained in Paragraphs 312.03 and 312.04 of the
Exchange's Listed Company Manual (the ``Manual''). The proposal will
provide greater flexibility for listed companies to adopt stock option
and similar plans (``Plans'') without shareholder approval, while
preserving the significant shareholder rights afforded under the
Policy.
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 self-regulatory organization
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 self-regulatory organization
has prepared summaries, set forth in Sections 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
During the past year, the Exchange has conducted a broad review of
the Policy. Based on that review, the Exchange recently adopted, and
the Commission approved, amendments to the Policy regarding related-
party transactions and private sales.\2\ The Exchange has continued its
review of that portion of the Policy that requires shareholder approval
of certain Plans.
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\2\ See Securities Exchange Act Release No. 39098 (September 19,
1997) 62 FR 50979 (September 29, 1997).
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Currently, the Policy requires a listed company to seek shareholder
approval of all stock option plans that are not ``broadly-based.'' The
only exception is for stock or options issued as an inducement for
employment to a person not previously employed by the company.
The legal requirements governing shareholder approval of Plans has
been subject to recent change. The Commission recently amended its
rules in this area, and those rules now permit companies to adopt Plans
without shareholder approval.\3\ The Commission's action recognizes the
increasing role of independent compensation committees and enhanced
disclosure rules regarding compensation policies. Listed companies also
have urged the Exchange to review the Policy in light of these changes.
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\3\ See Rule 16b-3(d) under the Exchange Act, as amended in
Securities Exchange Act Release No. 37260 (May 31, 1996) 61 FR 30376
(June 14, 1996).
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For these reasons, the Exchange has been reviewing the Policy with
its various constituents. The consensus favored some relaxation in the
Policy, but not a total repeal of the shareholder approval requirement
for Plans. Specifically, the general view was to require shareholder
approval when there is the potential for a material dilution of
shareholder's equity. The consensus was that the threshold should be
based on the cumulative dilution of an issuer's non-broad-based Plans,
and not on a single Plan. Constituents also asked for more guidance on
the definition of a ``broad-based'' Plan.
This proposed rule change would amend the Policy to exempt from
shareholder approval non-broad-based Plans in which:
No single officer or director acquires more than one
percent of the shares of the issuer's common stock outstanding at the
time the Plan is adopted; and
The cumulative dilution of all non-broad-based Plans of
the issuer does not exceed five percent of the issuer's common stock
outstanding at the time the Plan is adopted.
The Exchange reviewed the non-broad-based Plans of a sample of
listed companies,\4\ and the average dilution for such Plans was 3.35
percent, with the median dilution being somewhat lower. Based on this
review, the Exchange believes that a five percent cumulative threshold
will protect shareholder interests while affording issuers reasonable
flexibility in establishing their compensation policies.
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\4\ NYSE has indicated that they sampled 29 companies. Telephone
conversation between Michael Simon, NYSE, Steve Walsh, NYSE, and
Heather Seidel, Market Regulation, Commission, on January 16, 1998.
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The Exchange also proposes a definition of a ``broadly-based
Plan.'' The definition generally would require a review of a number of
factors, including the number of persons covered by the Plan and the
nature of the company's employees (such as whether they are compensated
on an hourly or salaried basis). The Exchange will invite companies to
discuss their proposed Plans with the Exchange staff to seek guidance
on whether the Exchange considers such Plans to be ``broadly-based.''
To provide a level of certainty for companies, the definition would
include a non-exclusive ``safe harbor'' for any Plan in which at least
20 percent of an issuer's employees are eligible, the majority of whom
are neither officers nor directors. This is based on the current ``rule
of thumb'' the Exchange uses in determining whether a Plan is broadly-
based.\5\
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\5\ The NYSE's definition of a ``broad-based plan'' is based on
NYSE interpretations of this term, and will not generally correspond
to definitions regarding the scope of stock options plans used in
other contexts. See, e.g., Sections 401(a)(26), 410 and 423 of the
Internal Revenue Code (26 U.S.C. 401(a)(26), 410 and 423) and
Section 201(2) of the Employee Retirement Income Security Act (29
U.S.C. 1051(2)).
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The rule change also makes one correction to the previous
amendments to the Policy, clarifying that, in calculating a company's
outstanding shares, the company must exclude shares held by
subsidiaries, not all affiliates.\6\ Finally, the proposed rule
[[Page 9037]]
change also amends the exception for stock or options issued as an
inducement for employment to a person not previously employed by the
company, to state that it must be a material inducement (as opposed to
an inducement essential) to such person's entering into an employment
contract with the company. In its discussions with the NYSE on the
proposed rule change, the Legal Advisory Committee raised for
discussion the current requirements that a stock option grant be an
``essential'' inducement, and believed that it is difficult, if not
impossible, to conclude that any single item is ``essential'' to a
person's entering into an employment contract. Rather, they believed
that a ``materiality'' standard would be more workable, yet still would
achieve the NYSE's goal of ensuring that the stock option grant be an
important aspect of an employment decision. The NYSE agreed with that
comment and incorporated the change into the proposed rule change.
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\6\ In September, 1997, the Commission approved various changes
to the NYSE's shareholder approval requirements. See supra note 2.
One such change substituted the term ``affiliate'' for
``subsidiary'' in Paragraph 312.04(c) of the Manual. While the NYSE
believed that use of the term ``affiliate'' would clarify the
operation of that provision, in fact, it has created confusion.
Specifically, an ``affiliate'' of a listed company can include
natural persons who control the company, as well as corporate
affiliates. While the NYSE never intended to exclude stock holdings
of natural persons in making calculations under Paragraph 312.04(c),
the current wording of this provision is ambiguous. To eliminate
this ambiguity, the NYSE now proposed to return to the original
working of Paragraph 312.04(c) through the use of the term
``subsidiary.'' As before, the NYSE will interpret the term to
include any majority-owned subsidiary of the listed company. See
Amendment No. 1, supra note 1.
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2. Statutory Basis
The Exchange believes that the basis under the Act of this proposed
rule change is the requirement under Section 6(b)(5) \7\ 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 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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\7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the 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 the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested person are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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 at the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-NYSE-97-37 and
should be submitted by March 16, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4402 Filed 2-20-98; 8:45 am]
BILLING CODE 8010-01-M
