[Federal Register Volume 62, Number 188 (Monday, September 29, 1997)]
[Notices]
[Pages 50979-50981]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25770]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39098; File No. SR-NYSE-97-14]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Approving Proposed Rule Change Relating to Amendments to the
Shareholder Approval Policy
September 19, 1997.
I. Introduction
On May 16, 1997, the New York Stock Exchange, Inc., (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change relating to amendments to its
Shareholder Approval Policy.\3\ The proposed rule change was published
for comment in Securities Exchange Act Release No. 38716 (June 5,
1997), 62 FR 32135 (June 12, 1997). No comment letters were received,
however, on August 8, 1997, the Exchange submitted a letter in support
of its filing.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The NYSE's Shareholder Approval Policy is contained in
Paragraphs 312.03 through 312.05 of the Exchange's Listed Company
Manual.
\4\ Letter from Noreen M. Culhane, Senior Vice President,
Listings and Client Service, NYSE, to Howard Kramer, Associate
Director, Division of Market Regulation, Commission (August 7,
1997).
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II. Description of the Proposal
Currently, the Exchange's shareholder approval policy requires a
listed company to obtain shareholder approval in four situations:
Related-Party Transactions: when selling more than one
percent of the company's stock, for either cash or other assets, to a
``related party,'' define to mean officers, directors and holders of
five percent or more of the company's common stock (or stock with five
[[Page 50980]]
percent or more of the company's voting power);
Private Sales: when selling 20 percent or more of the
company's stock, other than in a public offering for cash;
Stock Option Plans: when adopting stock option plans that
are not ``broadly-based''; or
Change of Control: with respect to any issuance of stock
that results in the change of control of the company.
The Exchange is modifying the first two of these requirements to
provide listed companies with flexibility in their financing plans. In
addition, the rule change restructures the wording of the Policy in
order to simplify the language. With the exception of the two changes
to the shareholder approval policy described below, this restructuring
does not substantially change the Exchange's shareholder approval
policy.
Related-Party Transactions
Issuers sometimes seek cash financing from one or more of their
``substantial'' security holders (which the Exchange defines as a
person holding either five percent of the company's stock or five
percent of the company's voting power). The Exchange now requires
shareholder approval if a sale to a substantial security holder results
in a one percent dilution.
The Exchange is proposing that cash sales of stock to a substantial
security holder be exempt from the Policy if the issuance is limited to
five percent of the issuer's stock. Further, the exemption from the
policy would apply only if the sale is at a price at least as high as
each of the book and market value of the stock. Shareholder approval
for issuances that result in a dilution of more than one percent of the
issuer's stock would continue to be required under the policy for sales
of stock to any related party (including substantial security holders)
for assets other than cash and cash sales to officers and directors.
Private Sales
The Exchange requires approval of all issuances that result in a 20
percent dilution, except for public offerings for cash. The Exchange
proposes to make a private cash sale of 20 percent or more of a
company's stock exempt from the policy if (i) the sales is at a price
at least as high as each of the book and market value of the stock and
(ii) the sale is a ``bona fide financing.'' A bona fide financing is a
cash sale either (i) in which a registered broker-dealer acts as an
intermediary in the transaction or (ii) directly by an issuer to
multiple purchases in which no one purchase, or group of related
purchases, acquires more than five percent of the issuer's common stock
or voting power. The five percent limit ensures that control persons do
not disproportionately increase their ownership in a listed company
through privately-negotiated sales, even if the sale price is at the
market.\5\
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\5\ The rule change also clarifies that shareholder approval is
required if any one of the four requirements is triggered,
notwithstanding the fact that the other requirements of the Policy
have not been triggered. For example, a direct sale by a company of
more than 20 percent of its stock is a bona fide financing still
would require shareholder approval as a related-party transaction if
the company sells more than one percent of the stock to an officer
or director.
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The Exchange has consulted with several committees, including its
Legal Advisory Committee, the Listed Company Advisory Committee, and
the Individual Investor Advisory Committee, and represents that the
committees have reviewed the proposal and encourage approval of the
proposed change.
The Exchange believes the basis under the Act for this proposed
rule change is the requirement under Section 6(b)(5) \6\ 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; and are not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\6\ 15 U.S.C. Sec. 78f(b)(5).
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III. Discussion
The Commission believes NYSE's proposal is consistent with the
requirements of Section 6(b)(5) of the Act.\7\ Section 6(b)(5)
requires, among other things, that the rules of an exchange be designed
to promote just and equitable principles of trade, perfect the
mechanism of a free and open national market system, and in general, to
further investor protection and the public interest.
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\7\ 15 U.S.C. Sec. 78f(b)(5).
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NYSE is proposing to amend its Shareholder Approval Policy to
exempt cash sales of stock to a substantial security holder if the
issuance is limited to five percent of the issuer's stock. The
exemption would apply only if the sale is at a price at least as high
as each of the book and market value of the stock. The Commission
believes the proposed amendment is reasonable and consistent with the
Act. Specifically, the Commission believes that cash sales do not
create the same valuation concerns as do sales of stock for non-cash
assets, and that such an exemption offers issuers flexibility when
selling a limited percentage of stock for cash to a substantial
security holder. Furthermore, the Commission notes that the Exchange
will continue to require shareholder approval for certain issuances
resulting in a dilution of more than one percent of the issuer's common
stock, including sales of stock to any related party for assets other
than cash, and cash sales to officers and directors.
The Exchange is also proposing to make a private cash sale of 20
percent or more of a company's stock exempt from the Shareholder
Approval Policy if the sale is at a price at least as high as each of
the book and market value of the stock, and the sale is a ``bona fide
financing.'' The Exchange defines a ``bona fide financing'' as a sale
through a broker-dealer acting as an intermediary or a sale to multiple
parties in which no one person acquires more than five percent of the
issuer's stock. In its letter of support the Exchange states that it
has historically exempted public cash offerings from Section 312.03(c)
of the Manual because there is a certain amount of disclosure and
pricing discipline in public offerings to protect stock holders from
potential abuse. The Exchange states that it believes market practices
and changes to the Commission's rules have blurred the differences
between public and private sales. The Exchange further notes that
companies now engage in broad-based sales of securities convertible
into listed common stock under Commission Rule 144A. In these
transactions, the NYSE states that registered broker-dealers perform
functions similar to that of underwriters by conducting due diligence,
buying the securities from the issuer, and reselling them to qualified
institutional buyers. Similarly, companies can raise capital by selling
securities privately in direct transactions with multiple parties. The
NYSE believes that in both cases the offerings have characteristics
similar to public offerings, noting that such sales can more closely
resemble public offerings for cash than sales of stock pursuant to a
shelf registration which are currently exempt from the shareholder
approval policy.
While the Commission recognizes that certain types of private
offerings, such as those structured to facilitate resales exclusively
between and among institutional investors pursuant to Commission Rule
144A, have certain characteristics that may make them resemble public
offerings, there are certain elements that sharply distinguish private
offerings from public
[[Page 50981]]
offerings such as the ``restricted'' status of the privately placed
securities,\8\ and the absence of both a prescribed public disclosure
document and a Section 11 remedy.\9\ Nevertheless, the Commission
believes that the limitations on price and the requirement that the
sales be bona fide financing appropriately limit the availability of
the exemption and should provide reasonable protections for
shareholders.
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\8\ See Preliminary note six, and Preliminary notes three and
four to Securities Act Rule 144A (Reg. Sec. 230.144A).
\9\ 15 U.S.C. Sec. 77k.
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In particular, requiring that private cash sales be made to
multiple, unrelated purchasers in which no one purchaser or group of
related purchasers can acquire more than five percent of the issuer's
common stock or voting power should help to prevent the exemption from
being used by issuers to avoid a shareholder vote when placing large
blocks of stock with a particular purchaser. Moreover, as the NYSE
states, this requirement should also help to impose pricing discipline
on the transaction, as well as to ensure that control persons do not
disproportionately increase their ownership in a company through
private sales. Further, as the NYSE indicates, the alternative
requirement that a broker dealer act as an intermediary to qualify for
the private cash offering exemption is meant to cover Rule 144A sales.
We agree with the NYSE that market practices in this area have
developed involving both due diligence and pricing that could serve to
protect shareholders from abuse of unfair stock placements. The
Commission also believes that the existing disclosure requirements for
private equity offerings also act as an effective safeguard against
potential abuse of private cash offerings.\10\ In summary, the
Commission believes that the limitation of the exemption to only a
``bona fide private financing'', as defined above, coupled with the
requirement that the sale be at a price at least as high as each of the
book and market value of the stock provides sufficient safeguards for
shareholders to support the exemption to the Policy in these limited
circumstances.
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\10\ See Exchange Act Form 10-Q, Item 2(c); and Exchange Act
Form 8-K, Item 9.
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VI. Conclusion
The Commission believes the proposed change should provide listed
companies with flexibility in their financing plans, while still
substantially preserving the significant shareholder rights afforded
under the Policy. Finally, the Commission believes the restructuring of
the wording of the Policy should simplify and clarify the Policy.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to the NYSE, and in particular Section 6(b)(5).
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (File No. SR-NYSE-97-14) be and
hereby is approved.
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\11\ 15 U.S.C. 78s(b)(2).
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. 97-25770 Filed 9-26-97; 8:45 am]
BILLING CODE 8010-01-M
