[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