[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]



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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