[Federal Register Volume 63, Number 72 (Wednesday, April 15, 1998)]
[Notices]
[Pages 18481-18483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9885]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39839; File No. SR-NYSE-97-37]


Self-Regulatory Organizations; New York Stock Exchange, Inc.: 
Order Granting Approval to Proposed Rule Change by the New York Stock 
Exchange, Inc., Relating to Shareholder Approval Policy

April 8, 1998.

I. Introduction

    On December 23, 1997, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), 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 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''), to provide greater 
flexibility for listed companies to adopt stock option and similar 
plans (``Plans'') without shareholder approval.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposed rule change and Amendment No. 1 to the 
proposed rule change,\3\ together with the substance of the proposal, 
was published for comment in Securities Exchange Act Release No. 39659 
(February 12, 1998), 63 FR 9036 (February 23, 1998). No comments were 
received on the proposal.
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    \3\ See letter from James E. Buck, Senior Vice President, NYSE, 
to Heather Seidel, Attorney, Market Regulation, Commission, dated 
January 28, 1998. Amendment No. 1 clarified that there is no 
relationship between the Exchange's definition of ``broadly-based'' 
and other definitions of similar terms under federal law. Amendment 
No. 1 also states why the Exchange is amending Paragraph 312.03(a) 
of the Manual to substitute the word ``material'' for ``essential.'' 
Finally, Amendment No. 1 explains why the proposal amends Paragraph 
312.04(c) to replace ``affiliate'' with ``subsidiary.''
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II. Description

    In September 1997, the Commission approved amendments to the Policy 
regarding related-party transactions and private sales.\4\ The current 
proposed rule change relates to that portion of the Policy requiring 
shareholder approval of certain Plans. Currently, the Policy requires a 
listed company to seek shareholder approval of all stock option plans 
that are not ``broadly-based'' with an exception for stock or options 
issued as an inducement for employment to a person not previously 
employed by the company.
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    \4\ See Securities Exchange Act Release No. 39098 (September 19, 
1997) 62 FR 50979 (September 29, 1997). The September 1997 
amendments to the Policy and the current proposed amendments 
resulted from a broad review of the Policy conducted by the 
Exchange.
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    However, in light of recent changes to the legal requirements 
governing shareholder approval of Plans,\5\ and at the urging of listed 
companies, the Exchange reviewed the Policy with its various 
constituents. According to the Exchange, 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, with the threshold based on the 
cumulative dilution of an issuer's non-broad-based Plans, and not on a 
single Plan.\6\ As a result, the NYSE has proposed to amend Paragraph 
312.03(a) of the Policy to exempt from shareholder approval non-broad-
based Plans in which: (1) 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 (2) 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.
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    \5\ The Commission recently amended its rules in this area. See 
Rule 16b-3(d) under the Act, as amended in Securities Exchange Act 
Release No. 37260 (May 31, 1996) 61 FR 30376 (June 14, 1996).
    \6\ Constituents also asked for more guidance on the definition 
of a ``broad-based'' Plan.
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    In addition, the Exchange has proposed to define ``broadly-based 
Plan'' in Paragraph 312.04(g).\7\ The proposed definition generally 
would require a review of a number of factors, including, but not 
limited to, the number of persons covered by the Plan

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and the nature of the company's employees, such as whether there are 
separate compensation arrangements for salaried and hour employees. In 
its filing, the NYSE noted that companies will be able to discuss their 
proposed Plans with the Exchange staff to seek guidance on whether the 
Exchange considers such Plans to be ``broadly-based.''
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    \7\ See note 14 and accompanying text.
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    Further, in order to provide a level of certainty for companies, 
the definition of a ``broadly-based'' plan states that the Exchange 
will consider any Plan in which at least 20 percent of an issuer's 
employees are eligible to receive stock or options, and the majority of 
those eligible are neither officers nor directors (the ``20% test''), 
to be broadly-based. However, the Exchange will not automatically 
consider a Plan that does not meet this 20% test to be narrowly-based. 
Rather, the proposed rule change encourages a listed company adopting a 
Plan that it believes to be broadly-based but that fails the 20% test 
to discuss the Plan with Exchange staff.\8\
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    \8\ The Commission notes that the language in proposed Paragraph 
312.04(g) states that the 20% test is a non-exclusive safe harbor. 
The Commission notes that all plans that meet the 20% test will be 
considered broadly-based by the NYSE. The safe harbor is non-
exclusive in that plans that do not meet the 20% test may still be 
deemed broadly-based after discussion with Exchange staff. Phone 
conversation between Mike Simon, NYSE, and Heather Seidel, Attorney, 
Market Regulation, Commission, on February 11, 1998.
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    The proposed rule change also amends Paragraph 312.04(c) to clarify 
that, in calculating a company's outstanding shares for the purpose of 
Paragraph 3112.03, the company must exclude shares held by 
``subsidiaries,'' instead of ``affiliates.'' The Exchange will 
interpret the term ``subsidiary'' to include any majority-owned 
subsidiary of a listed company.\9\ Finally, the proposed rule change 
also amends the exception in Paragraph 312.03(a)(3) 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 a employment contract with the company.
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    \9\ See Amendment No. 1, supra note 3.
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of Section 6(b).\10\ Specifically, 
the Commission believes the proposal is consistent with the Section 
6(b)(5)\11\ requirements that the rules of an exchange be designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts, and, in general, to protect investors and the 
public,\12\ in that it provides greater flexibility for issuers to 
adopt certain non-broad-based Plans while preserving the significant 
shareholder approval rights afforded under the Policy.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78(b)(5).
    \12\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    The Commission believes it is consistent with the Act to allow the 
Exchange to exempt from shareholder approval certain non-broad-based 
Plans that should not materially dilute shareholders equity, while 
still requiring shareholder approval for Plans that would have a 
material effect on a shareholder's equity in the company. The proposed 
rule change should protect shareholder rights by exempting from 
shareholder approval only those Plans in which a single officer or 
director does not acquire more than one percent of the shares of common 
stock outstanding at the time the Plan is adopted, and where the 
cumulative dilution of all non-broad-based Plans does not exceed five 
percent of the common stock outstanding at the time the Plan is 
adopted. The Commission believes the one percent and five percent 
thresholds appear to adequately safeguard shareholders rights by still 
requiring approval of those plans that will have a material effect on 
shareholder equity while allowing a listed company appropriate 
flexibility in establishing compensation policies.\13\
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    \13\ The Commission notes that the five percent threshold is 
based on the Exchange's review of the Plans of 29 NYSE listed 
companies. See Notice Release.
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    The Commission also believes that the Exchange's definition of 
``broadly-based'' Plan is reasonable. The Commission notes that it is 
based on current interpretations used by the Exchange to determine 
whether a Plan is broadly-based, and should provide guidance to listed 
companies and shareholders while still allowing the Exchange to review 
plans on a case-by-case basis. The Commission also notes that the 
NYSE's definition does not generally correspond to definitions 
regarding the scope of stock options plans used in other contexts.\14\ 
The Commission also notes that the Exchange will not automatically 
consider a Plan that does not meet the 20% test to be narrowly-based, 
but rather encourages a listed company adopting a Plan that it believes 
to be broadly-based but that fails the 20% test to discuss the Plan 
with Exchange staff.\15\
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    \14\ Amendment No. 1, supra note 3. 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)).
    \15\ See note 8, supra.
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    The Commission believes that the proposed role change substituting 
``subsidiary'' for ``affiliate'' in Paragraph 312.04(c) is reasonable 
because it eliminates any ambiguity pertaining to whether shares held 
by a natural person who controls a company are excluded from the 
calculation of when shareholder approval is required in Paragraph 
312.03. The NYSE states it never intended to exclude the shares of such 
persons in calculating shares actually issued and outstanding for 
purposes of determining whether shareholder approval is required under 
Paragraph 312.03. The Commission agrees with the NYSE that using 
``subsidiary'' clarifies this issue because a subsidiary is generally 
defined to include only companies, not natural persons. The Commission 
notes that the NYSE will interpret the term to include any majority-
owned subsidiary of the listed company. Also, the Commission notes that 
other self-regulatory organizations use the term ``subsidiary'' in 
similar rules regarding shareholder approval.\16\
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    \16\ See Chicago Stock Exchange Article XXVII, Rule 
1900I(j)(vi); Pacific Exchange Rule 3.3(d), Commentary .01; and 
National Association of Securities Dealers Rule 4460(i)(3).
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    Finally, the Commission believes it is reasonable for the Exchange 
to amend Paragraph 312.03(a)(3) to require that a stock option grant be 
a ``material'' inducement, rather than an ``essential'' one, to a 
person's entering into an employment contract, based on the Exchange's 
belief that a ``materiality'' standard will be more workable, yet still 
will achieve the NYSE's goal of ensuring that the stock option grant be 
an important aspect of an employment decision in order for it to 
qualify as an exemption to the requirement of shareholder approval.
    In summary, the Commission believes that the changes proposed by 
the NYSE will provide listed companies with more flexibility in issuing 
stock option or purchase plans while still adequately protecting 
shareholder rights to approve those plans that will have a material 
effect on their equity. In addition, the other changes should provide 
some guidance to listed companies and shareholders concerning the type 
of

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Plans that need to receive shareholder approval while still providing 
the NYSE with a certain amount of flexibility to review such Plans 
under the shareholder approval requirements on a case-by-case basis.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-NYSE-97-37), as amended, is 
approved.

    \17\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-9885 Filed 4-14-98; 8:45 am]
BILLING CODE 8010-01-M