[Federal Register Volume 63, Number 223 (Thursday, November 19, 1998)]
[Notices]
[Pages 64304-64307]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30948]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40679; File No. SR-NYSE-98-32]
November 13, 1998.


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. Relating to Shareholder 
Approval of Stock Option Plans

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 13, 1998, the New York Stock Exchange, Inc. (the 
``Exchange'' or the ``NYSE'') filed with the Securities and Exchange 
Commission (the ``Commission'' or the ``SEC'') 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\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 amend Paragraphs 312.01, 312.03 and 
312.04 of its Listed Company Manual (the ``Manual''). The proposed rule 
change amends the Exchange's shareholder approval policy (the 
``Policy'') with respect to stock option and similar plans (``Plans''). 
The text of the proposed rule change is as follows:

Text of the Proposed Rule Change

    Italics indicates additions; [brackets] indicate deletions.

312.00  Shareholder Approval Policy

    312.01  Shareholders' interest and participation in corporate 
affairs has greatly increased. Management has responded by providing 
more extensive and frequent reports on matters of interest to 
investors. In addition, an increasing number of important corporate 
decisions are being referred to shareholders for their approval. This 
is

[[Page 64305]]

especially true of transactions involving the issuance of additional 
securities.
    Good business practice is frequently the controlling factor in the 
determination of management to submit a matter to shareholders for 
approval even though neither the law nor the company's charter makes 
such approvals necessary.The Exchange encourages this growth in 
corporate democracy. For example, due to the recent growth of officer 
and director equity-based compensation arrangements and the increased 
interest of shareholders in this area, companies may determine to 
submit stock option and similar plans to shareholders for approval, 
whether or not the Exchange requires such approval.
* * * * *
    312.03  Shareholder approval is a prerequisite to listing in four 
situations: (a) Shareholder approval is required with respect to a 
stock option or purchase plan, or any other arrangement, pursuant to 
which officers or directors may acquire stock (collectively, a 
``Plan'') except:
    (1) for warrants or rights issued generally to security holders of 
the company;
    (2) pursuant to a broadly-based Plan [that includes other employees 
(e.g. ESOPs)];
    (3) where options or shares are to be issued to a person not 
previously employed by the company, as a material inducement to such 
person's entering into an employment contract with the company; or
    (4) pursuant to a Plan that provides that (i) no single officer or 
director may acquire under the Plan more than one percent of the shares 
of the issuer's common stock outstanding at the time the Plan is 
adopted, and (ii) together with all Plans of the issuer (other than 
Plans for which shareholder approval is not required under subsections 
(1) to (3) above), does not authorize the issuance of more than five 
percent of the issuer's common stock outstanding at the time the Plan 
is adopted.
* * * * *
    312.04  For the purpose of Para. 312.03:
* * * * *
    [(g) Whether a Plan is ``broadly-based'' depends on a variety of 
factors, including, but not limited to the number of officers, 
directors and other employees covered by the Plan and whether there are 
separate compensation arrangements for salaried employees and hourly 
employees. The Exchange will deem a Plan to be ``broadly-based'' if at 
least 20 percent of the company's employees are eligible to receive 
stock or options under the Plan and at least half of those eligible are 
neither officers nor directors (the ``20 percent test''). However, this 
is a non-exclusive safe harbor and the fact that a Plan does not meet 
the 20 percent test does not mean that the Exchange will consider the 
Plan to be narrowly-based. The Exchange encourages a listed company 
adopting a Plan that does not meet the 20 percent test, but that the 
company believes is ``broadly-based,'' to discuss the matter with the 
Exchange staff prior to filing a listing application covering the 
shares to be issued under the Plan.]
    (g) ``Officer'' has the same meaning as defined by the Securities 
and Exchange Commission in Rule 16a-1(f) under the Securities Exchange 
Act of 1934, or any successor rule.
    (h) A Plan is ``broadly-based'' if, pursuant to the terms of the 
Plan:
    at least a majority of the company's full-time employees in the 
United States, who are ``exempt employees,'' as defined under Fair 
Labor Standards Act of 1938, are eligible to receive stock or options 
under the Plan; and
    at least a majority of the shares of stock or shares of stock 
underlying options awarded under the Plan, during the shorter of the 
three-year period commencing on the date the Plan is adopted by the 
company or the term of the Plan, must be awarded to employees who are 
not officers or directors of the company.

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 Exchange 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 Exchange has prepared summaries, set forth in 
section 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
    As a prerequisite to listing, the Policy requires shareholder 
approval of stock option or purchase plans or any other arrangement 
pursuant to which either officers or directors acquire stock. The 
Policy also contains, however, four exemptions from this requirement, 
including an exemption for ``broadly-based'' Plans. The purpose of the 
proposed rule change is to amend the provisions in the mutual governing 
shareholder approval of Plans, including the definition of what 
constitutes a ``broadly-based'' Plan.
    The Exchange historically had not provided a definition of what 
constitutes a ``broadly-based'' Plan other than to state that such a 
Plan must include employees other than officers and directors. The one 
example in the policy of such a Plan was an employee stock option plan, 
or ``ESOP.'' In December of 1997, the Exchange filed a proposed rule 
change amending the Policy which was published for public comment \3\ 
by the Commission as required under Section 19(b)(1) of the Act.\4\ The 
Commission received no comments on the proposed rule change, which was 
subsequently approved on April 8, 1998.\5\ Among other things, the 
Original Proposal codified existing Exchange interpretations regarding 
``broadly-based'' plans. Specifically, that proposal stated that the 
definition of ``broadly-based'' required a review of a number of 
factors, including the number of persons included in the Plan, and the 
nature of the company's employees. The Exchange also codified a non-
exclusive safe harbor for Plans in which at least 20 percent of a 
company's employees were eligible, provided that the majority of those 
eligible were neither officers nor directors.
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    \3\ Exchange Act Release No. 39659 (February 12, 1998), 63 FR 
9036 (February 23, 1998).
    \4\ 15 U.S.C. 78s(b)(1).
    \5\ Exchange Act Release No. 39839 (April 8, 1998), 63 FR 18481 
(April 15, 1998) (the ``Original Proposal'').
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    Following the approval and effectiveness of the Original Proposal, 
the Exchange and the Commission received a significant number of 
inquiries and comments regarding the proposal. These originated 
primarily from the institutional investor community and focused on the 
definition of ``broadly-based.'' Many commentators were concerned that 
the Original Proposal could be a ``loop-hole'' pursuant to which 
companies could establish Plans of significant size that included 
officers and directors without the need for shareholder approval. 
Commentators also expressed general concern regarding the potential 
dilutive effects of Plans.
    In response to the inquiries and comments, the Exchange issued a 
Request for Comment on the definition of ``broadly-based'' Plans. The 
Exchange received 166 comments in response to that request. These 
comments are discussed in Section II.C., below. The

[[Page 64306]]

Request for Comment indicated the Exchange's intention to establish a 
task force (the ``Task Force'') to review the comments and to make 
recommendations regarding potential changes to the definition of 
``broadly-based'' Plan.
    The Exchange thereafter established the Task Force to review the 
comments. The Task Force was composed of representatives of the 
Exchange's Legal Advisory Committee, Individual Investors Advisory 
Committee, Pension Managers Advisory Committee, and Listed Company 
Advisory Committee. In addition, members of the Task Force included 
representatives of other Exchange constituencies, including a 
representative from the Council of Institutional Investors. Following 
its deliberations, the Task Force recommended the following:
    (1) Retain, but modify the definition of a ``broadly-based'' Plan. 
The new definition would classify a Plan as ``broadly-based'' if, 
pursuant to the terms of the Plan:
    (a) At least a majority of the issuer's full-time, exempt U.S. 
employees \6\ are eligible to participate under the plan; and
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    \6\ See 29 U.S.C. 213(a) for the definition of ``exempt 
employees.''
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    (b) At least a majority of the shares awarded under the Plan (or 
shares of stock underlying options awarded under the Plan) during the 
shorter of the three year period commencing on the date the Plan is 
adopted by the issuer, or the term of the Plan itself, are made to 
employees \7\ who are not officers or directors of the issuer.\8\
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    \7\ The Exchange proposes a two part test for determining 
whether a plan is broadly-based. In the first prong, a majority of 
the company's full-time employees who are ``exempt employees'' must 
be eligible to receive stock. As a general matter, ``exempt 
employees'' are salaried employees in an executive, administrative 
or professional capacity. The Task Force recommended limiting this 
prong of the definition to ``exempt employees'' since non-exempt 
employees often are covered by compensation arrangements that do not 
include stock options.
    The second part of the test requires that at least a majority of 
the shares awarded under a Plan be awarded to employees who are not 
officers or directors of a company. This part of the test is not 
limited to ``exempt employees,'' allowing the calculation of the 
``majority of shares awarded'' to include both ``exempt employees'' 
and non-exempt employees who are not officers or directors. The 
focus of this requirement is to ensure that a company actually 
implements a Plan in a broadly-based fashion. In this regard, it 
does not matter whether the awards to persons other than officers or 
directors are to ``exempt'' or non-exempt employees. Telephone call 
between Michael Simon, Milbank, Tweed, Hadley & McCloy, and Kelly 
McCormick, Attorney, Division of Market Regulation, Commission, 
dated November 12, 1998.
    \8\ In this regard, the Exchange proposes to use the definition 
of ``officer'' contained in Commission Rule 16a-1(f) under the Act.
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    (2) Establish the definition of a ``broadly-based'' Plan as an 
exclusive test, not a safe harbor.
    (3) Revise the Exchange's general policy on shareholder approval 
issues to recognize the increased use of Plans as means to compensate 
officers and directors and state the Exchange's view that companies 
should consider submitting Plans to shareholder whether or not required 
by Exchange policy.
    (4) Direct the Task Force or other appropriate group to immediately 
commence a study to establish a maximum overall dilution listing 
standard for all non-tax-qualified Plans that otherwise would be exempt 
from shareholder approval. The goal would be to complete this study in 
time for Exchange review prior to the year 2000 proxy statement season.
    The rule amendments being proposed in this filing implement the 
first three Task Force recommendations. In addition, the Exchange has 
adopted the fourth recommendation and will direct the Task Force to 
consider a possible listing standard regarding a dilution test.
    The Exchange believes that the Task Force's recommendations 
represent an effective and workable compromise regarding shareholder 
approval of Plans. The proposal blends tests based both on Plan 
eligibility and Plan awards. In addition, while providing certainty 
through the use of an exclusive test, the Exchange believes the 
proposed amendments also state a general Exchange policy recognizing 
the increased use of Plans by companies and the Exchange's view that 
companies should consider submitting Plans to shareholders, whether or 
not required under the Policy. The Exchange believes the amendments 
also provide consistency in coverage by adopting the Commission's 
definition of ``officer,'' as contained in Rule 16a-1(f) under the Act. 
Finally, the Task Force recognizes that this proposal may only be an 
interim step in addressing this issue, and recommends that the Exchange 
consider an overall dilution test. Since the Exchange did not request 
comment on this issue in its original Request for Comment, the Exchange 
believes that further study of such a test is prudent.
2. Statutory Basis
    The NYSE believes that the basis under the Act for this proposed 
rule change is the requirement under Section 6(b)(5) \9\ 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 foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, 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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    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    As discussed, the Exchange issued a Request for Comment on the 
definition of a ``broadly-based'' plan. The Exchange received 166 
comment letters in response to that solicitation.\10\ As a general 
matter, the listed company community favored retaining the current 
shareholder approval policy with respect to stock option plans. In 
contrast, the institutional investor community generally favored a 
narrower definition of what constitutes a ``broadly-based'' plan, and 
suggested that such a definition be an exclusive test, not a non-
exclusive safe harbor. The Task Force considered these comments in 
proposing the compromise position the Exchange is proposing in this 
filing.
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    \10\ Interested persons are directed to the public file, located 
at the places specified in Item IV below, to review the comments 
received by the NYSE. The public file contains: (1) a Summary of the 
Comment Letters (Exhibit B); (2) the NYSE Request for Comment 
(Exhibit 2A); (3) the Comment Letters in Response to the Request 
(Exhibit 2B); and (4) the Report of the NYSE Task Force (Exhibit 
2C).
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III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of 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 such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

[[Page 64307]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. In particular, the Commission 
requests comment on whether the ``actual participation'' standard of 
paragraph 312.03(h) of the Manual (which states that at least a 
majority of the shares of stock or shares underlying options awarded 
under the Plan, during the shorter of the three-year period commencing 
on the date the Plan was adopted by the company or the term of the 
plan, must be awarded to employees who are not officers or directors), 
in conjunction with the ``eligibility'' portion of proposed paragraph 
312.03(h), adequately addresses commenters' concerns regarding non-
executive participation, as well as eligibility, in a Plan. The 
Commission requests comment on whether a company could meet the 
definition of a broadly-based plan by nominally complying with the 
participation prong and the thereby avoid the shareholder approval 
requirements. In particular, could a company either issue grants to 
non-executive employees in the first three years of the Plan but 
reserve a majority of the shares actually available under a Plan for 
executives and directors once the three years has elapsed? 
Alternatively, could a company not issue any grants during the first 
three years of the Plan but reserve all shares available under the Plan 
for grants only to executives and directors once the three years has 
elapsed? The Commission also requests comment on whether Section 162(m) 
of the Internal Revenue Code,\11\ (which requires shareholder approval 
of applicable employee remuneration in excess of one million dollars 
for covered employees for the remuneration to be eligible for deduction 
as a trade or business expense) provides shareholders with additional 
protection by affording shareholders an adequate opportunity to vote on 
certain stock option plans.
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    \11\ 26 U.S.C. 162(m).
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    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 in the Commission's Public 
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies 
of such filing will also be available for inspection and copying at the 
principal office of the NYSE. All submissions should refer to File No. 
SR-NYSE-98-32 and should be submitted by December 10, 1998.

    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. 98-30948 Filed 11-18-98; 8:45 am]
BILLING CODE 8010-01-M