[Federal Register Volume 72, Number 1 (Wednesday, January 3, 2007)]
[Notices]
[Pages 170-171]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-22446]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54999; File No. SR-NYSE-2006-30]


Self-Regulatory Organizations; New York Stock Exchange, Inc. (a/
k/a New York Stock Exchange LLC); Order Approving a Proposed Rule 
Change and Amendments No. 1 & 2 Thereto Relating to the Treasury Share 
Exception in NYSE Listed Company Manual Section 312.03, Section 312.04, 
Section 703.01(A), and Section 903.02

December 21, 2006.

I. Introduction

    On May 5, 2006, the New York Stock Exchange LLC (the ``Exchange'' 
or ``NYSE'') filed with 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 relating to the ``treasury share exception'' in 
NYSE Listed Company Manual Sections 312.03, 312.04, 703.01(A), and 
903.02. On August 11, 2006, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ On September 25, 2006, the Exchange filed 
Amendment No. 2 to the proposed rule change.\4\ The proposed rule 
change, as amended, was published for comment in the Federal Register 
on October 16, 2006.\5\ The Commission received one comment on the 
proposal.\6\ This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \4\ See Partial Amendment No. 2 to Form 19b-4 dated September 
25, 2006 (``Partial Amendment No. 2'').
    \5\ See Securities Exchange Act Release No. 54579 (October 5, 
2006), 71 FR 60786 (``Notice'').
    \6\ See Letter to Nancy M. Morris, Secretary, Commission, from 
Alan P. Eggleston, Executive Vice President & General Counsel, Peter 
M. Finn, First Vice President, Regulatory Affairs, and Peter 
Cunningham, First Vice President, Investor Relations, Astoria 
Financial Corporation, dated October 11, 2006 (``Astoria Letter'').
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II. Description of the Proposal

    Section 312.03 of the Exchange's Listed Company Manual requires 
that companies obtain shareholder approval before issuing stock in 
certain situations or in significantly large amounts.\7\ Historically, 
the rule has not been applied to any issuance by a company of shares 
from the treasury, that is, a reissuance of shares once issued but then 
reacquired by the company. This practice gave rise to what has become 
known as the ``treasury share exception.'' The Exchange stated that the 
``treasury shares exception'' results from the way the rule is written, 
making shareholder approval a ``prerequisite to listing.'' The Exchange 
has taken the view that once listed, shares remain listed even if they 
are repurchased by the company and taken back into ``treasury.'' 
Accordingly, when treasury shares are re-issued, the Exchange has not 
required that they be ``re-listed.'' Since no listing application is 
required, the Exchange has taken the position that Section 312.03 is 
not triggered.
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    \7\ The section provides that shareholder approval is a 
``prerequisite to listing'' additional shares by a listed company in 
several situations, including an issuance of: (1) more than 1% of 
the current outstanding common stock to an insider (an officer or 
director, or an entity affiliated with an officer or director); (2) 
more than 5% of the current outstanding to a 5% or greater 
shareholder or an affiliate thereof; (3) or more than 20% of the 
current outstanding in any transaction other than a public offering 
or ``bona fide private financing'' (as defined in Section 
312.04(f)). Approval is also required when an issuance will result 
in a ``change of control of the issuer.'' These provisions apply in 
the same way to offerings of securities that are convertible into 
common stock, and the percentages in each case apply either to 
outstanding common equity or common voting power. Shareholder 
approval is also required for equity compensation plans. See NYSE 
Listed Company Manual Sections 312.03(a) and 303A.08.
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    Prior to 2003, the Exchange's rule requiring shareholder approval 
of stock option plans resided in Section 312.03 as well, and the 
Exchange also applied the treasury share exception in that context. The 
rule regarding such plans was significantly revised in 2003, and 
codified in a different section of the Listed Company Manual, Section 
303A.08. At this time, the ``treasury share exception'' was 
specifically made unavailable for equity compensation plans, so that 
shareholder approval would be required regardless of whether a plan was 
funded in whole or in part through the use of treasury shares.\8\
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    \8\ See Securities Exchange Act Release No. 48108 (June 30, 
2003), 68 FR 39995, 40002 (July 3, 2003) (``Equity Compensation Plan 
Release'').
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    In its proposed rule change, NYSE acknowledged that the treasury 
share exception has been criticized on the ground that it allows 
companies to store up large reserves of stock against a future issuance 
of shares in transactions that could significantly dilute existing 
shareholders without their approval. Accordingly, the Exchange filed a 
proposed rule change with the Commission to amend Section 312.03 to 
eliminate the treasury stock exception.\9\ The Exchange has also 
modified Section 312.04(j) to clearly state that the issuance of shares 
from treasury is considered an issuance of shares for the purpose of 
Section 312.03.
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    \9\ The Exchange also proposed a transition period for companies 
that execute a binding contract with respect to the issuance of 
common stock prior to the date that is five business days after the 
date that the Commission noticed the proposed rule change in the 
Federal Register, so that the treasury share exception was available 
for such transactions even though the transactions do not close 
until after the date of Commission approval of this proposed rule 
change. See Partial Amendment No. 2, supra note 4. The proposal was 
published in the Federal Register on October 16, 2006. See supra 
note 5.
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    The Exchange also proposed an amendment to Section 312.04 to state 
that the term ``market value'' means the official closing price on the 
Exchange as reported to the Consolidated Tape immediately preceding the 
entering into of a binding agreement to issue the securities. For 
example, if the transaction is entered into on a Tuesday after the 
close of the regular session at 4 p.m. Eastern Standard Time, then 
Tuesday's official closing price is used. If the transaction is entered 
into at any time between the close of the regular session on Monday and 
the close of the regular session on Tuesday, then Monday's official 
closing price is used.
    The Exchange is also proposing to amend Section 312.03(b) to 
specify that it covers issuances that are part of a ``series of related 
transactions.'' This proposed change parallels the language used in 
Section 312.03(c) relating to the issuance of 20% or more of a 
company's voting common securities. The Exchange further proposes to 
amend Section 703.01(A) to require that companies issuing shares from 
treasury in a transaction or series of related transactions notify the 
Exchange in writing in advance of the issuance, indicating whether 
shareholder approval is required pursuant to Section 312.03 and, if 
required, the date such shareholder approval was obtained. The Exchange 
also proposes to amend

[[Page 171]]

Sections 703.01(A) and 903.02 to require that companies indicate in the 
Subsequent Listing Application whether shareholder approval is required 
with respect to the issuance being listed pursuant to Sections 303A.08 
or 312.03 and, if required, the date such shareholder approval was 
obtained.

III. Comments

    The Commission received one comment letter on the proposed rule 
change.\10\ Astoria Financial Corporation, an NYSE-listed company, 
stated that, ``concerns recently raised by certain shareholders and 
other market participants regarding the use of treasury shares to 
circumvent shareholder approval rules for transactions which result in 
a change of control have merit.'' However, Astoria thought that the 
proposal should provide some mechanism to exempt the issuance of 
treasury shares related to equity compensation plans previously 
approved by shareholders.
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    \10\ Astoria Letter, supra note 6.
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    The Exchange responded to Astoria's comment letter.\11\ NYSE 
explained that the treasury stock exception, currently available under 
Section 312.03, is not available with respect to equity compensation 
plans. Shareholder approval requirements for equity compensation plans 
are set forth in Section 303A.08 of the Listed Company Manual. Under 
that provision of the Listed Company Manual, the definition of the term 
``equity compensation plan'' clearly states that the definition 
encompasses the delivery of either newly issued or treasury shares. As 
a result, the Exchange stated that the proposed elimination of the 
treasury stock exception under Section 312.03 does not impact equity 
compensation plans.
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    \11\ See Letter to Nancy M. Morris, Secretary, Commission, from 
Mary Yeager, Assistant Secretary, NYSE, dated December 4, 2006 
(``NYSE Response Letter'').
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IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, 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) of the Act.\12\ Specifically, the Commission finds that 
the proposal is consistent with Section 6(b)(5) of the Act \13\ in that 
it is designed 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 is not designed to permit unfair 
discrimination between issuers.
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    \12\ 15 U.S.C. 78f(b). In approving this proposal, the 
Commission has considered the proposed rules' impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that, with respect to NYSE-listed 
companies, the proposed rule change will reduce the potential for 
significant dilution without shareholder approval. The Commission 
believes that the necessity of shareholder approval of a transaction 
should be governed by the substantive nature of the transaction, not 
the status or type of shares used in the transaction. In this regard, 
the proposed rule change should promote greater shareholder input in 
control transactions and other corporate actions resulting in issuances 
of stock involving NYSE-listed companies. The proposed changes to 
Section 312.03 and 312.04 will also make these provisions consistent 
with the Exchange's elimination of the treasury share exception from 
the Exchange's equity compensation plan approval rules.\14\
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    \14\ See Equity Compensation Plan Release, supra note 8. With 
respect to the sole commenter on the proposed rule change, the 
Commission agrees with the Exchange that the treasury share 
exception being eliminated by the NYSE's proposed changes in Section 
312.03 is currently not available with respect to shareholder 
approval of equity compensation plans as set forth in Section 
303A.08. As the Exchange's response notes, the existing definition 
of ``equity compensation plan'' in Section 303A.08 encompasses the 
delivery of either newly issued or treasury shares. As a result, the 
proposed elimination of the treasury stock exception does not have 
any effect on the shareholder approval requirements for equity 
compensation plans.
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    With respect to the proposed change in Section 312.03(b), to 
clarify that the rule covers issuances that are part of a ``a series of 
related transactions, the Commission believes this change is beneficial 
as it is designed to ensure that the overall substance of a transaction 
or series of transactions indicates the necessity of shareholder 
approval. In particular, the Commission believes that this change 
ensures that companies cannot avoid the shareholder approval 
requirements by simply issuing stock in a piecemeal fashion to avoid 
the requirements of the rule and makes Section 312.03(b) consistent 
with the requirements of Section 312.03(c). With respect to the 
proposed changes in Sections 703.01(A) and 903.02, which, in general, 
require that listed companies notify the Exchange in writing in advance 
of an issuance, state whether shareholder approval is required and, if 
so, when it was obtained, and indicate such information in any 
Subsequent Listing Application, the Commission believes these changes 
are reasonable as they will facilitate the Exchange's monitoring of 
listed companies for compliance with the revised shareholder approval 
rules. The Commission also believes that the Exchange's clarification 
of the term ``market value'' is consistent the protection of investors 
as it ensures that the most recent closing price, and not an average 
price, is used in situations where reference is made to the market 
value of an issuer's securities. This change should provide certainty 
as to what price is being used when determining market value. Finally, 
the Exchange has provided for a transition period for companies that 
execute a binding contract with respect to the issuance of common stock 
prior to the date that is five business days after the date that the 
Commission noticed the proposed rule change in the Federal Register. 
The Commission believes that this transition period is a reasonable way 
to provide listed companies with guidance as to on-going transactions 
and sufficient notice of the proposed rule change.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-NYSE-2006-30), as amended by 
Amendment Nos. 1 and 2, be, and it hereby is, approved.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6-22446 Filed 12-29-06; 8:45 am]
BILLING CODE 8011-01-P