Document ID: SEC-2006-1334-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2006-10-16T04:00Z

[Federal Register: October 16, 2006 (Volume 71, Number 199)]
[Notices]               
[Page 60786-60788]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16oc06-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54579; File No. SR-NYSE-2006-30]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc. (a/
k/a New York Stock Exchange LLC); Notice of Filing of 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 
and Section 703.01(A)

October 5, 2006.
    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 May 5, 2006, the New York Stock Exchange, LLC (the 
``Exchange'' or ``NYSE'') 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 
Exchange. 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 Commission

[[Page 60787]]

is publishing this notice to solicit comments on the proposed rule 
change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The substance of Amendment No. 1 was changed in Amendment 
No. 2. See infra note 4. In Amendment No. 1, the Exchange had (1) 
modified the proposed rule change to state that if a company has 
executed a binding contract prior to August 15, 2006 with respect to 
the issuance of common stock, the existing treasury share exception 
will continue to be available for the transaction; and (2) revised 
the definition of ``market value.''
    \4\ In Amendment No. 2, which replaced and superseded Amendment 
No. 1 in its entirety, the Exchange (1) revised the example provided 
with respect to the proposed definition of ``market value'' to make 
it clearer; and (2) amended the transition period proposed so that 
the existing treasury share exception would continue to be available 
for companies that have entered into a binding contract with respect 
to the issuance of common stock prior to the date that is five 
business days after the Commission publishes notice of the proposed 
rule change in the Federal Register.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule filing reflects amendments to the current NYSE 
Listed Company Manual shareholder approval requirements for certain 
transactions. The text of this proposed rule change is available on the 
Exchange's Web site at http://apps.nyse.com/[fxsp0]commdata/

pub19b4.nsf/[fxsp0]docs/89637D57B[fxsp0]29A9E63852[fxsp0]571F40076E765/
[fxsp0]$FILE/NYSE-2006-30%[fxsp0]20A-2pdf, at the Exchange's principal 
office, and in the Commission's Public Reference Room.

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 NYSE 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 
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
    Section 312.03 of the Listed Company Manual has for many years 
required that companies obtain shareholder approval before issuing 
stock in certain situations or in significantly large amounts.\5\ The 
precise terms have changed somewhat over the years, but the rule has 
historically 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.
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    \5\ The section provides that shareholder approval is a 
``prerequisite to listing'' additional shares by a listed company in 
several situations. To paraphrase, they are an issuance of 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), 
more than 5% of the current outstanding to a 5% or greater 
shareholder or an affiliate thereof, 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. The Commission notes that 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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    The ``treasury shares exception'' results from the way the rule is 
written, making shareholder approval a ``prerequisite to listing.'' The 
Exchange takes the view that once listed, shares remain listed even if 
they are repurchased by the company and taken back into ``treasury.'' 
\6\ Accordingly, when treasury shares are re-issued, we do not require 
that they be ``re-listed.'' Since no listing application is required, 
Section 312.03 is not triggered.
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    \6\ This approach is also reflected by the fact that, pursuant 
to Section 902.02 of the NYSE Listed Company Manual, listed 
companies are charged annual fees calculated for each class of 
security listed based on the number of shares issued and 
outstanding, including treasury stock and restricted stock.
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    Note that prior to 2003, the Exchange's rule requiring shareholder 
approval of stock option plans resided in Section 312.03 as well, and 
the treasury share exception was also applied 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.\7\
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    \7\ See Securities Exchange Act Release No. 48108 (June 30, 
2003), 68 FR 39995, 40002 (July 3, 2003).
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    The treasury share exception has been criticized because it 
potentially 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. In 
light of this criticism, on December 30, 2005, the Exchange solicited 
comment from listed companies and investors on whether or not the 
treasury stock exception should be eliminated. We received 19 comment 
letters or e-mails in response. Fourteen of the commenters, primarily 
institutional investors, supported the elimination of the exception. 
These commenters generally criticized the current exception as 
detrimental to shareholders, providing the potential for significant 
dilution without shareholder approval. Several noted that the historic 
rationale for the exception was outdated and that the need for 
shareholder approval should be governed by the substance of the 
transaction, not the technical status of the shares used. Five 
commenters, primarily listed companies, advocated maintenance of the 
status quo. Several of these commenters expressed the view that the 
exception provides companies with important flexibility in structuring 
and negotiating transactions in a manner consistent with shareholders' 
interests.
    The Exchange agrees that there is a legitimate concern that the 
exception could result in an unacceptable level of dilution without 
shareholder input. Accordingly, the Exchange proposes to amend Section 
312.03 to eliminate the treasury stock exception.
    The Exchange is also proposing to provide companies a limited 
transition period with respect to the proposed elimination of the 
treasury stock exception. The Exchange stated that it is sensitive to 
companies' need for certainty when planning a transaction involving the 
issuance of shares. Accordingly, the Exchange has proposed a limited 
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 publishes notice of 
this filing in the Federal Register, so that the existing treasury 
share exception would continue to be available for the transaction even 
though the transaction does not close until after the date of 
Commission approval of this proposed rule change.
    The Exchange is also proposing related amendments to Section 
312.04, a section that amplifies and interprets the operative 
provisions of Section 312.03. As initially filed with the Commission, 
one of these proposed amendments codified the guidance the Exchange 
historically provided to issuers on the time frame allowed where an 
issuer chose to establish the market value of the securities to be 
issued based on an averaged price. The Exchange allowed issuers to 
define market value in the context of Section 312.03 as either the last 
reported sale price on the trading date prior to the date that the 
issuer enters into a definitive agreement to issue the securities or 
with reference to average price over a period of time that can not 
exceed ten trading days prior to the date of issuance. In this 
amendment, the Exchange is revising its original proposal so 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

[[Page 60788]]

session on Monday and the close of the regular session on Tuesday, then 
Monday's official closing price is used. This change will result in 
issuers no longer having the ability to establish market value based on 
an averaged price. It will also bring this aspect of the rule in line 
with the similar Nasdaq Stock Market rule.
    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.
    In addition, the Exchange 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 
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.
2. Statutory Basis
    The Exchange believes that its proposed rule change, as amended, is 
consistent with Section 6(b) of the Act \8\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act \9\ in particular, in that 
it is 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, in general, to protect investors and the public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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 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

    The Exchange requested comment from listed companies and investors 
on whether or not the treasury stock exception should be eliminated and 
received 19 comments in response. These comments are described in more 
detail above.

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 NYSE 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send e-mail to rule-comments@sec.gov. Please include File 

Number SR-NYSE-2006-30 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC, 20549-1090.
    All submissions should refer to File Number SR-NYSE-2006-30. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro/shtml
). 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. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NYSE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File number SR-NYSE-2006-30 and should be submitted by November 6, 
2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-17067 Filed 10-13-06; 8:45 am]

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