[Federal Register: October 16, 2003 (Volume 68, Number 200)]
[Notices]
[Page 59650-59656]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16oc03-132]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48610; File No. SR-Amex-2003-42]
Self Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of a Proposed Rule Change and Amendment
Nos. 1, 2 and 3 Thereto by the American Stock Exchange LLC Relating to
Shareholder Approval of Stock Option Plans and Other Equity
Compensation Arrangements
October 9, 2003.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 6, 2003, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
On July 24, 2003, the Amex filed Amendment No. 1 to the proposed rule
change.\3\ On September 10, 2003, the Amex filed Amendment No. 2 to the
proposed rule change.\4\ On October 1, 2003, the Amex filed Amendment
No. 3 to the proposed rule change.\5\ The Commission is publishing this
notice to solicit comments on the proposed rule change, as amended,
from interested persons and is approving the proposal, as amended, on
an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Claudia Crowley, Vice President, Listing
Qualifications, Amex, to Nancy Sanow, Assistant Director, Division
of Market Regulation (``Division''), Commission, dated July 22, 2003
(``Amendment No. 1''). Amendment No. 1 supercedes and replaces
Amex's original Rule 19b-4 filing in its entirety.
\4\ See letter from Claudia Crowley, Vice President, Listing
Qualifications, Amex, to Nancy Sanow, Assistant Director, Division,
Commission, dated September 9, 2003 (``Amendment No. 2''). Amendment
No. 2 supercedes and replaces Amex's original Rule 19b-4 filing and
Amendment No. 1 in their entirety.
\5\ See letter from Claudia Crowley, Vice President, Listing
Qualifications, Amex, to Sapna C. Patel, Special Counsel, Division,
Commission, dated October 1, 2003 (``Amendment No. 3''). In
Amendment No. 3, the Amex made a technical change to the proposed
rule language.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Section 711 of the Amex Company
Guide relating to shareholder approval of stock option and equity
compensation plans.
Below is the text of the proposed rule change, as amended. Proposed
new language is italicized; proposed deleted language is [bracketed].
* * * * *
American Stock Exchange LLC Company Guide
* * * * *
Sec. 711, [Options to Officers, Directors or Key Employees]--
Shareholder Approval of Stock Option and Equity Compensation Plans
Approval of shareholders is required in accordance with Section 705
[(unless exempted under paragraphs (a) and (b) below) as a prerequisite
to approval of applications to list additional shares reserved for]
with respect to the establishment of (or material amendment to) a stock
option[s] or purchase plan or other equity compensation arrangement
pursuant to which options or stock may be acquired by officers,
directors, employees, or consultants [granted or to be granted to
officers, directors or key employees], regardless of whether or not
such authorization is required by law or by the company's charter,
except for:[.]
[Note: This policy does not preclude the adoption of a stock option
plan, or the granting of options, subject to ratification by
shareholders, prior to the filing of an application for the listing of
the shares reserved for such purpose.
The Exchange will not require shareholders' approval as a condition
to listing shares reserved for the exercise of options when:]
(a) [such options are issued] issuances to an individual, not
previously an employee[d] or director of [by] the company, or following
a bonafide period of non-employment, as an inducement [essential]
material to entering into [a contract of] employment with the company
provided that such issuances are approved by the company's independent
compensation committee or a majority of the company's independent
directors, and, promptly following an issuance of any employment
inducement grant in reliance on this exception, the company discloses
in a press release the material terms of the grant, including the
recipient(s) of the grant and the number of shares involved [the
potential issuance of shares pursuant to such options does not exceed
5% of the company's outstanding common stock]; or
(b) [such options are to be granted:]
[(i)] [under a] tax qualified, non-discriminatory employee benefit
plans [or arrangement] (e.g., plans that meet the requirements of
Section 401(a) or 423 of the Internal Revenue Code) or parallel
nonqualified plans, provided such plans are approved by the company's
independent compensation committee or a majority of the company's
independent directors; or plans that merely provide a convenient way to
purchase shares in the open market or from the issuer at fair market
value [in which all, or substantially all, of the company's employees
participate, in a fair and equitable manner]; or
(c) a plan or arrangement relating to an acquisition or merger; or
(d) warrants or rights issued generally to all security holders of
the company or stock purchase plans available on equal terms to all
security holders of the company (such as a typical dividend
reinvestment plan).
A listed company is required to notify the Exchange in writing with
respect to the use of any of the exceptions set forth in paragraphs (a)
through (d).
[(ii) under a plan or arrangement for officers, directors or key
employees provided such incentive arrangements do not authorize the
issuance of more than 5% of outstanding common stock in any one year
and provided that all arrangements adopted without shareholder approval
in any five-year period do not authorize, in the aggregate, the
issuance of more than 10% of such common stock. (For the purpose of
calculating the percentage of stock issued in the aggregate, stock to
be issued pursuant to options which have expired and/or been cancelled
shall not be included.)]
[For purposes of the above policy, the term ``options'' includes
not only the usual type of nontransferable options granted in
consideration of continued employment, but also any other arrangement
under which controlling shareholders, officers, directors or key
employees may acquire (other than as part of a public offering) stock
or convertible securities of a company at a price below market price at
the time such stock is acquired or through the use of credit extended,
directly or indirectly, by the company. Thus, the sale to such a
person(s) of a common stock purchase warrant or right (not part
[[Page 59651]]
of a public offering) or the sale of stock to such person who has
borrowed money from the company, will normally necessitate shareholder
approval.]
Commentary * * *
.01 Section 711 requires shareholder approval when a plan or other
equity compensation arrangement is established or materially amended.
For these purposes, a material amendment would include, but not be
limited to, the following:
(a) any material increase in the number of shares to be issued
under the plan (other than to reflect a reorganization, stock split,
merger, spinoff or similar transaction);
(b) any material increase in benefits to participants, including
any material change to: (i) permit a repricing (or decrease in exercise
price) of outstanding options, (ii) reduce the price at which shares or
options to purchase shares may be offered, or (iii) extend the duration
of a plan;
(c) any material expansion of the class of participants eligible to
participate in the plan; and
(d) any expansion in the types of options or awards provided under
the plan.
While general authority to amend a plan would not obviate the need
for shareholder approval, if a plan permits a specific action without
further shareholder approval, then no such approval would generally be
required. However, if a plan contains a formula for automatic increases
in the shares available (sometimes called an ``evergreen formula''), or
for automatic grants pursuant to a dollar-based formula (such as annual
grants based on a certain dollar value, or matching contributions based
upon the amount of compensation the participant elects to defer), such
plans cannot have a term in excess of ten years unless shareholder
approval is obtained every ten years. Plans that do not contain a
formula and do not impose a limit on the number of shares available for
grant would require shareholder approval of each grant under the plan.
A requirement that grants be made out of treasury shares or repurchased
shares will not alleviate these additional shareholder approval
requirements.
As a general matter, when preparing plans and presenting them for
shareholder approval, issuers should strive to make plan terms easy to
understand. In that regard, it is recommended that plans meant to
permit repricing use explicit terminology to make this clear.
Section 711 provides an exception to the requirement for
shareholder approval for shareholder approval for warrants or rights
offered generally to all shareholders. In addition, an exception is
provided for tax qualified, non-discriminatory employee benefit plans
as well as parallel nonqualified plans\1\ as these plans are regulated
under the Internal Revenue Code and Treasury Department regulations. An
equity compensation plan that provides non-U.S. employees with
substantially the same benefits as a comparable tax-qualified, non-
discriminatory employee benefit plan or parallel nonqualified plan that
the issuer provides to its U.S. employees, but for features necessary
to comply with applicable foreign tax law, is also exempt from
shareholder approval under this section.
Further, there is an exception for inducement grants to new
employees because in these cases a company has an arm's length
relationship with the new employees. Inducement grants for these
purposes include grants of options or stock to new employees in
connection with a merger or acquisition. Section 711 requires that such
issuances must be approved by the issuer's independent compensation
committee or a majority of the issuer's independent directors. Also,
promptly following an issuance of any employment inducement grant in
reliance on this exception, the listed company must disclose in a press
release the material terms of the grant, including the recipient(s) of
the grant and the number of shares involved.
In addition, plans or arrangements involving a merger or
acquisition do not require shareholder approval in two situations.
First, shareholder approval will not be required to convert, replace or
adjust outstanding options or other equity compensation awards to
reflect the transaction. Second, shares available under certain plans
acquired in acquisitions and mergers may be used for certain post-
transaction grants without further shareholder approval. This exception
applies to situations where the party which is not a listed company
following the transaction has shares available for grant under pre-
existing plans that meet the requirements of this Section 711. These
shares may be used for post-transaction grants of options and other
equity awards by the listed company (after appropriate adjustment of
the number of shares to reflect the transaction), either under the pre-
existing plan or arrangement or another plan or arrangement, without
further shareholder approval, provided: (1) The time during which those
shares are available for grants is not extended beyond the period when
they would have been available under the pre-existing plan, absent the
transaction, and (2) such options and other awards are not granted to
individuals who were employed by the granting company or its
subsidiaries at the time the merger or acquisition was consummated. A
plan or arrangement adopted in contemplation of the merger or
acquisition transaction would not be viewed as pre-existing for
purposes of this exception. This exception is appropriate because it
will not result in any increase in the aggregate potential dilution of
the combined enterprise. In this regard, any additional shares
available for issuance under a plan or arrangement acquired in
connection with a merger or acquisition would be counted in determining
whether the transaction involved the issuance of 20% or more of the
company's outstanding common stock, thus triggering the shareholder
approval requirements of Section 712(b).
Inducement grants, tax qualified non-discriminatory benefit plans,
and parallel nonqualified plans are subject to approval by either the
issuer's independent compensation committee, or a majority of the
issuer's independent directors. A listed company is not permitted to
use repurchased shares to fund option plans or grants without prior
shareholder approval. In addition, the issuer must notify the Exchange
in writing when it uses any of these exceptions (see also Part 3 with
respect to the requirements applicable to additional listing of the
underlying shares).
* * * * *
\1\ The term ``parallel nonqualified plan'' means a plan that is
a ``pension plan'' within the meaning of the Employee Retirement
Income Security Act (``ERISA''), 29 U.S.C. Sec. 1002 (1999), that
is designed to work in parallel with a plan intended to be qualified
under Internal Revenue Code Section 401(a), to provide benefits that
exceed the limits set forth in Internal Revenue Code Section 402(g)
(the section that limits an employee's annual pre-tax contributions
to a 401(k) plan), Internal Revenue Code Section 401(a)(17) (the
section that limits the amount of an employee's compensation that
can be taken into account for plan purposes) and/or Internal Revenue
Code Section 415 (the section that limits the contributions and
benefits under qualified plans) and/or any successor or similar
limitations that may thereafter be enacted. However, a plan will not
be considered a parallel nonqualified plan unless (i) it covers all
or substantially all employees of an employer who are participants
in the related qualified plan whose annual compensation is in excess
of the limit of Code Section 401(a)(17) (or any successor or similar
limitation that may hereafter be enacted) and (ii) its terms are
substantially the same as the qualified plan that it parallels
except for the elimination of
[[Page 59652]]
the limitations described in the preceding sentence; and (iii) no
participant receives employer equity contributions under the plan in
excess of 25% of the participant's cash compensation.
See also Section 806.
* * * * *
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 Amex 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 III below. The Amex 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
The Exchange represents that Section 711 of the Amex Company Guide
currently requires listed companies to obtain shareholder approval for
many stock option plans and other arrangements in which officers,
directors and key employees participate, to address concerns about the
possibility of self-dealing and dilution to the detriment of
shareholders. The Exchange further states that under Section 711(b)(i)
of the Amex Company Guide there is an exception for ``broadly based''
plans in which all, or substantially all, of the company's employees
participate in a fair and equitable manner, even if officers, directors
and key employees receive option grants under the plan, as well as for
de minimus grants.
The Exchange represents that, in order to enhance investor
confidence and provide consistency across marketplaces, it is proposing
to eliminate the existing exceptions to the shareholder approval
requirements under current Section 711 of the Amex Company Guide and to
require shareholder approval of all stock option and equity
compensation plans, subject to limited exceptions.\6\ The proposed
amendments to Section 711 of the Amex Company Guide will become
effective upon SEC approval.
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\6\ Section 302 of the Amex Company Guide provides that listed
companies may not reissue treasury shares without first obtaining
shareholder approval, for any purpose where the rules or policies of
the Exchange would require such approval had the shares to be issued
been previously authorized but unissued. This requirement is
unchanged by the current proposal.
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The Exchange represents that existing plans will not require
shareholder approval unless there is a material amendment to the plan.
Proposed Commentary .01 to Section 711 of the Amex Company Guide
specifies a non-exclusive list of plan amendments that would be
considered material, and also clarifies that while broad general
authority to amend a plan would not obviate the need for shareholder
approval, if a plan permits a specific action without further
shareholder approval, then no such approval would be required. Certain
provisions in a plan, however, cannot be amended without shareholder
approval. For example, plans that contains a formula for automatic
increases in the shares available (sometimes called an ``evergreen
plan'') or for automatic grants pursuant to a dollar-based formula
cannot have a term in excess of ten years unless shareholder approval
is obtained every ten years. In addition, plans that do not contain a
formula and do not impose a limit on the number of shares available for
grant would require shareholder approval of each grant under the plan.
A requirement that grants be made out of treasury shares or repurchased
shares will not alleviate these additional shareholder approval
requirements. The proposed Commentary also provides that issuers should
strive to make plan terms easily understandable and that plans meant to
permit repricing should use explicit terminology in this regard.
With respect to plans involving a merger or acquisition,
shareholder approval would not be required in two situations. First,
shareholder approval would not be required to convert, replace or
adjust outstanding options or other equity compensation awards to
reflect the transaction. Second, shares available under certain plans
acquired in corporate acquisitions and mergers may be used for certain
post-transaction grants without further shareholder approval. This
exception applies to situations where the party which is not a listed
company following the transaction has shares available for grant under
pre-existing plans that meet the requirements of revised Section 711 of
the Amex Company Guide.\7\ These shares may be used for post-
transaction grants of options and other equity awards by the listed
company (after appropriate adjustment of the number of shares to
reflect the transaction), either under the pre-existing plan or another
plan, without further shareholder approval, so long as (1) the time
during which those shares are available for grants is not extended
beyond the period when they would have been available under the pre-
existing plan, absent the transaction, and (2) such options and other
awards are not granted to individuals who were employed by the granting
company at the time the merger or acquisition was consummated. The
Exchange would view a plan adopted in contemplation of the merger or
acquisition as not pre-existing for purposes of this exception. This
exception is appropriate because it would not result in any increase in
the aggregate potential dilution of the combined enterprise.\8\
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\7\ The Amex represents that such post-transaction grants can
only be made under pre-existing plans that were previously approved
by shareholders. Telephone conversation between Claudia Crowley,
Vice President, Listing Qualifications, Amex, and Sapna C. Patel,
Attorney, Division, Commission, on July 23, 2003.
\8\ The Amex notes that any such shares reserved for listing in
connection with the transaction would be counted by the Amex in
determining whether the transaction involved the issuance of 20% or
more of the company's outstanding common stock and thus required
shareholder approval under Section 712(b) of the Amex Company Guide.
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The adoption of tax-qualified, non-discriminatory benefit plans
(pursuant to Internal Revenue Code and Treasury Department regulations)
or parallel nonqualified plans, will not require shareholder approval,
but must be approved by either the issuer's independent compensation
committee or a majority of its independent directors. In addition, an
equity compensation plan that provides non-U.S. employees with
substantially the same benefits as a comparable tax-qualified, non-
discriminatory employee benefit plan or parallel nonqualified plan that
the issuer provides to its U.S. employees, but for features necessary
to comply with applicable foreign tax law, is also exempt from
shareholder approval under Section 711 of the Amex Company Guide.
However, the proposed rule addresses only the issue of whether
shareholder approval is required pursuant to Amex rules, and would not
impact any shareholder approval or other requirements under the
Internal Revenue Code or other applicable laws or requirements with
respect to such plans.
The Exchange is also proposing to retain its existing exception for
inducement grants to new employees (including a previous employee
following a bonafide period of non-employment by the listed company),
including grants to new employees in connection with a merger or
acquisition. The Exchange is also proposing to remove the existing
restriction which
[[Page 59653]]
limits such grants to five percent of the company's outstanding common
stock, which is in conformance with recently approved New York Stock
Exchange, Inc. (``NYSE'') and The Nasdaq Stock Market, Inc.
(``Nasdaq'') proposals.\9\ The Exchange does not believe that
shareholder approval is necessary in these circumstances for several
reasons. The Exchange believes that inducement grants are often subject
to some urgency and the need to obtain shareholder approval could thus
be impracticable. Furthermore, the Exchange believes that such grants
are negotiated at ``arms'' length'' and do not involve the potential
for self-dealing on the part of existing officers and directors.
However, the Exchange represents that all inducement grants will be
subject to approval by either the issuer's independent compensation
committee or a majority of its independent directors. Additionally, the
Exchange represents that promptly following an issuance of any
employment inducement grant in reliance on this exception, a company
must disclose in a press release the material terms of the grant,
including the recipient(s) of the grant and the number of shares
involved.
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\9\ See Securities Exchange Act Release No. 48108 (June 30,
2003), 68 FR 39995 (July 3, 2003) (order approving File Nos. SR-
NYSE-2002-46 and SR-NASD-2002-140). See also Section 303A(8) of the
NYSE's Listed Company Manual; NASD Rule 4350(i) and IM-4350-5; and
File No. SR-NASD-2003-130.
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In addition, rights and warrants issued generally to all
shareholders will not require shareholder approval, nor would plans
that merely provide a convenient way for all security holders to
purchase shares on the open market or from the issuer at fair market
value on equal terms. The Amex believes that such issuances do not
raise the same concerns regarding self-dealing and dilution as stock
option plans.
Further, the Exchange proposes to require the issuer to notify the
Exchange in writing when it uses any of the exceptions to the
shareholder approval requirement contained in Section 711 of the Amex
Company Guide, and such grants are also subject to Part 3 of the Amex
Company Guide with respect to the requirements applicable to the
additional listing of the underlying shares.
The Exchange also proposes to delete the existing provision of
Section 711 of the Amex Company Guide, which contains an exception from
the shareholder approval requirement for an option plan that does not
authorize the issuance to officers, directors or key employees of more
than five percent of outstanding common stock in any one year (provided
all such arrangements adopted without shareholder approval in any five
year period do not authorize the issuance of more than ten percent of
outstanding common stock), and which governs participation by
controlling shareholders, officers, directors and key employees in
discounted private placements.\10\
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\10\ The Exchange has submitted a separate rule change proposal
(SR-Amex-2003-70) to amend Section 713 of the Amex Company Guide to
reincorporate this policy solely in the context of discounted
private placements. The Commission notes that this separate proposed
rule change filed by the Amex is currently pending before the
Commission and has not been approved.
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Finally, the Exchange notes that the Commission has asked the Amex
to adopt a rule similar to the NYSE's rule prohibiting members and
member organizations from giving a proxy to vote without instructions
from beneficial owners when the matter to be voted on authorizes the
implementation of any equity compensation plan, or any material
revision to the terms of any existing equity compensation plan.\11\ The
Amex has consented to reconsidering this issue.\12\
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\11\ See NYSE Rule 452 and Section 402.08 of the NYSE's Listed
Company Manual.
\12\ Telephone conversation between Claudia Crowley, Vice
President, Listing Qualifications, Amex, and Sapna C. Patel, Special
Counsel, Division, Commission, on October 2, 2003. The Commission
notes that equity compensation plans have become an important issue
for shareholders. Because of the potential for dilution from such
issuances, the Commission believes that shareholders should be
making the determination rather than brokers on their behalf. The
Commission further notes that, generally under Amex rules, only
matters that are considered routine are allowed to be voted on by a
broker on behalf of a beneficial owner. Because of the recent
significance and concern about equity compensation plans, the
Commission strongly urges the Amex to designate that shareholder
approval of equity compensation plans is not a routine matter and
must be voted on by the beneficial owner.
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2. Statutory Basis
The Exchange believes that the proposed rule change, as amended, is
consistent with Section 6 of the Act \13\ in general and furthers the
objectives of Section 6(b)(5)\14\ in particular in that it is 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 facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, to protect investors
and the public interest and is not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\13\ 15 U.S.C. 78f(b).
\14\ 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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. 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. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. 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-Amex-2003-42 and should be submitted by November 6, 2003.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful review, the Commission finds that the Amex's
proposal, as amended, is consistent with the Act and the rules and
regulations promulgated thereunder applicable to a national securities
exchange and, in particular, with the requirements of Section 6(b) of
the Act.\15\ Specifically, the Commission finds that approval of the
Amex's proposal, as amended, is consistent with Section 6(b)(5) of the
Act \16\ in that it is designed to, among other things, facilitate
transactions in securities; to prevent fraudulent and manipulative acts
and practices; to promote just and
[[Page 59654]]
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 does not
permit unfair discrimination among issuers.
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\15\ 15 U.S.C. 78f(b). In approving the Amex's proposal, as
amended, the Commission has considered the proposed rule's impact on
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
\16\ 15 U.S.C. 78f(b)(5).
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The Commission has long encouraged exchanges to adopt and
strengthen their corporate governance listing standards in order to,
among other things, restore investor confidence in the national
marketplace. The Commission believes that the Amex's amended proposal,
which requires shareholder approval of equity compensation plans and
which follows the Commission's approval of similar proposals by the
NYSE and Nasdaq,\17\ is the first step under this directive because it
should have the effect of safeguarding the interests of shareholders,
while placing certain restrictions on Amex-listed companies.
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\17\ See supra note 9.
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In addition, the Commission notes that the Amex's proposal, as
amended, is similar and almost identical to proposals by NYSE and
Nasdaq requiring shareholder approval of equity compensation plans that
have previously been approved by the Commission.\18\ The Commission
believes that it has already considered and addressed the issues that
may be raised by the Amex's proposal when it approved the NYSE and
Nasdaq's proposals. The Commission notes that approval of the Amex's
proposal, as amended, will conform Amex's shareholder approval
requirements for equity compensation plans with those of the NYSE and
Nasdaq, and will immediately impose the same requirements on Amex
issuers as those imposed upon NYSE and Nasdaq issuers. The adoption of
these standards by the Amex is an important step to ensure that issuers
will not be able to avoid shareholder approval requirements for equity
compensation plans based on their listed marketplace.
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\18\ See supra note 9.
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A. Exception From Shareholder Approval for Inducement Grants
The Commission believes that the requirement that the issuance of
all inducement grants be subject to review by either the issuer's
independent compensation committee or a majority of the board's
independent directors, under the Amex's amended proposal, should
prevent abuse of this exception from shareholder approval. The
Commission notes that the Amex is proposing to include a requirement,
similar to the requirement under NYSE's recently approved shareholder
approval rule, that, promptly following the grant of any inducement
award, companies must disclose in a press release the material terms of
the award, including the recipient(s) of the award and the number of
shares involved.\19\ The Commission notes that the Amex is also
proposing a requirement, similar to the requirements under the NYSE and
Nasdaq's recently approved shareholder approval rules,\20\ that an
issuer must notify it in writing when it uses this exception, and/or
any other exception, from its shareholder approval requirement. The
Commission believes that these disclosure and notification requirements
will provide transparency to investors and should reduce the potential
for abuse of this exception for inducement grants.
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\19\ This disclosure would, of course, be in addition to any
information that is required to be disclosed in annual reports filed
with the Commission. For example, Item 201(d) of Regulation S-K [17
CFR 229.201(d)] and Item 201(d) of Regulation S-B [17 CFR
228.201(d)] require issuers to present--in their annual reports on
Form 10-K or Form 10-KSB--separate, tabular disclosure concerning
equity compensation plans that have been approved by shareholders
and equity compensation plans that have not been approved by
shareholders.
\20\ See Section 303A(8) of the NYSE's Listed Company Manual and
NASD Rules 4310(c)(17)(A) and 4320(e)(15)(A) .
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In addition, the Amex proposes to limit its exception for
inducement grants to new employees or to previous employees being
rehired after a bona fide period of interruption of employment, and to
new employees in connection with an acquisition or merger. The
Commission believes that these limitations should help to prevent the
inducement exception from being used inappropriately.
B. Exception From Shareholder Approval for Mergers and Acquisitions
The Commission notes that the Amex's exception from shareholder
approval for mergers and acquisitions contains safeguards that should
prevent abuse in this area. First, only pre-existing plans that were
previously approved by the acquired company's shareholders would be
available to the listed company for post-transactional grants. In
addition, shares under those previously approved plans could not be
granted to individuals who were employed, immediately before the
transaction, by the post-transaction listed company or its
subsidiaries. The Commission also notes that, under both the Amex's
proposal, as amended, any shares reserved for listing in connection
with a merger or acquisition pursuant to this exception would be
counted by the Amex in determining whether the transaction involved the
issuance of 20% or more of the company's outstanding common stock,
thereby requiring shareholder approval under Section 712(b) of the Amex
Company Guide. Finally, the Commission notes that the Amex proposes an
additional requirement that an issuer must notify it in writing when it
uses this exception, and/or any other exception, from its shareholder
approval requirement. Based on the above, the Commission believes that
the Amex has provided measures to ensure that the exception for mergers
and acquisitions is only used in limited circumstances, which should
help reduce the potential for dilution of shareholder interests.
C. Exception From Shareholder Approval for Tax Qualified and Parallel
Nonqualified Plans
The Commission believes that, given the extensive government
regulation--the Internal Revenue Code and Treasury regulations--for tax
qualified plans and the general limitations associated with parallel
nonqualified plans, shareholders should not experience significant
dilution as a result of this exception. In addition, the Commission
notes that the Amex proposes to add a limitation under this exception
that a plan would not be considered a nonqualified parallel under its
proposal if employees who are participants in such plans receive
employer contributions under the plans in excess of 25% of the
participants' cash compensation. The Commission further notes that the
Amex proposes an additional requirement that an issuer must notify it
in writing when it uses this exception, and/or any other exception,
from its shareholder approval requirement. The Commission believes
that, taken together, these limitations should reduce concerns
regarding abuse of this exception from the shareholder approval
requirements.
In addition, the Commission notes that, similar to the exemption
under Section 303A(8) of the NYSE's Listed Company Manual, the Amex
proposes to adopt an exception from the shareholder approval
requirements for an equity compensation plan that provides non-U.S.
employees with substantially the same benefits as a comparable tax
qualified, non-discriminatory employee benefit plan or parallel
nonqualified plan that the issuer provides to its U.S. employees, but
for features necessary to comply with applicable foreign tax law. The
Commission believes that this change will conform Amex's shareholder
approval rule to that of the NYSE and will provide greater clarity for
issuers regarding tax qualified, non-
[[Page 59655]]
discriminatory employee benefit plans and parallel nonqualified plans
for their non-U.S. employees.
D. Material Amendments to Plans
The Commission notes that the Amex proposes to provide a non-
exclusive list, similar to lists found in the NYSE and Nasdaq's
shareholder approval rules,\21\ as to what constitutes a material
amendment to a plan. As noted above, material amendments to plans will
require shareholder approval under Amex rules. A material amendment
under the Amex proposal, as amended, would include, but is not limited
to: A material increase in the number of shares to be issued under the
plan (other than to reflect a reorganization, stock split, merger,
spinoff or similar transaction); a material increase in benefits to
participants, including any material change to (1) permit a repricing
(or decrease in exercise price) of outstanding options, (2) reduce the
price at which shares or options to purchase shares may be offered, or
(3) extend the duration of the plan; a material expansion of the class
of participants eligible to participate in the plan; an expansion of
the type of options or awards available under the plan. The Amex's
proposal, as amended, also describes what would constitute a material
amendment for plans containing a formula for automatic increases (such
as evergreen plans) and automatic grants requiring shareholder
approval.
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\21\ See supra note 9.
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The Commission believes that the Amex's non-exclusive list of what
would constitute a material amendment to a plan provides companies with
clarity and guidance for when certain amendments to plans would require
shareholder approval. The Commission also believes that the Amex's
proposal to conform its non-exclusive list with the NYSE and Nasdaq's
rules on material amendments/revisions should help to ensure that the
concept of material amendments is consistent among the markets so that
differences between the markets cannot be abused.
E. Repricing of Plans
The Commission notes that, under the Amex's proposal, as amended,
if a plan is amended to permit repricing, such an amendment would be
considered a material amendment to a plan requiring shareholder
approval. In addition, the Amex recommended in its proposal that plans
meant to permit repricing should explicitly and clearly state that
repricing is permitted.
The Commission believes that the Amex's proposal, as amended,
should benefit shareholders by ensuring that companies cannot do a
repricing of options, which can have a dilutive effect on shares,
without explicit shareholder approval of such provisions and their
terms. The Commission also believes that the Amex's approach to
repricings is similar to the NYSE and Nasdaq's respective approaches to
repricings, and should offer companies clarity and guidance as to when
a change in a plan regarding the repricing of options would trigger a
shareholder approval requirement.
F. Evergreen or Formula Plans and Plans Without a Formula or Limit on
the Number of Shares Available
The Commission notes the Amex's proposal, as amended, provides
guidance for the treatment of evergreen/formula plans. More
specifically, under the Amex's proposal, as amended, if a plan contains
a formula for automatic increases in the shares available or for
automatic grants pursuant to a formula, such plans cannot have a term
in excess of ten years unless shareholder approval is obtained every
ten years. In addition, under the Amex's proposal, as amended, if a
plan contains no limit on the number of shares available and is not a
formula plan, then each grant under the plan will require separate
shareholder approval. Furthermore, the Amex's proposal, as amended,
provides that a requirement that grants be made out of treasury or
repurchased shares will not alleviate the need for shareholder approval
for additional grants.\22\
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\22\ See also supra note 8.
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The Commission believes that these provisions should help to ensure
that certain terms of a plan cannot be drafted so broad as to avoid
shareholder scrutiny and approval. The Commission also believes that
Amex's proposed rules relating to the treatment of evergreen/formula
plans and plans that do not contain a formula or place a limit on the
number of shares available should provide more clarity and transparency
to issuers as to when shareholder approval would be required for such
plans. Finally, the Commission believes that the provision ensuring
that treasury and repurchased shares cannot be used to avoid these
additional shareholder approval requirements strengthens the proposal
and ensures that companies cannot avoid compliance with the rule.
G. Miscellaneous Provisions and Other Items
The Commission notes that the Amex's amended proposal--similar to
the NYSE and Nasdaq's recently approved shareholder approval rules
\23\--incorporates the term ``equity compensation'' and proposes that
plans that merely provide a convenient way to purchase shares in the
open market or from the issuer at fair market price on equal terms to
all security holders would not require shareholder approval. The
Commission believes that the Amex's proposal, as amended, is consistent
with the NYSE and Nasdaq's rules in this area and should provide
greater clarity with respect to which plans would and would not require
shareholder approval.
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\23\ See supra note 9.
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The Commission notes that the Amex's proposal, as amended, provides
that pre-existing plans, which were adopted prior to the SEC's approval
of the Amex's proposal, would essentially be ``grandfathered'' and
would not require shareholder approval unless the plans were materially
amended. The Commission believes that this clarification should provide
companies with guidance as to which plans would be subject to the new
Amex shareholder approval requirements.
Finally, the Commission urges the Amex to quickly adopt a standard
prohibiting discretionary broker voting of equity compensation plans.
NASD rules do not provide for broker voting on any matters, and NYSE
rules prohibit broker voting on equity compensation plans. In its
approval of the NYSE and Nasdaq proposals, the Commission considered
the impact on smaller issuers, such as those listed on Nasdaq and the
Amex, in response to the comments received on this issue.\24\ The
Commission believes that the benefit of ensuring that the votes reflect
the views of beneficial shareholders on equity compensation plans
outweighs the potential difficulties in obtaining the vote, and,
therefore, strongly recommends that the Amex quickly adopt a
prohibition on broker voting of equity compensation plans.\25\
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\24\ See also supra notes 9 and 11.
\25\ See also supra note 12 and accompanying text.
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H. Summary
Overall, the Commission believes that the Amex's proposal, as
amended, is similar to the NYSE and Nasdaq's recently approved
shareholder approval rules.\26\ The Commission therefore believes that
the Amex's proposal, as amended, should provide for more clear
[[Page 59656]]
and uniform standards for shareholder approval of equity compensation
plans. The Commission notes that, even with the availability of the
proposed limited exceptions to shareholder approval under the Amex's
proposal, as amended, shareholder approval under the new standards
would be required in more circumstances than under existing Amex rules.
The Commission further notes that the Amex proposes to adopt a
requirement that an issuer must notify it in writing when it uses one
of the exceptions from the shareholder approval requirements. The
Commission believes that such a requirement, coupled with the
additional disclosure requirements for inducement grants, should reduce
the potential for abuse of any of the exceptions.\27\
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\26\ See supra note 9.
\27\ See also supra note 19 and accompanying text.
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The Commission believes that the Amex's proposal, as amended, which
is similar to the NYSE's shareholder approval rule and almost identical
to Nasdaq's shareholder approval rule,\28\ sets a consistent, minimum
standard for shareholder approval of equity compensation plans. The
Commission believes that the Amex's proposal, as amended, should help
to ensure that companies will not make listing decisions simply to
avoid shareholder approval requirements for equity compensation plans
and should provide shareholders with greater protection from the
potential dilutive effect of equity compensation plans. Based on the
above, the Commission finds that the Amex's proposal, as amended,
should help to protect investors, are in the public interest, and do
not unfairly discriminate among issuers, consistent with Sections 6(b)
of the Act.\29\ The Commission therefore finds the Amex's proposal, as
amended, to be consistent with the Act and the rules and regulations
thereunder.
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\28\ See supra note 9.
\29\ 15 U.S.C. 78f(b)(5).
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V. Accelerated Approval of the Amex's Proposal and Amendment Nos. 1, 2
and 3
The Commission finds good cause for approving the Amex's proposal,
as amended, prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register. The Commission notes that the
Amex's proposal, as amended, is similar to the NYSE's proposal and
almost identical to the Nasdaq's proposal requiring shareholder
approval of equity compensation plans. Both the NYSE and Nasdaq
proposals were published for comment in the Federal Register and
recently approved by the Commission.\30\ The Commission believes that
it already considered and addressed the issues that may be raised by
the Amex's proposal in its approval of the NYSE and Nasdaq's
proposals.\31\
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\30\ See Securities Exchange Act Release No. 46620 (October 8,
2002), 67 FR 63486 (notice of the NYSE's proposal). The Commission
also published a correction to the notice of the NYSE's proposal.
See Securities Exchange Act Release No. 44620A (October 21, 2002),
67 FR 65617 (October 25, 2002). See Securities Exchange Act Release
No. 46649 (October 11, 2002), 67 FR 64173 (notice of Nasdaq's
proposal). See supra note 9.
\31\ Some of the substantive provisions ultimately adopted by
the NYSE and Nasdaq, and now being proposed for adoption by the
Amex, were in response to these comments. The comments on the NYSE
and Nasdaq proposals were also discussed in detail in the
Commission's approval order of the NYSE and Nasdaq proposals. See
supra note 9.
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The Commission believes that accelerated approval of the Amex's
proposal, as amended, is essential to allow for immediate harmonization
of, and consistency in, the shareholder approval requirements for
equity compensation plans between the Amex, the NYSE, and Nasdaq. This
will prevent issuers from making listing decisions based on differences
in self-regulatory organization shareholder approval requirements and
should provide equal investor protection to shareholders on the
dilutive effects of plans irrespective of where the security trades.
The Commission further believes that making the Amex's new shareholder
approval rules effective upon Commission approval will immediately
impose the same requirements on Amex issuers as those imposed upon NYSE
and Nasdaq issuers. Based on the above, the Commission finds good
cause, consistent with Sections 6(b)(5) and 19(b)(2) of the Act \32\ to
approve the Amex's proposal, as amended, on an accelerated basis.
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\32\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\33\ that the proposed rule change (SR-Amex-2003-42) and Amendment
Nos. 1, 2 and 3 are hereby approved on an accelerated basis.
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\33\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26103 Filed 10-15-03; 8:45 am]
BILLING CODE 8010-01-P