NYSE Proposes to Amend Exclusions from Equity Compensation Rules to Mirror Practice
The New York Stock Exchange proposes to amend Section 303A.08 of the Manual to clarify the circumstances under which certain sales of a listed company’s securities will not be deemed to be equity compensation for purposes of that rule. The rule proposal states as follows:
Section 303A.08 provides that an “equity-compensation plan” is a plan or other arrangement that provides for the delivery of equity securities (either newly issued or treasury shares) of the listed company to any employee, director or other service provider as compensation for services. The adoption of an equity compensation plan under the rule — or any material revision to a plan — is subject to shareholder approval. However, Section 303A.08 provides for certain exclusions from its definition of equity compensation plan, including for:
Plans that merely allow employees, directors or other service providers to elect to buy shares on the open market or from the listed company for their current fair market value, regardless of whether the:
– shares are delivered immediately or on a deferred basis; or
– payments for the shares are made directly or by giving up compensation that is otherwise due (for example, through payroll deductions).
The Exchange has always interpreted the above provision with respect to the purchase of shares for fair market value as applying only when the securities are acquired directly from the company, either in the form of treasury shares or newly-issued shares. Plans that merely allow their participants to elect to buy shares on the open market do not give rise to any concern about diluting the economic interests of the company’s shareholders.
For purposes of the above exclusion from the definition of equity compensation plan, the Exchange has always interpreted “current fair market value” as requiring that the price used be the most recent official closing price on the Exchange. For the avoidance of doubt, the Exchange now proposes to include in Section 303A.08 text specifying how the fair market value of the issuer’s common stock should be calculated for this purpose. “Fair market value” will be defined as the most recent official closing price on the Exchange, as reported to the Consolidated Tape, at the time of the issuance of the securities. For example, if the securities are issued after the close of the regular session at 4:00 pm Eastern Standard Time on a Tuesday, then Tuesday’s official closing price will be used. If the securities are issued 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 will be used.
The proposed definition of fair market value under Section 303A.08 is modeled on the definition of “Official Closing Price” set forth in Section 312.04(j), as such definition is proposed to be amended by this filing (as discussed below). However, the definitions differ in one material respect. The Official Closing Price as defined in Section 312.04(j) (as proposed to be amended) when used in calculating whether a transaction qualifies for an applicable exemption from the shareholder approval requirements of Sections 312.03(b) and (c) is defined as the most recent official closing price on the Exchange, as reported to the Consolidated Tape, at the time of the signing of a binding agreement to issue the securities. By comparison, “fair market value” for purposes of Section 303A.08 will be the most recent official closing price on the Exchange, as reported to the Consolidated Tape, at the time of the issuance of the securities themselves, rather than most recently reported at the time of the signing of the binding agreement.
In particular, issuers may issue shares in lieu of cash at the election of participants in a deferred compensation arrangement because the exclusion from the definition of equity compensation plan applies to plans that allow employees, directors and service providers to elect to buy shares from the listed company for their current fair market value regardless of whether the shares are issued immediately or on a deferred basis. Arrangements of this type are common and they are appropriate as they are primarily designed to ensure that the issuances under the deferred compensation arrangement are not economically dilutive to the other shareholders at the time of such issuance. For example, a director compensation plan may require its participants to defer receipt of a portion of their director fees until the director retires from the board. Such arrangements may provide that an individual director can elect to receive shares in lieu of the deferred cash compensation, with the number of shares to which such director is entitled representing the number of shares whose fair market value at the time of issuance equals the amount of the deferred compensation. Because any economic dilution to the issuer’s shareholders would be incurred at the time of the deferred issuance, requiring that the shares are issued for fair market value measured at the time of issuance of the shares rather than at the time the company incurs the obligation ensures that the issuance is not economically dilutive.
The Exchange also proposes to clarify the definition of “Official Closing Price” used in Section 312.04(j) of the Manual. That provision currently reads in relevant part as follows:
“Official Closing Price” of the issuer’s common stock means the official closing price on the Exchange as reported to the Consolidated Tape immediately preceding the signing of a binding agreement to issue the securities.
As amended, the provision will read as follows:
“Official Closing Price” of the issuer’s common stock means the most recent official closing price on the Exchange, as reported to the Consolidated Tape, at the time of the signing of a binding agreement to issue the securities.
The purpose of this amendment is simply to clarify the meaning of the provision and it is not intended to have any substantive effect.
Contact Steve Quinlivan for more information.