| Release No. 34-29131 Release No. 35-25303 Release No. IC-18114 April 26, 1991 56 F.R. 19925
|
 Table of Contents
|
I. SHAREHOLDER APPROVAL REQUIREMENTS
Rule 16b-3 requires as a condition to exemption that plans and material plan amendments be approved by shareholders.6 Consistent with the former rules, new Rule 16b-3's shareholder approval requirement does not apply to two types of plans, both established as trusts. First, plans in trust form are excluded where less than 20 percent of the total market value of securities held by the trust are employer securities held by insiders.7 Second, pension and retirement plans in trust form are excluded when they have broad-based employee participation.8
In this connection, questions have arisen with respect to the effect of plan withdrawal provisions on a plan's status as a pension or retirement plan. Recognizing the types of withdrawals authorized, the types of withdrawals penalized and the nature of the penalties imposed by the Internal Revenue Code (the "Code") on plans qualified under Section 401(k) of the Code,9 such plans will be considered pension or retirement plans under former Rule 16a-8(g)(3) and new Rule 16b-3(b)(3)(ii).10
II. INTERPRETATION OF PLAN AMENDMENT SHAREHOLDER APPROVAL REQUIREMENTS
Rule 16b-3 requires shareholder approval of plan amendments in three circumstances. Specifically, "any amendment to the plan shall be ... approved [by shareholders] if the amendment would: (A) materially increase the benefits accruing to participants under the plan; (B) materially increase the number of securities which may be issued under the plan;11 or (C) materially modify the requirements as to eligibility for participation in the plan."12
Whether an amendment requires shareholder approval depends first, on whether the amendment affects insiders, and second, if it affects insiders, on whether the amendment is "material" as discussed below. A plan amendment requires shareholder approval only where it materially increases the number of securities issuable to insiders, modifies eligibility requirements to add a class of insiders, or increases benefits to insiders.13
An objective analysis is appropriate with respect to whether an amendment materially increases the number of shares issuable under a plan. But with respect to whether a plan amendment materially modifies eligibility or increases benefits by, for example, adding a new class of insiders or type of award or grant, a qualitative analysis is appropriate. The qualitative analysis should be applied in light of both the plan provisions previously presented to shareholders for their approval and the amendment's purposes and effects.
A. Increases Securities Issuable
Amendments increasing the number of securities issuable to insiders under the plan by more than ten percent are material.14 The ten percent test is based on the amount of securities issuable under the plan as last expressly approved by shareholders.15 Increases to reflect stock splits and stock dividends are not included in the ten percent calculation.
B. Modify Eligibility
An amendment that adds a class of insiders is a material amendment regardless of the number in the class added, unless the amendment is needed to comport with changes in the Code, the Employee Retirement Income Security Act of 1974 ("ERISA"),16 their rules or other laws.17 For example, where a plan is amended to add outside directors as a new class of insider participants, shareholders approval is required.18 A new class of insiders also would be added as a consequence of a plan amendment decreasing a plan's minimum length of service eligibility requirement.19 On the other hand, where the plan is amended to reflect an increase in the number of insiders in a class previously eligible to participate, due to, for example, an acquisition of another company, the amendment does not modify eligibility requirements materially.
C. Increase Benefits
Numerous questions have arisen about whether particular types of plan amendments are deemed to increase benefits materially. When a plan sponsor determines that a plan amendment is necessary or desirable to authorize additional benefits, whether the amendment requires shareholder approval will depend on the nature of the benefits authorized by the amendment and on how comparable they are to those benefits previously authorized by shareholders under the plan.20 The Commission recognizes that, although the determination of whether a plan amendment requires shareholder approval is therefore usually dependent on the pre-existing terms of the plan, the Commission's concern for shareholders' interest in the level of compensation obliges it to seek to expedite future requests for staff advice as to the applicability of the shareholder approval requirement to proposed plan amendments. The following interpretations address some of the more common shareholder approval questions. The Commission has requested the Division to monitor future interpretive letters with the objective of publishing further interpretive releases on this subject, as appropriate.
In some instances the Division has found that amendments to plans authorize benefits so comparable to those previously authorized under the plan that shareholder approval is not required.21 For example, shareholder approval was not required where a plan amendment permitted an insider to use previously acquired shares, or to have shares withheld, to satisfy an option exercise payment when the plan previously authorized SARs.22 Similarly, an amendment to a plan that previously had authorized SARs to permit the employer to make plan-related non-market rate loans to insiders to help them exercise options did not require shareholder approval.23 These amendments will continue to be viewed as not requiring shareholder approval.
In contrast, there are instances where amendments to plans authorize benefits so unlike those previously authorized under the plan that shareholder approval is required. For example, if a plan amendment is necessary to allow the grant of appreciation rights that are exercisable upon or following certain events, and/or that provide a benefit measured in a manner different from what the plan otherwise permits,24 shareholder approval of such an amendment will be required.25 Similarly, an amendment to permit issuance of reload options generally requires shareholder approval notwithstanding other provisions of the plan that authorize SARs or permit insiders to use previously acquired shares or have shares withheld to pay for option exercise.26 The reload option permits the insider optionee to receive not only the original option spread, but the spread on follow-up grants as well the aggregate amount of which may approach or exceed the original spread.
As has been the case traditionally, the following amendments also are viewed as not increasing benefits materially and therefore do not require shareholder approval. First, a plan amendment adjusting option terms to reflect a restructuring transaction, such as a holding company formation, stock split or dividend, extraordinary dividend, spin-off or issuance of repurchase rights, does not require shareholder approval where the plan includes an anti-dilution provision.27 Second, an amendment allowing insider participants to elect to have shares withheld, or to deliver previously owned shares, to satisfy federal (including FICA), state and local tax withholding requirements or liability, up to the amount calculated by applying the insider's maximum marginal rate, arising from (1) the exercise for securities of an option, warrant or similar right related to any shares withheld; or (2) the receipt or vesting of shares or similar securities related to any shares withheld, does not require shareholder approval.28 Third, plan amendments needed to comport with changes in the Code, ERISA, their rules29 or other laws do not require shareholder approval.30 Fourth, shareholder approval is not required for an amendment to permit insider participants to defer and/or direct installment payment of distributions.31 Finally, a plan amendment to pay benefits to a greater extent in stock and to a lesser extent in cash than previously provided does not require shareholder approval.32
Questions also arise as to plan amendments that convert discretionary company contributions to mandatory contributions. Such an amendment does not provide benefits comparable to those under previously authorized provisions approved by shareholders and requires shareholder approval.33
Finally, former Rule 16b-3 addressed "any amendment to the plan" but also had been applied to amendments affecting outstanding awards, grants or securities. Henceforth, in such cases the determination will turn on whether the amended terms of the outstanding awards, grants or securities would be permitted for new issuances under the plan and whether the plan itself satisfies the shareholder approval requirement. Where an amendment affects outstanding awards, grants or securities, if the amended terms are consistent with the plan and the plan satisfies the shareholder approval requirement, the amendment does not require separate shareholder approval.34 In essence the change is viewed and analyzed simply as a new grant or award under the plan.35 Thus, for example, if a stock option originally was awarded with a vesting period of four years, and one year after grant an amendment reduced the vesting period to two years from the original grant, the amendment would be considered a new grant of an option with a one year vesting period. If, at the time of the amendment, the plan permitted the issuance of options with a one year vesting period, the amendment would not require shareholder approval. Likewise, if a plan was amended to permit payment in cash, in whole or in part, of an outstanding award, originally required to be paid in securities, the amendment would not require shareholder approval if the insider could be given a similar type of new award payable in cash.36
III. OTHER MATTERS
The Commission solicited comment in the Adopting Release concerning "exit boxes" that were included on the final Forms 4 and Forms 5. The comment period expired March 31, 1991 without any comment being received. As such, the Commission has elected to retain the exit boxes on the forms, as set forth in the Adopting Release.
IV. TECHNICAL AMENDMENTS TO THE FINAL RULES
The Commission is issuing technical amendments to the following rules in Part 240: Rule 16a-1(a)(2)(ii); Rule 16a-1(c)(3); Rule 16a-1(f); Rule 16a-4(b) and (c); Rule 16a-8(b); Rule 16b-3(c)(2)(i); Rule 16b-3(e); and Rule 16b-3(g). The technical amendments are intended to correct and clarify these rules by making the changes listed below.
List of Subjects in 17 CFR Parts 240, 241, 251, and 271
Reporting, recordkeeping requirements, and securities.
In accordance with the foregoing, Title 17 Chapter II of the Code of Federal Regulations is amended as follows:
PART 240 GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934
1. The authority citation for Part 240 continues to read as follows: Authority: 15 U.S.C. 77c, 77d, 77s, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 78s, 78w, 78x, 79q, 79t, 80a-29, 80a-37, unless otherwise noted.
2. In §240.16a-1, paragraph (a)(2)(ii)(A) is amended by adding a proviso and cross-reference after the semicolon, paragraphs (c)(3)(i), (c)(3)(ii), and the first sentence of paragraph (f) are revised as follows:
§240.16a-1 Definition of Terms.
* * * * *
(a) * * *
(A) * * * provided, however, that the presumption of such beneficial ownership may be rebutted; see also §240.16a-1(a)(4);
* * * * *
(c) * * *
(i) are awarded pursuant to an employee benefit plan satisfying the provisions of §240.16b-3(a)(1), (a)(2) and (c)(2); or (ii) may be redeemed or exercised only upon a fixed date or dates at least six months after award, or incident to death, retirement, disability or termination of employment;
* * * * *
(f) The term "officer" shall mean an issuer's president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice-president of the issuer in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer. * * *
* * * * *
3. By revising the introductory text to paragraph (b) and the introductory text of paragraph (c) of §240.16a-4 to read as follows:
§240.16a-4 Derivative Securities.
* * * * *
(b) The exercise or conversion of a call equivalent position, if exempt from Section 16(b) of the Act, shall be reported no later than the next Form 4 otherwise required or the Form 5 filed with respect to the fiscal year in which the transaction occurred, whichever is earlier, and all exercises and conversions, whether exempt or not, shall be treated for reporting purposes as:
* * * * *
(c) The exercise or conversion of a put equivalent position, if exempt from Section 16(b) of the Act, shall be reported no later than the next Form 4 otherwise required or the Form 5 filed with respect to the fiscal year in which the transaction occurred, whichever is earlier, and all exercises and conversions, whether exempt or not, shall be treated for reporting purposes as:
* * * * *
4. By revising the introductory text of paragraph (b) of §240.16a-8 as follows:
§240.16a-8 Trusts.
* * * * *
(b) Trust Holdings and Transactions. Holdings and transactions in the issuer's securities held by a trust shall be reported by the trustee on behalf of the trust, if the trust is subject to Section 16 of the Act, except as provided below. Holdings and transactions in the issuer's securities held by a trust (whether or not subject to Section 16 of the Act) may be reportable by other parties as follows:
* * * * *
5. In §240.16b-3, by revising paragraph (c)(2)(i) and the introductory text of paragraphs (e) and (g) as follows:
§240.16b-3 Employee Benefit Plan Transactions.
* * * * *
(c)* * *
(i) Disinterested Administration. The grant or award is made pursuant to an employee benefit plan in which the selection of officers and directors for participation and decisions concerning the timing, pricing, and amount of a grant or award, if not determined under a formula meeting the conditions in paragraph (c)(2)(ii) of this section, are made solely by the board of directors, if each member is a disinterested person, or a committee of two or more directors, each of whom is a disinterested person, i.e., a director who is not, during the one year prior to service as an administrator of a plan, or during such service, granted or awarded equity securities pursuant to the plan or any other plan of the issuer or any of its affiliates, except that:
* * * * *
(e) Cash Settlements of Stock Appreciation Rights and Tax Withholding. A transaction involving the exercise and cancellation of a stock appreciation right (whether or not the transaction also involves the related surrender and cancellation of a stock option), and the receipt of cash in complete or partial settlement of that right, or the cash settlement of an equity security to satisfy the tax withholding consequences of either the receipt or vesting of the equity security or the exercise of a derivative security related to the equity security, which shall be deemed a stock appreciation right, shall be exempt from Section 16(b) of the Act if the plan satisfies the conditions of paragraph (a) and paragraph (b) of this §240.16b-3, if applicable, and the following conditions are met:
* * * * *
(g) Distributions of Plan Securities. A distribution to a participant of securities that have been held pursuant to a plan for the benefit of that participant shall be exempt from Section 16(b) of the Act if the plan satisfies the conditions of paragraph (a) and paragraph (b), if applicable, and the acquisition of the securities under the plan satisfied the conditions of either paragraph (c) or (d) of this §240.16b-3.
* * * * *
PART 241 INTERPRETIVE RELEASES RELATING TO THE SECURITIES EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER
PART 251 INTERPRETIVE RELEASES RELATING TO THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 AND GENERAL RULES AND REGULATION THEREUNDER
PART 271 INTERPRETIVE RELEASES RELATING TO THE INVESTMENT COMPANY ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER
Parts 241, 251 and 271 of Title 17, Chapter II of the Code of Federal Regulations are amended by adding this Release Nos. 34-29131, 35-25303, IC-13114 (April 26, 1991) to the lists of interpretive releases.
By the Commission.
1 Release No. 34-28869 (February 8, 1991) [56 FR 7242] (the "Adopting Release").
2 15 U.S.C. 78p (1988).
3 15 U.S.C. 78a et seq. (1988).
4 17 CFR 240.16b-3. References in this release to "Rule 16b-3" include both former and newly adopted ("new") Rule 16b-3 unless otherwise specified.
5 An "insider" is: (1) pursuant to Section 16(a) of the Exchange Act, an officer or director of an issuer with a class of equity securities registered under Section 12 of the Exchange Act [15 U.S.C. 78l (1988)] or a holder of over ten percent of any such class; (2) pursuant to Section 30(f) of the Investment Company Act [15 U.S.C. 80a-29(f) (1988)], an officer, director, member of an advisory board, investment adviser or affiliated person of an investment adviser of a registered closed end investment company or a holder of over ten percent of a class of securities (other than short-term paper) issued by such a company; or (3) pursuant to Section 17(a) of the Public Utility Holding Company Act of 1935 [15 U.S.C. 79q(a) (1988)], an officer or director of a registered public utility holding company.
Under the new rules, the term "officer" includes an issuer's president, principal financial officer, principal accounting officer (or controller where there is no principal accounting officer), vice presidents in charge of a principal business unit or function and any other person, whether employed by the issuer or its parent or subsidiary, who performs similar policy-making functions for the issuer. See new Rule 16a-1(f), Section IV, infra.
6 Issuers also may be required to seek shareholder approval for their benefit plans pursuant to state law or the rules of self-regulatory organizations. See, e.g., N.Y. Bus. Corp. Law Section 505(d); NYSE Company Manual Section 312.03(a).
7 See new Rule 16b-3(b)(3)(i). These plans have been exempt under former Rule 16a-8(b). The phrase used in that rule, "consists of equity securities with respect to which reports would otherwise be required," has been replaced with "consists of equity securities held by persons subject to section 16(a) of the Act," which comports with the manner in which the former Rule has been interpreted.
8 See new Rule 16b-3(3)(ii). These plans have been exempt under former Rule 16a-8(g)(3). The phrase used in that Rule, "whose employees generally are the beneficiaries of the plan," has been replaced with "providing for broad-based employee participation," which comports with the manner in which the former rule has been interpreted and is essentially the same phrase used in new Rule 16b-3(d)(2)(1)(A). A plan satisfying the conditions of Section 410(b) of the Internal Revenue Code [26 U.S.C. 410(b) (1988)] satisfies the requirement for broad-based employee participation.
9 26 U.S.C. 401(k) (1988). Section 72(t) of the Code [26 U.S.C. 72(t) (1988)] generally imposes a ten percent tax on pre-age 591/2 withdrawals. Section 72(t) generally does not impose the tax on pre-age 591/2 withdrawals in connection with (1) death; (2) disability; (3) an annuity; (4) post-age 55 separation from service; (5) dividends; (6) medical expenses; and (7) qualified domestic relations orders.
10 This position modifies the position expressed in Release No. 34-18114 (Sept. 24, 1981) [46 FR 48147] (the "1981 Q&A Release") at question and answer ("Q&A") 70 and certain letters issued by the Division of Corporation Finance (the "Division"). Q&A 70 stated that for a plan to be regarded as a pension or retirement plan under former Rule 16a-8(g)(3), significant penalties had to accompany early plan withdrawals and cited as examples penalties other than those imposed by the current Code. Letters reflecting the position prior to modification include, for example, Gainsco, Inc. (March 19, 1991) (the staff's position granted largely in reliance on the plan's providing a one year participation suspension for any insider making an early plan withdrawal).
11 Former Rule 16b-3(c) and new Rule 16b-3(a)(1) require that plans limit the number of securities issuable by requiring them to specify the amount of securities to be awarded or the method by which the amount is to be determined. See Thompson, Hine and Flory (March 29, 1991).
12 Former Rule 16b-3(a) and New Rule 16b-3(b).
13 To the extent that the 1981 Q&A release and Division letters suggest that insiders are not the sole focus of inquiry in determining whether shareholder approval is necessary, that position is modified.
14 For purposes of determining the number of shares issued under a plan, the gross rather than net number of shares actually issued must be used. Therefore, shares tendered back by participants could not be added back in determining the number of shares available for issuance under the plan. See, e.g., Anheuser-Busch Companies, Inc. (Dec. 20, 1990). Shares underlying expired or cancelled and unexercised options or other derivative securities, however, could be added back.
15 Historically, shareholder approval has not been required for an amendment extending a plan expiration date if the number of shares issuable is not increased as a result. See, e.g., South Carolina National Corporation (Jan. 8, 1991). The Commission intends to continue following this position.
16 29 U.S.C. 1001 et seq. (1988).
17 See, e.g., NCNB Corporation and Designated Subsidiaries Stock/Thrift Plan and Trust (March 2, 1989) (amendment to decrease two-year eligibility requirement for participation to one-year does not require shareholder approval where decrease required to comport with a change in the Code). Similarly, an amendment needed to comport with the law that increases benefits does not require shareholder approval. See Section II.C, infra.
18 Prior letters to the contrary may not be relied on with respect to plan amendments effected after publication of this release. See, e.g., Transamerica Corporation (March 30, 1990) (amendment to add a class of 13 non-employee directors did not require shareholder approval).
19 Q&A 100(d) stated that an amendment waiving a two-year eligibility requirement for participation that significantly increases the number of participants, including insiders, was required to be approved by shareholders. To the extent that Q&A 100(d) suggests that the number of insiders added is significant, this position no longer may be relied upon with respect to plan amendments affected after publication of this release. As to prior letters that no longer may be relied upon with repect to plan amendments effected after publication of this release, see, e.g., X/L Datacomp, Inc. (March 2, 1987) (amendment to delete five-month eligibility requirement for participation did not require shareholder approval).
20 Statements throughout this section on increases in benefits to the effect that shareholder approval is not required for an amendment assume that the amendment does not increase the number of securities issuable or modify eligibility requirements materially.
21 This analysis of future awards also extends to amendments affecting outstanding awards, grants or securities.
22 See, e.g., C.R. Bard, Inc. (March 3, 1989). This is true because such an amendment may be viewed as creating an SAR by allowing insiders to obtain their options' spread with no cash investment by pyramiding their shares. See Colema Realty v. Bibow, 555 F. Supp. 1030 (D. Conn. 1983) (amendment permitting insiders to use shares to pay option exercise prices enabled them to pyramid and thereby created the equivalent of an SAR). Pyramiding is the use of shares to exercise options for a greater number of shares which, in turn, are used to exercise even more options until all options sought to be exercised are exercised. Where the plan does not already authorize SARs or allow use of previously owned shares or withholding, shareholder approval would be required. See also Release No. 34-19756 (May 24, 1983) [48 FR 23173].
23 See, e.g., The Walt Disney Company (Dec. 26, 1986). Prior letters involving amendments introducing loan programs that did not examine whether SARs were authorized may not be relied on with respect to plan amendments effected after publication of this release. See Media General, Inc. (May 8, 1981) (amendment permitting company to make loans to participants to exercise plan options did not require shareholder approval).
24 For example, plan sponsors often seek to amend plans so that "limited SARs" (LSARs') that are exercisable only after certain triggering events (typically, a shift in corporate control or commencement of a tender offer) and that pay a benefit measured by a modified price formula (e.g., related to the average market price or the tender offer price for the issuer's securities) may be granted.
25 1981 Q&A Release, n.142 and prior inconsistent letters may not be relied on with respect to plan amendments effected after publication of this release. Note 142 indicated that an amendment to permit LSARs to be granted did not require shareholder approval if SARs already were authorized. See, e.g., Gannett Co., Inc. (Nov. 3, 1989) (amendment giving administrative committee discretion to grant LSARs to option holders where SARs authorized did not require shareholder approval).
26 The holder of a reload option can surrender underlying shares to pay the exercise price of the option and, upon exercise, will receive an automatic grant of a new option at current market price for the number of shares surrendered.
27 See, e.g., Turner Broadcasting System, Inc. (Nov. 5, 1990).
28 See, e.g., Brunswick Corporation (Aug. 16, 1990) and Alberto-Culver Company (Jan. 22, 1990).
29 See Primark Corp. (Oct. 23, 1987) (amendment to cause a plan to comply with a change in the Code by providing that employer matching contributions will vest after five years rather than the earlier of ten years of service or five years of continuous participation in the plan does not require shareholder approval). This position is consistent with the previously discussed position that amendments to eligibility requirements required by changes in the law do not require shareholder approval. See Section II.B, supra.
30 In addition, amendments needed to comport with the new Section 16 rules do not require shareholder approval. See Adoption Release, n.244.
31 See Q&A 101(m) and Boeing Co. (Aug. 2, 1988).
32 See, e.g., Texaco, Inc. (May 22, 1989) (amendment to allow benefits to be paid in stock rather than cash does not require shareholder approval); and BellSouth Corporation (March 26, 1987) (amendment to require performance unit awards to be paid in stock rather than stock and cash does not require shareholder approval).
Under the new rules, securities that may be redeemed or exercised only for cash can be acquired, exercised and disposed of without Section 16 consequences if they (1) are awarded pursuant to a plan satisfying the disinterested administration or formula requirement of Rule 16b-3(c)(2); or (2) may be redeemed only upon a fixed date or dates at least six months after award or incident to death, retirement, disability or termination of employment. See new Rule 16a-1(c)(3), Section IV, infra. Issuers granting such securities are not subject to new Rule 16b-3's shareholder approval requirement.
33 See Anderson, Greenwood & Co. (Dec. 10, 1984).
34 Prior letters that did not examine the terms of the plan at the time of amendment may not be relied upon with respect to plan amendments effected after publication of this release. See, e.g., Occidental Petroleum Corporation (March 30, 1990) (amendment accelerating restricted stock vesting period on a shift in control did not require shareholder approval); Summit Bancorporation (Feb. 6, 1989) (amendment extending an outstanding option's expiration date from five years to ten years after grant required shareholder approval, even though the plan had provided that options could have a ten year expiration date); and C3, Inc. (March 4, 1985) (amendment giving a committee the discretion to determine vesting periods of options did not require shareholder approval, even though the plan had provided that options must vest at 20 percent per year).
35 An extension of an option exercise period is deemed to be a redemption of an old security and grant of a new security for purposes of Section 16. See Release No. 34-26333 (Dec. 13, 1988) [53 FR 49997, 50009].
36 Q&A 101(g) is modified to the extent the answer did not take into account the terms of the plan.
 |