

[Federal Register: May 29, 2007 (Volume 72, Number 102)]
[Notices]               
[Page 29566-29567]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29my07-120]                         


[[Page 29566]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55796; File No. SR-NYSE-2007-28]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Granting Approval to Proposed Rule Change to Exempt Limited 
Partnerships From Certain of its Shareholder Approval Rules

May 22, 2007.

I. Introduction

    On March 9, 2007, the New York Stock Exchange LLC (the ``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act (``Act''), and Rule 19b-4 thereunder,\2\ a proposed rule 
change to exempt limited partnerships from certain of the Exchange's 
shareholder approval rules. The proposed rule change was published for 
comment in the Federal Register on April 2, 2007.\3\ The Commission 
received no comments on the proposed rule change. This order approves 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55528 (March 26, 
2007), 71 FR 15747.
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II. Description of the Proposal

    The Exchange proposes to exempt limited partnerships from the 
obligation to obtain shareholder approval under the circumstances set 
forth in Manual Sections 312.03(b), (c), and (d) for the issuance of 
common stock and securities convertible into or exchangeable for common 
stock.\4\
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    \4\ NYSE-listed limited partnerships would still be subject to 
the Exchange's shareholder approval requirements for equity 
compensation plans. See NYSE Listed Company Manual Sections 303A.08 
and 312.03(a). Moreover, the Commission notes that the filing does 
not in any way limit the applicability of the provisions of the 
Listed Company Manual relating to limited partnership roll-up 
transactions. See NYSE Listed Company Manual Section 105.
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    Subject to certain exceptions specified therein, Manual Sections 
312.03(b), (c), and (d) require listed issuers to obtain shareholder 
approval prior to the issuance of common stock or securities 
convertible into or exchangeable for common stock in any transaction or 
series of related transactions in the following situations:
     Where the potential dilution exceeds either one percent of 
the number of shares of common stock or one percent of the voting power 
outstanding before the issuance to: (a) a director, officer or 
substantial security holder of the company (each a ``Related Party''); 
(b) a subsidiary, affiliate or other closely-related person of a 
Related Party; or (c) any company or entity in which a Related Party 
has a substantial direct or indirect interest.
     If the Related Party involved in a transaction covered by 
the preceding bullet is classified as such solely because such person 
is a substantial security holder, and if the issuance relates to a sale 
of stock for cash at a price at least as great as each of the book and 
market value of the issuer's common stock, then shareholder approval 
will not be required unless the number of shares of common stock to be 
issued, or unless the number of shares of common stock into which the 
securities may be convertible or exercisable, exceeds either five 
percent of the number of shares of common stock or five percent of the 
voting power outstanding before the issuance.
     If: (a) the common stock has, or will have upon issuance, 
voting power equal to or in excess of 20 percent of the voting power 
outstanding before the issuance of such stock or of securities 
convertible into or exercisable for common stock; or (b) the number of 
shares of common stock to be issued is, or will be upon issuance, equal 
to or in excess of 20 percent of the number of shares of common stock 
outstanding before the issuance of the common stock or of securities 
convertible into or exercisable for common stock.
     If the issuance will result in a change of control of the 
issuer.
    The Exchange stated that the policy underlying these requirements 
is that shareholders should have the right to vote on any issuance of 
common stock that is materially dilutive of either their voting or 
economic interest in the company, and that Nasdaq has similar 
shareholder approval requirements to those of the NYSE. The Exchange 
stated, however, that Nasdaq exempts limited partnerships (``LPs'') 
from those requirements,\5\ which the Exchange believes has placed it 
at a disadvantage in competing with Nasdaq for initial public offerings 
and transfers of LPs.
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    \5\ See Nasdaq Marketplace Rule 4360 (``Qualitative Listing 
Requirements for Nasdaq Issuers That Are Limited Partnerships''); 
see also Securities Exchange Act Release No. 30811 (June 15, 1992); 
57 FR 28542 (June 25, 1992) (SR-NASD-91-58); see also Securities 
Exchange Act Release No. 34533 (August 15, 1994); 59 FR 43147 
(August 22, 1994) (SR-NASD-93-3).
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    The Exchange stated several reasons that it believes LPs may be 
appropriately excluded from certain shareholder approval rules. First, 
the Exchange stated that to be treated as a partnership for federal tax 
purposes, an LP must ensure that 90% of its income is derived from 
``qualified sources,'' which generally refers only to income derived 
from natural resource-related activities. Most listed LPs are engaged 
in energy-related businesses. The typical business model of LPs in the 
energy industry is to use their capital to acquire assets (e.g., 
pipelines) that produce predictable revenue streams and to commit in 
their partnership agreements to distribute most of their profits to the 
LP's unit holders. These LPs acquire assets frequently and pay for them 
by issuing additional LP units. The Exchange believes that the ability 
of an LP listed on Nasdaq to issue additional LP units without the 
expense and uncertainty of obtaining shareholder approval provides 
Nasdaq with an advantage over the Exchange in attracting and retaining 
listings of LPs.
    The Exchange also stated its belief that an analysis of the 
policies regarding voting and economic dilution underpinning its 
shareholder approval requirements demonstrates that it is appropriate 
to exempt LPs from their application. Listed LPs generally provide very 
limited voting rights to their unit holders, and typically, control of 
the LP resides with the general partner (``GP'') and the LP's board is 
that of the GP. The owner of the GP appoints the board and the common 
unit holders of the LP have no voting rights with respect to the 
election of directors. LP partnership agreements often provide that LP 
unit holders can vote only on a merger or dissolution of the LP or on 
any amendment to the partnership agreement that is adverse to their 
interests. As such, the Exchange believes that investors who buy LP 
units generally have no expectation that they will be able to vote. 
Therefore, the Exchange believes that the policy that shareholders 
should be able to vote on any stock issuances that are materially 
dilutive of their voting power is of less relevance to LPs than to 
regular corporations. Furthermore, the Exchange states that because LP 
unit holders generally do not have the right to elect directors, most 
LPs do not hold annual meetings. Therefore, it would not be possible 
for an LP to arrange for shareholder approval to be obtained in 
conjunction with an annual meeting, as would be possible for a regular 
company, and an LP could potentially have to call a special meeting 
every time it needed approval of an issuance pursuant to the 
shareholder approval rules.
    The Exchange also believes that the economic dilution concerns 
underpinning the shareholder approval rules are also less relevant in 
the case of LPs. Listed LPs typically are required

[[Page 29567]]

under their partnership agreements to distribute almost all of their 
earnings to their unit holders and specify a minimum quarterly 
distribution that the LP is required to make. As such, LPs will only 
invest in new assets if they know that those assets will be 
sufficiently accretive to earnings to pay the minimum quarterly 
distribution required for the additional units that are sold to raise 
the capital to pay for those assets.

III. Discussion

    After careful review of the proposal, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\6\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\7\ which 
requires, among other things, that the rules of an exchange be designed 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
the national market system, and, in general, to protect investors and 
the public interest; and are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. In 
making this finding, the Commission notes that shareholder approval 
rules are extremely important because, among other things, such rules 
provide shareholders with a voice in transactions that are material to, 
and may have an effect on, their respective investments. However, for 
many of the reasons noted by the Exchange, the Commission agrees with 
the Exchange that treating LPs differently with respect to certain 
types of shareholder approval rules is appropriate given the use of LPs 
and the expectations of investors in such entities. The Commission 
believes, however, that the rationale for treating an LP differently 
than, for example, a traditional corporation with respect to 
shareholder input on equity compensation is less compelling. 
Accordingly, the Commission believes that it is beneficial from a 
corporate governance perspective that the Exchange will be retaining 
for LPs its rules regarding shareholder approval of equity 
compensation.\8\ Finally, in approving the proposed rule change to 
Manual Sections 312.03(b), (c), and (d), the Commission notes that the 
proposal will conform the Exchange's rules to Nasdaq's comparable rules 
for limited partnerships.
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    \6\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition and 
capital formation. See 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ See NYSE Listed Company Manual Sections 303A.08 and 
312.03(a).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-NYSE-2007-28) be, and hereby 
is, approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    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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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-10200 Filed 5-25-07; 8:45 am]

BILLING CODE 8010-01-P
