

[Federal Register: October 31, 2007 (Volume 72, Number 210)]
[Notices]               
[Page 61699-61701]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31oc07-140]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56700; File No. SR-Phlx-2007-78]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Amend Article FOURTH of its Restated Certificate of Incorporation

October 24, 2007.
    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 October 5, 2007, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by the 
Exchange pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(3) thereunder.\4\ The Exchange has designated this proposal as 
one concerned solely with the administration of the Exchange, which 
renders the proposal effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(3).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Phlx proposes to amend its Restated Certificate of Incorporation 
(``Certificate'') by modifying the definition of ``Related Persons'' in 
Article FOURTH. The text of the proposed rule change is available at 
the Exchange, on the Exchange's Web site at http://www.phlx.com/exchange/phlx_rule_fil.html
, and at the Commission's Public Reference 

Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for the proposed rule change, and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    As discussed further below, the Exchange represents that the 
purpose of the proposed rule change is to amend the definition of 
``Related Persons'' as it appears in Article FOURTH of the Certificate 
to remove unnecessary burdens on the flexibility of the Exchange and 
its shareholders in effecting certain types of lawful fundamental 
transactions. The Exchange believes that this should facilitate 
appropriate deliberation, discussion, and activities by the 
shareholders of the Exchange in relation to fundamental transactions 
and other appropriate matters, without compromising the policies 
underlying the concentration limits on voting and ownership of Common 
Stock of the Exchange contained in Article FOURTH of the Certificate.
    Article FOURTH of the Certificate imposes limitations on ownership 
and voting by holders of Phlx's Common Stock.\5\ For purposes of 
applying these limitations, the holdings of a Phlx shareholder are 
combined with those of the shareholder's ``Related Persons.'' Clause 
(b)(iii)(B) of Article FOURTH provides, in pertinent part, that:
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    \5\ The concentration limits in the Certificate limit any 
person, either alone or together with its Related Person, to (i) 
owning 40% of the outstanding Common Stock of the Exchange (20% in 
the case of Exchange members), and (ii) exercising voting rights in 
respect of more than 20% of the Common Stock. A waiver by the Board 
of Governors, subject to Commission approval, is permitted in 
certain cases. See Article FOURTH (b)(iii) and (v).

    * * * ``Related Persons'' shall mean (1) with respect to any 
Person,\6\ all ``affiliates'' and ``associates'' of such Person (as 
such terms are defined in Rule 12b-2 under the Securities Exchange 
Act of 1934, as amended (the ``Exchange Act'')), (2) with respect to 
any natural person constituting a ``member'' (as such term is 
defined in the Exchange Act) of the Corporation, any broker or 
dealer with which such member is associated and (3) any two or more 
Persons that have any agreement, arrangement or understanding 
(whether or not in writing) to act together for the purpose of 
acquiring, holding, voting or disposing of shares of Common Stock. 
(Footnote added).
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    \6\ In Article FOURTH (a)(iv), ``Person'' is defined as an 
individual, partnership (general or limited), joint-stock company, 
corporation, limited liability company, trust or unincorporated 
organization, and a government or agency or political subdivision 
thereof.

    The Exchange notes that ownership and voting concentration limits 
are intended to ensure that the Exchange's management is not beset with 
conflicts of interest for the benefit of a small number of individuals 
or entities such that the Exchange cannot meet the statutory standards 
for national securities exchanges set forth in Sections 6 \7\ and 19 
\8\ of the Act.\9\ The Exchange believes that the ``Related Persons'' 
definition is intended to keep members and other persons from evading 
the numerical limits of holding shares in multiple affiliates or by 
having secret agreements with other shareholders whereby their ``true'' 
level of ownership, control, or voting power indirectly exceeds the 
permitted percentage limits.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78s.
    \9\ See Securities Exchange Act Release No. 50699 (November 18, 
2004), 69 FR 71126 (December 8, 2004) (proposed SRO governance 
rulemaking). The organizational documents of other national 
securities exchanges contain similar concentration limits. See 
Securities Exchange Act Release Nos. 45803 (April 23, 2002), 67 FR 
21306 (April 30, 2002) (SR-ISE-2002-01) (approving the restructuring 
of International Securities Exchange, Inc. from a limited liability 
company to a corporation); and 49718 (May 17, 2004), 69 FR 29611 
(May 24, 2004) (SR-PCX-2004-08) (approving the demutualization of 
the former Pacific Exchange, Inc.). See also Securities Exchange Act 
Release Nos. 49067 (January 13, 2004), 64 FR 2761 (January 21, 2004) 
(SR-BSE-2003-19) (approving the operating agreement of the Boston 
Options Exchange); and 54399 (September 1, 2006), 71 FR 53728 
(September 12, 2006) (SR-ISE-2006-45) (granting accelerated approval 
of the establishment of ISE Stock Exchange, LLC as a facility of the 
International Securities Exchange, Inc.).
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    Phlx is of the view that the policy underlying these restrictions 
was not intended to inhibit the Exchange or shareholders from effecting 
certain kinds of fundamental, and otherwise lawful, transactions, such 
as effecting an initial public offering or a merger or from entering 
into agreements or arrangements that are necessary or directly related 
to the execution of such transactions.\10\
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    \10\ Indeed, such fundamental transactions have been 
consummated, and are currently contemplated, by other national 
securities exchanges. In these cases, charter provisions of such 
exchanges similar to those in Article FOURTH of the Certificate were 
deleted or amended to accommodate specific transactions, such as 
when the Pacific Exchange was acquired by Archipelago Holdings. See 
Securities Exchange Act Release 50170 (August 9, 2004), 69 FR 50419 
(August 16, 2004) (SR-PCX-2004-56); see also International 
Securities Exchange Holdings, Inc. Form 8-K, Item 5.02 (Accession 
Number 1193125-7-96585 (April 30, 2007)).

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[[Page 61700]]

    Moreover, Phlx does not believe that the concentration limits or 
the ``Related Persons'' definition were intended to have the effect of 
limiting discussions among shareholders of any sort as they relate to 
the business of the Exchange or other matters of concern to the 
shareholders. In order to structure a fundamental transaction in a 
manner that is mutually beneficial to all parties, management and 
shareholders need the freedom to discuss various aspects of the 
transaction without the threat of these initial discussions triggering 
sub-clause (3) of the ``Related Person'' definition, thereby 
potentially causing the shareholders who are party to such discussions 
to exceed their permitted ownership and/or voting limits.
    The proposed amendment is intended to (i) provide that certain 
ordinary agreements, arrangements or understandings in connection with 
potential fundamental transactions of the type described above are 
expressly permitted, and (ii) negate any inference that discussions or 
other communications among shareholders affecting the interests of the 
shareholders or the Exchange, as they relate to such transactions or 
certain other matters (that are not otherwise exempted under the 
definition), would cause shareholders to be regarded as ``Related 
Persons.''

a. Exempted Matters

    The proposed amendment would exclude from the scope of the 
``Related Persons'' definition any agreement, arrangement, or 
understanding pertaining to any of the following: A merger, sale, 
acquisition, or other corporate affiliation of or by the Exchange or 
any subsidiary; the sale of all or substantially all of the assets of 
the Exchange; the issuance, offer, or sale by the Exchange and/or one 
or more shareholders (whether in one or more public or private 
transactions) of Common Stock of the Exchange.
    The purpose of this language is to provide that certain types of 
ordinary and customary agreements and arrangements in connection with 
potential fundamental transactions, such as those described above, do 
not cause such shareholders to be ``Related Persons.'' These would 
include, for example, underwriting agreements relating to an initial 
public offering, merger agreements, asset purchase agreements, lock-up 
and standstill agreements, and voting agreements in connection with an 
acquisition.
    The Exchange believes that if these types of agreements cannot be 
entered into without causing existing shareholders to be regarded as 
``Related Persons'' (and thereby causing the aggregation of their 
shareholdings to prohibited levels), then Phlx will be severely 
hampered in its ability to proceed to structure and negotiate an 
otherwise lawful, fundamental transaction of the type described above. 
However, the proposal is intended to narrowly define certain types of 
transactions about which agreements, arrangements, and understandings 
may be concluded without causing the shareholders that are party 
thereto to be regarded as ``Related Persons.'' The Phlx believes that 
the legitimate policy concerns that are safeguarded by the current 
voting and ownership limitations in the Exchange's Certificate continue 
to be addressed, because Article FOURTH would still treat as ``Related 
Persons,'' persons who are parties to agreements that are formed for 
any reason that is outside of the defined list of exempted transactions 
and certain related preparatory agreements (see discussion below).\11\
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    \11\ Of course, if a fundamental transaction were to proceed, 
the concentration limits and related procedures set forth in Article 
FOURTH would apply to any shareholder or prospective shareholder of 
the Exchange, unless the Certificate is further amended or the 
Exchange is not the surviving entity in the case of a merger. In 
these latter cases, any proposed amendment or any proposed new or 
successor Certificate would need to be filed with the Commission. 
See Sections 3(a)(27) (defining ``rules of an exchange'' to include 
the certificate of incorporation or ``instruments corresponding to 
the foregoing'') and 19(b) (specifying procedures pertaining to 
filing and approval of self-regulatory organizations' rules and 
proposed rule changes) of the Act, 15 U.S.C. 78c(a)(27) and 
78s(b)(1). Thus, the protections afforded by the concentration 
limits would not be diluted in the case of a fundamental 
transaction.
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b. Certain Preparatory Activities

    The proposal will also exempt from the ``Related Persons'' 
definition certain agreements, arrangements, or understandings that 
relate to preparations for effecting fundamental transactions, 
including the preparation, filing with the Commission, or dissemination 
of a registration, proxy, or information statement in respect of any of 
the matters or transactions described in the Exempted Matters section 
above and any proposal or plan to do any of the foregoing, and any step 
that is required for, or specifically and directly related thereto.
    The above language is intended to cover activities relating to the 
preparations, plans, and/or steps required for, or specifically and 
directly related to, the types of fundamental transactions described 
above. This clause expands the scope of activities that are proposed to 
be permitted without triggering the ``Related Persons'' definition. 
However, the proposal clearly defines the scope of activities that can 
be engaged in and cannot serve as a subterfuge for members or 
affiliates or other shareholders to join together to use their 
ownership or voting rights to attempt to manage the day-to-day 
operations of the Exchange to their benefit and disadvantage of others 
or to deny access to the facilities of the Exchange.

c. Discussions of Other Communications

    This proposed amendment is also intended to clarify that certain 
communications among shareholders affecting the interests of the 
shareholders or the Exchange (other than those relating to transactions 
or activities that are otherwise exempted under the proposal) will not 
be presumed to constitute an ``agreement, arrangement, or understanding 
. . . to act together for the purpose of acquiring, holding, voting or 
disposing of shares of Common Stock.'' The Exchange believes that 
Article FOURTH, as currently drafted, could result in an inappropriate 
chilling effect on legitimate discussions or other communications that 
do not implicate any of the Commission's concerns underlying the 
concentration limits and the ``Related Persons'' definition, as 
discussed above.
    The proposal provides that the following shall not create a 
presumption or inference that persons have an agreement, arrangement, 
or understanding for the purposes of determining ``Related Persons,'' 
as defined by Article FOURTH: (i) Communications by or among any 
persons (or their officers, agents or representatives) for the purpose 
of understanding, considering, or communicating the advisability, 
desirability, or feasibility of any matter concerning the interests of 
the Exchange or its shareholders, or (ii) the fact that two or more 
persons (or their officers, agents or representatives) may have 
expressed or communicated common views as to the advisability, 
desirability or feasibility of any matter concerning the interests of 
the Exchange or its shareholders (including, in either such case, by 
way of voting or otherwise acting as Governors,\12\ members of

[[Page 61701]]

standing or other committees or shareholders).
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    \12\ See Phlx By-Law Article I, Section 1-1(m).
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    By listing non-exclusive examples of permitted discussions and 
other communications, the Exchange hopes to clarify that certain 
customary and appropriate conversations and other communications 
between and among shareholders will not cause the shareholders to be 
considered ``Related Persons'' and result in the aggregation of their 
shares or voting rights in a way that would improperly restrict 
legitimate communication among shareholders.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \13\ in general, and furthers the objectives of 
Sections 6(b)(5) of the Act \14\ in particular, in that it is designed 
to promote just and 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 by modifying Phlx's Certificate to remove unnecessary 
burdens on the flexibility of the Exchange and its shareholders in 
effecting certain types of lawful fundamental transactions. The 
Exchange also believes that its proposal is consistent with Section 
6(b)(1) of the Act \15\ in that it should facilitate appropriate 
deliberation, discussion, and activities by the shareholders of the 
Exchange in relation to fundamental transactions and other appropriate 
matters, without compromising the policies underlying the concentration 
limits on voting and ownership of Common Stock of the Exchange 
contained in Article FOURTH of the Certificate.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ 15 U.S.C. 78f(b)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing rule change is concerned solely with the 
administration of the Exchange, it has become effective pursuant to 
Section 19(b)(3)(A)(iii) of the Act and Rule 19b-4(f)(3) thereunder. At 
any time within 60 days of the filing of such proposed rule change the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.

IV. Solicitation of Comments

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

Electronic Comments

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

File Number SR-Phlx-2007-78 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2007-78. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2007-78 and should be 
submitted on or before November 21, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-21382 Filed 10-30-07; 8:45 am]

BILLING CODE 8011-01-P
