Many institutional investors and corporate governance groups are furious over the New York Stock Exchange's revised proposal to amend its listing requirement regarding shareholder approval of stock option plans.
Plus, the Council of Institutional Investors, which is leading the fight, doesn't think the Securities and Exchange Commission's extension of the comment period on the proposal to Jan. 25 will help their cause.
"They extended the comment period 21/2 weeks after the (initial) comment period was over," said Sarah Teslik, executive director of the council. The initial comment period ended Dec. 10; the SEC announced the extension Dec. 29.
Other organizations responding negatively are Institutional Shareholder Services, Bethesda, Md.; State of Wisconsin Investment Board, Madison; and the activist investment fund LENS, Washington.
The proposal amends the NYSE's definition of broad-based stock option plans, which are exempt from shareholder approval.
The revised proposal said a plan would be considered broadly based if "at least a majority of the issuer's full-time, exempt U.S. employees are eligible to participate under the plan; and at least a majority of the shares awarded under the plan (or shares of underlying stock options awarded under the plan) during the shorter of the three-year period commencing on the date the plan is adopted by the issuer or the term of the plan itself, are made to employees who are not officers or directors of the issuer."
The main complaint by institutional investors is the proposal did not address the issue of stockholder "dilution" when options for new stock are issued.
The NYSE put together a task force to advise it on the proposal, with representatives from corporations, institutional investors and corporate governance groups, including Linda Scott, director of investment affairs for the New York State Common Retirement Fund, representing the Council of Institutional Investors.
After the furor broke out, the council asked that Kurt Schacht, chief legal officer of the Wisconsin Investment Board, be added to the task force.
According to Ms. Teslik, the NYSE refused to do it unless Linda Scott withdrew from the task force. "They refused to let him in. Linda had to withdraw to make room for him," said Ms. Teslik.
She said the council wanted Mr. Schacht on the task force because he's a lawyer and CFA and has expertise in "dilution," on which the task force is now working.
"We told them if they chose not to add him they wouldn't have anyone on the task force with expertise (in dilution standards). They wanted the press to think they were acting fairly so they agreed to add him," if Linda withdrew, said Ms. Teslik.
NYSE spokeswoman Kimberly Williams would not comment.
Although he wouldn't speak for the NYSE, John F. Olson, partner, Gibson Dunn & Crutcher LLP, a Washington-based law firm, who is chairman of the task force, said, "I thought it was a very reasonable suggestion to add Kurt (Schacht) to the task force. I think she (Ms. Teslik) is creating an issue where there is no issue."
HOW SAGA BEGAN
The saga began last April when the SEC cleared a rule by the NYSE that the NYSE deemed a stock option plan broadly based, and exempt from needing shareholder approval, if at least 20% of the company's employees are eligible to receive stock or options under the plan and at least half are neither officers nor directors.
After the outcry from institutional investors and corporate governance groups, the NYSE set up the task force.
Mr. Olson pointed out the revised rule "was approved unanimously by the task force," including members representing institutional investors. The task force also recommended looking at the dilution standard for stock option plans, saying even if a plan would qualify as broad based, if the result would be a dilution of shareholder's equity by a certain percentage, the plan would require shareholder approval.
"It's disingenuous (for institutions and corporate governance groups) to say they didn't know what the rule was," said Mr. Olson. "They were all represented on the task force."
And some of them do approve of what was done.
Peter Clapman, TIAA-CREF senior vice president and general counsel, said, "I agreed with the proposal as a significant improvement (over a bad rule). The pragmatic course for institutional investors now is to support the new rule and hope that the task force makes other changes (in the dilution standard)," he added.
Tom Herndon, executive director of the Florida State Board of Administration, Tallahassee, who was on the task force, said the new proposal "is certainly better than the first version." While the proposal doesn't address the question of dilution, he said, "I hope that institutions would realize that you don't build Rome in a day."
But according to Ms. Teslik, the task force's unanimous approval came about because some people on it "could not understand" the proposal, especially its use of the Fair Labor Standards Act to describe its definition of "exempt" employees.
"If you don't know what it means (you can't make an informed decision)," she said.
"We had experts in the room on labor and pension law," said Mr. Olson. "We spent a significant amount of time talking about the issue. It was understood by everyone."
He also pointed out Ms. Teslik "saw drafts of the report before it was done." If she was concerned about this, "all she had to do was bring it to our attention."
In its Nov. 30 comment letter to the SEC, the council called the proposal "an exercise in sleight of hand." It also asked the SEC to take over responsibility, claiming the NYSE is not a neutral policy-making body on stock options.
"The fact that a private, not-for-profit corporation whose constituents are the ones who get stock options, has taken much of this voting right away from shareholders should raise regulators' eyebrows," the letter said.
CRITICIZING TASK FORCE
In Kurt Schacht's letter to the SEC for the State of Wisconsin Investment Board, he criticized the task force for limiting its work to defining broad-based plans."This limited consideration came despite the fact the overwhelming concern expressed by those commenting on the rule was (and remains) the potential dilution created by option plans."
Institutional Shareholder Services, Bethesda, Md., in a letter to the SEC Dec. 2, recommended "the SEC quickly send the NYSE back to the drawing board with a mandate to formulate a `dilution' test for use in the 1999 proxy season."
Patrick McGurn, director, corporate programs at ISS, said it is possible to have a dilution rule in place for the 1999 proxy season. "The exchange would have to come up with a level that would please everyone. It would be contentious but it could be done," he said.
The activist investment fund LENS said in its letter to the SEC that the "SEC should tell the NYSE to go back and start over or give up entirely."