I. Introduction
On November 26, 2003, the New York Stock Exchange, Inc. (“NYSE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, the proposed rule change to list and trade 73/4% Premium Equity Participating Security Units (PEPSSM Units), Series B (“Units”). The proposed rule change was published for comment in the Federal Register on December 19, 2003.
17 CFR 240.19b-4.
See Securities Exchange Act Release No. 48918 (December 12, 2003), 68 FR 70851.
II. Description of the Proposed Rule Change
The NYSE proposes to list and trade the Units pursuant to Section 703.19 of the Listed Company Manual (“Manual”). Each of the Units consists of (1) a purchase contract (“Purchase Contract”) issued by PPL Corporation (“PPL”) and (2) a 2.5% undivided beneficial ownership interest in a $1,000 principal amount note (“Note”) due May 2006 issued by PPL Capital Funding, Inc. (“PPL Capital”) and guaranteed by PPL.
Under Section 703.19 of the Manual, the Exchange may approve for listing and trading securities not otherwise covered by the criteria of Sections 1 and 7 of the Manual, provided the issue is suited for auction market trading. See Securities Exchange Act Release No. 28217 (July 18, 1990), 55 FR 30056-01 (July 24, 1990).
See Registration No. 333-108450. The Registration Statement became effective on January 8, 2004.
The Units are being offered pursuant to an exchange offer, the full terms of which are set out in the Registration Statement. Specifically, PPL offers to exchange the Units and a cash payment of $0.375 for each validly tendered and accepted 73/4% Premium Equity Participating Security Unit (collectively referred to as the “Old Units”), subject to, among other things, the condition that the Old Units remain listed on the Exchange.
The Exchange represents that the Registration Statement provides a detailed discussion and comparison of the Old Units and the Units so that holders can evaluate whether it is in their best interests to participate in the exchange offer.
Each Purchase Contract obligates the holder of a Unit to purchase from PPL, no later than May 18, 2004 (the “Contract Settlement Date”), for a price of $25, the following number of shares of PPL common stock, $0.01 par value: (a) if the average of the closing prices of PPL's common stock over the 20-trading day period ending on the third trading day prior to the Contract Settlement Date multiplied by 1.017 is equal to or greater than $65.03, 0.3910 shares; (b) if the average of the closing prices of PPL's common stock over the same period multiplied by 1.017 is less than $65.03 but greater than $53.30, a number of shares, between 0.3910 and 0.4770 shares, having a value, based on the 20-trading day average of the closing prices, equal to $25; and (c) if the average of the closing prices of PPL's common stock over the same period multiplied by 1.017 is less than or equal to $53.30, 0.4770 shares. PPL will also pay Unit holders a quarterly fixed amount in cash, called a contract adjustment payment, at a rate of 0.46% per year of the stated amount of $25 per Unit, or $0.1150 per year.
From the date of issuance until the Contract Settlement Date, the Notes will constitute subordinated obligations of PPL Capital and will be guaranteed on a subordinated basis by PPL. On or after Contract Settlement Date, the Notes will constitute senior obligations of PPL Capital and will be guaranteed on a senior basis by PPL. Prior to the Contract Settlement Date, the ownership interest in the Notes will be pledged to secure the Unit holders' obligation to purchase PPL's common stock under the purchase contract. PPL has appointed a remarketing agent to remarket, or sell on behalf of Unit holders, the Notes to third party investors on a date (the “Remarketing Date”) just prior to the Contract Settlement Date. Unit holders may choose to opt out of the remarketing of the Notes to third party investors to satisfy their payment obligations on the Contract Settlement Date. A Unit holder who opts out of the remarketing of the Notes would be required to settle each Purchase Contract for $25.00 in cash.
PPL Capital will also pay Unit holders interest at a rate of 7.29% per year on the principal amount of the Note. If there is a successful remarketing of the Notes, the interest rate will be reset and may be greater or less than 7.29% per year. PPL unconditionally guarantees the payment of principal and interest on the Notes of PPL Capital.
The Units represent both an equity and fixed income investment in PPL. The equity investment is in the form of the Purchase Contract, which, unless earlier terminated, requires a Unit holder to purchase a variable number of shares of PPL common stock. The fixed income investment is in the form of a trust preferred security that represents an undivided beneficial interest in the subordinated Notes of PPL Capital which are guaranteed on a subordinated basis by PPL.
The Units will conform to the issuer listing criteria under Section 703.19 of the Manual and be subject to the relevant continuing listing criteria under Section 801 and 802 of the Manual. The Exchange will impose the issuer listing requirements of Section 703.19(1) of the Manual on PPL. The Exchange represents that PPL is an NYSE-listed company in good standing. The Units will also meet the listing standards found in Section 703.19(2) of the Manual, except that the Units will not have the minimum life of one year required for listings.
Section 801.00 of the Manual provides, in relevant part, that when an issuer that has fallen below any of the continued listing criteria has more than one class of securities listed, the Exchange will give consideration to delisting all such classes. Section 802.01D of the Manual states, in relevant part, that delisting of specialized securities will be considered when the number of publicly-held shares is less than 100,000; the number of holders is less than 100; and aggregate market value of shares outstanding is less than $1 million. The Exchange also notes that it may, at any time, suspend a security if it believes that continued dealings in the security on the Exchange are not advisable.
The issuer listing standards require: (1) If the issuer is a NYSE-listed company, the issuer must be a company in good standing; (2) if the issuer is an affiliate of an NYSE-listed company, the NYSE-listed company must be a company in good standing; and (3) if not listed, the issuer must meet NYSE original listing standards as set forth in Sections 102.01-102.03 and 103.01-05 of the Manual.
The equity listing standards require: (1) At least 1 million securities outstanding; (2) at least 400 holders; (3) minimum life of one year; and (4) at least $4 million market value. The Units will not have a minimum life of one year because the Contract Settlement Date is May 18, 2004. The Exchange notes that it does not believe that the Units will raise any significant new regulatory issues. Because the Units will meet or exceed the other requirements under Section 703.19 of the Manual, the Exchange believes that the Units will have sufficient liquidity and depth of market, even if listed for a period shorter than one year. The Exchange also notes that the underlying PPL common stock from which the value of the Unit is in part derived will remain outstanding and listed on the Exchange following maturity of the Units.
The Exchange's existing equity trading rules apply to trading of the Units. The Exchange will also have in place certain other requirements to provide additional investor protection. First, pursuant to Exchange Rule 405, the Exchange will impose a duty of due diligence on its members and member firms to learn the essential facts relating to every customer prior to trading the Units. Second, the Units will be subject to the equity margin rules of the Exchange. Third, the Exchange will, prior to trading the Units, distribute a circular to the membership providing guidance with regard to member firm compliance responsibilities (including suitability recommendations) when handling transactions in the Units and highlighting the special risks and characteristics of the Units. With respect to suitability recommendations and risks, the Exchange will require members, member organizations and employees thereof recommending a transaction in the Units: (1) To determine that such transaction is suitable for the customer, and (2) to have a reasonable basis for believing that the customer can evaluate the special characteristics of, and is able to bear the financial risks of, such transaction.
NYSE Rule 405 requires that every member, member firm or member corporation use due diligence to learn the essential facts relative to every customer and to every order or account accepted.
See NYSE Rule 431.
The Exchange represents that its surveillance procedures are adequate to properly monitor the trading of the Units. Specifically, the Exchange will rely on its existing surveillance procedures governing equity, which have been deemed adequate under the Act.
III. Discussion
After careful consideration, 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, and, in particular, with the requirements of Section 6(b)(5) of the Act. Accordingly, the Commission finds that the listing and trading of the Units is consistent with the Act and will promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, and, in general, protect investors and the public interest consistent with Section 6(b)(5) of the Act.
Id.
15 U.S.C. 78f(b)(5). In approving this rule, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
As described more fully above, the Exchange proposes to list and trade the Units, which represent both an equity and fixed income investment in PPL. The equity investment is in the form of the Purchase Contract, which, unless earlier terminated, requires a Unit holder to purchase a variable number of shares of PPL common stock at a specified price, both to be determined at the time of termination. The fixed income investment is in the form of a trust preferred security that represents an undivided beneficial interest in the subordinated Notes of PPL Capital which are guaranteed on a subordinated basis by PPL. The Units are being offered pursuant to an exchange offer which will reduce the interest paid on the Notes by Unit holders as compared to the Old Units. The Exchange represents that the value of the Units is in part derived from the underlying PPL common stock. Unit holders are guaranteed at least the principal amount the payment of principal and interest on the Notes of PPL Capital. PPL will also pay Unit holders a quarterly fixed amount in cash, called a contract adjustment payment, at a rate of 0.46% per year of the stated amount of $25 per Unit, or $0.1150 per year.
See supra note 5.
The Commission notes that the Exchange's rules and procedures address the special concerns attendant to the trading of certain types of hybrid securities. In particular, by imposing the listing standards for certain types of hybrid securities, suitability, disclosure, and compliance requirements noted above, the Commission believes the Exchange has addressed adequately the potential problems that could arise from the hybrid nature of the Units. The Commission notes that the Exchange will distribute a circular to its members regarding member firm compliance responsibilities when handling transactions in the Units and highlighting the special risks and characteristics of the Units. Moreover, the Commission notes that the Exchange will distribute a prospectus to the holders of the Old Units calling attention to the specific risks associated with the purchase of the Units.
The Exchange's “Other Securities” listing standards in Section 703.19 of the Manual provide that issuers satisfying earnings and net tangible assets requirements may issue securities such as the Units provided that the issue is suited for auction market trading. The Commission notes that the Exchange has represented the following in accordance with the listing standards of Section 703.19 of the Manual: (1) That PPL is an NYSE-listed company in good standing; (2) there will be at least 1 million securities outstanding; (3) at least 400 holders; and (4) at least $4 million from which the value of the Unit is in part derived will remain outstanding and listed on the Exchange following maturity of the Units. The Commission notes that the Units will meet all of the relevant listing standards found in Section 703.19 of the Manual except that the Units will not have the minimum life of one year. Because the Units are being offered in connection with an exchange offer, the Commission believes that the Units will have sufficient liquidity and depth of market, even if listed for a period of shorter than one year. The Exchange will also provide each of the holders of the Old Units with a registration statement outlining the specific risks associated with the purchase of the Units. Consequently, the Commission does not believe that the Units will raise any significant regulatory issues.
See supra notes 8 and 9.
Because the issuer of the Unit is PPL (the Purchase Contract issued by PPL and the Note issued by PPL Capital and guaranteed by PPL), the Commission does not object to the Exchange's reliance on PPL to meet the issuer listing requirements of Section 703.19 of the Manual. The Units will conform to the listing guidelines under 703.19 of the Manual, except for the life of one year requirement, and the continued listing guidelines under Sections 801 and 802 of the Manual. The Commission also believes that the listing and trading of the Units should not unduly impact the market for the Units or raise manipulative concerns because the Exchange's existing equity trading rules and equity margin rules will apply to trading of the Units. As discussed more fully above, the Exchange will also have in place certain other requirements to provide additional investor protection. The Exchange represents that its surveillance procedures are adequate to properly monitor the trading of the Units. The Commission notes that the Exchange will rely on its existing surveillance procedures governing equity, which the Exchange represents have been deemed adequate under the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-NYSE-2003-40), be, and hereby is, approved.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1757 Filed 1-27-04; 8:45 am]
BILLING CODE 8010-01-P