SEC takes aim at anti-takeover tactic
Boston — Many American stockholders feel their rights are increasingly being threatened. And the Securities and Exchange Commission wants to do something about it. When negotiations between the three major stock markets - the American Stock Exchange, the New York Stock Exchange and the National Association of Securities Dealers (NASDAQ) - over a one-share, one-vote rule fell apart, the frustrated Commission decided to use its authority and make a ruling on its own.
The SEC voted 4 to 1 on June 11 to propose a tentative regulation that would bar public trading in United States corporations that deny shareholders the right to vote, or substantially reduce their authority in management affairs. In other words, the Commission would prohibit the nation's stock markets from listing companies that deny voting rights to all shareholders.
In the face of hostile takeover attempts, many companies issue so-called supermajority voting shares - shares with a lower dividend but higher voting capability - to corporate management, giving themselves a majority of the votes. They'll also offer a ``dividend sweetener'' - shares with no votes but higher dividends - to get existing shareholders to forgo the one-share, one-vote principle.
While this tends to prevent a raider from buying enough voting shares to stage a takeover, it greatly reduces the voting rights of those holding existing common stock, and allows ``insiders to control what goes on in the company, no matter how many shareholders there are,'' says Ellen Dry, staff attorney at the SEC's division of market regulation.
The SEC's proposal, then, is the result of ``growing concern over problems caused by the New York Stock Exchange's recent decision to allow two classes of stock,'' Ms. Dry says. It's an attempt to prohibit ``the coercive aspect of exchange,'' says Nell Minow, general counsel at Institutional Shareholders Services, Inc., in Washington.
It may also serve to force the dissenting markets to reach a responsible compromise and make a ruling on their own.
Currently, only the NYSE and the Pacific Stock Exchange have a one-share, one-vote standard. They have proposed lowering their listing standards to accommodate many companies that have issued more than one class of stock with disproportionate voting rights, often as a takeover defense.
But some charge the American Stock Exchange is holding out for a one-share, one-vote rule with fewer - and narrower - exceptions than either the NYSE or NASDAQ can accept. ``AMEX will be the one most harmed,'' says Gordon Macklin, president at the National Association of Securities Dealers. ``They have the highest percentage of low-voting companies and they don't offer any unique services.''
Yet the NYSE will benefit greatly, because ``they'll now be to able to list shares with lesser voting rights, which before would have been more likely to list on AMEX or NASDAQ,'' says Mr. Macklin.
Others say, however, that AMEX is not holding up the works. An AMEX spokesman says the exchange ``would be willing to go to one-share, one-vote if NASD would do the same.''
All have agreed, at any rate, on the need for an immediate decision. The SEC's regulation is subject to public comment through mid-July, and to a tentatively scheduled public hearing on July 22.
In response to many companies' argument that the SEC isn't authorized to make such a rule - saying it's a decision for the states to make - a staff member of the House subcommittee on telecommunications and finance says ``the SEC can propose whatever it wants ... but Congress can overrule them with a law.''
Many hope the SEC's proposal is dropped altogether, with the three major markets coming to an agreement beforehand. ``Pressure from the SEC's proposal, and from the more onerous Dingell-Markey bill'' will probably provide them with incentive, Ms. Minow says.
The Dingell-Markey bill, sponsored by Democratic Representatives John Dingell of Michigan and Edward Markey of Massachusetts, is a stronger one-share, one-vote proposal, and ``allows no grandfather-type clause,'' while it gives a lot of authority to the SEC and states to make exceptions, says a member of the telecommunications subcommittee. It will come down a bit harder on the markets than the SEC's proposal, which is ``making sure both sides' rights are protected,'' Ms. Minow says.
A one-share, one-vote rule is unlikely to have a great impact on takeover attempts, industry specialists say. Supermajority voting is ``one of the lesser-used methods of resistance [to hostile takeovers],'' says Dry. The tactic is generally used, not in the heat of a takover battle, but as a long-term means of discouraging takeover attempts.
And the exceptions made in the SEC's proposal would give the exchanges a certain amount of flexibility, and ``the authority to waive some of their standards,'' says Robert Sevigny, staff attorney at SEC's division of market regulations.
The rule would still allow the listing of companies that had issued dual or multiple classes of stock with unequal voting rights by May 15, and would allow new stocks to be issued with lower voting rights. (The Dingell-Markey bill would not allow this, however.) It's purpose is to allow family-owned companies that want to go public to retain control, Dry explains.
Another proposed SEC ruling concerns the treatment of foreign companies that aren't in compliance with current listing standards. It would allow the markets to waive certain standards, on a case-by-case basis, in order to put the other markets ``on equal footing with NASDAQ which can list foreign companies more easily,'' Mr. Macklin says.
In cases where companies are in conformity with all the legal requirements of their home country, differences in financial reporting or corporte structure will no longer automatically exclude them, Macklin says.
``You have to recognize that they [foreign corporations] are operating under a completely different set of laws,'' Sevigny says.