NYSE May Overturn Rule Barring Anti-Takeover Tactic

The New York Stock Exchange is poised to overturn its half-century-old prohibition against listed companies issuing multiple classes of stock with disparate voting rights, a ban that has threatened to drive some prominent corporations using the maneuver as a takeover defense off the Big Board and into the over-the-counter market.

The exchange said Thursday that a subcommittee of its public policy committee has recommended allowing companies to issue new classes of such stock as long as they have the approval of holders of two-thirds of their existing common shares and the approval of a majority of their outside directors.

Under the proposal, the voting differential between the new shares and the old could be no more than 10-to-1, and no shareholder rights other than voting could differ.

The recommendation must be approved by the full committee, the NYSE board of directors and the Securities and Exchange Commission, a process that could take several months.

But its immediate effect would be to quash delisting proceedings the exchange has started against four NYSE companies: Dow Jones & Co., publisher of the Wall Street Journal; Hershey Foods Corp.; General Cinema Corp., and Coastal Corp. All established new classes of stock as takeover defenses.

The delisting proceedings, aimed at ousting a corporation’s stock from trading on the exchange, have been suspended pending the possible rule change.

Implicit in the subcommittee’s recommendation, said two of the panel’s members at a press briefing here, is the notion that the exchange should allow a corporation to make any bylaw or charter change that gains two-thirds approval from shareholders--a sufficiently large block, they reasoned, to protect the existing shareholders’ interests.

“That’s a big, big hurdle,” subcommittee member Andrew C. Sigler, chairman and chief executive of Champion International Corp., said of the approval requirement. “I’ll be damned if I can see how they (corporate managements) will get it in most situations.”

Sigler and A. A. Sommer, a former SEC commissioner who chaired the subcommittee, downplayed suggestions that the competitive pressures facing the New York exchange affected their recommendation. “Most of us don’t have ties to the exchange,” Sigler said.

Nevertheless, the NYSE no longer dominates trading in shares of major corporations as it once did. Some large companies have chosen to remain in the over-the-counter market, which is supervised by the National Assn. of Securities Dealers and now nearly matches the Big Board in efficiency and liquidity, two key considerations for publicly traded corporations.

The exchange also has lost its virtual monopoly in trading of stock in its own listed companies, as more trading is executed on regional stock exchanges and by brokerages specializing in private transactions.

Sigler and Sommer dismissed the possibility that the issuance of new classes of stock might serve to disenfranchise minority shareholders whose votes might be diluted in the process.

The growing influence of outside directors--those not members of a company’s management--and the greater detail of corporate disclosures required by SEC rules should help protect shareholder interests, they said.

More than half of the equity of NYSE-listed companies, they added, is now owned by “professional” shareholders--institutions and other major investors--who are adept at protecting their rights.

Issuing new classes of stock with disproportionately powerful voting rights has become an inviting step in takeover defenses because it allows managements to place large blocks of votes in friendly hands. Dow Jones, for example, established a class of common stock this year with 10 times the voting rights of its existing class A common explicitly to keep control of the company in the Bancroft family. The Bancrofts--heirs of company founder Clarence Barron--already control 56% of the stock.

Dow Jones issued the new stock to existing shareholders at the rate of one for every two class A shares, with the proviso that it could subsequently only be transferred back to members of the Bancroft family. Otherwise, it would automatically be converted back to class A common.

Under the subcommittee’s proposed rule, Dow Jones would probably meet the two-thirds shareholder-approval provision handily: In addition to the family’s 56%, other insiders own 5% and institutional investors 31%.

At Hershey Foods, insiders own more than 50% and institutions 21%; at Coastal, a Houston energy company, the figures are 15% for insiders and 35% for institutions, and at General Cinema, the figures are 37% for insiders and 30% for institutions.