1-Share, 1-Vote Securities Rule Adopted by SEC
The Securities and Exchange Commission voted 4-1 on Thursday to limit companies’ use of an important anti-takeover strategy. The commission adopted a so-called one-share, one-vote rule limiting the circumstances under which the stock exchanges and the over-the-counter market may list or quote the price of securities with unequal voting rights.
But the commission in Washington substantially watered down the rule before adopting it. The SEC allowed a number of exceptions and included a “grandfather clause” that apparently will allow all companies currently having different classes of stock to remain listed on the major exchanges. The exchanges, however, apparently will have the last word on whether to continue to list all of those companies, lawyers said.
Plans Dropped
In an effort to fend off hostile takeover bids, some companies, especially newspaper and media concerns, have established two classes of stock. The moves have served to concentrate shareholder voting power in the hands of one group of shareholders, often members of the family controlling the companies.
Separately, the SEC commissioners at least temporarily decided against suggesting legislation meant to give investors more access to the courts. In a 5-0 vote, the commissioners dropped plans to ask Congress to adopt a law preventing brokers from forcing customers to settle disputes through private arbitration. Thursday’s decision was regarded as a victory for the industry and drew sharp criticism from lawyers representing small investors.
On the one-share, one-vote rule, the SEC had been expected to allow exemptions for the approximately 300 companies that already had separate stock categories when the rule was first proposed in May, 1987. But the commissioners also allowed exemptions for about a dozen companies that had adopted the anti-takeover safeguard since then, including Times Mirror Co., the parent of the Los Angeles Times. Lawyers said the exemptions almost certainly will mean that Times Mirror as well as other newspaper and media companies that have used similar strategies will be able to keep their listings on the New York and American stock exchanges.
Lawyers late Thursday were still trying to interpret last-minute amendments written into the one-share, one-vote rule. But several said the new rule probably will sharply limit the number of new instances of companies adopting two categories of stock as an anti-takeover measure.
Kenneth L. Bialkin, a lawyer in New York with Skadden, Arps, Slate, Meagher & Flom, said the decision means that “there is an extremely powerful tool which now will not be as available” to prevent takeovers.
Merit Debated
However Joel Seligman, a professor of securities and corporate law at the University of Michigan Law School, said the new rule is less significant now because other anti-takeover strategies have been devised. “The impact of this is much less than it would have been four years ago,” he said.
Proponents of a tough one-share, one-vote rule billed it as an effort to preserve corporate democracy and to prevent increasing concentration of power in the hands of a few shareholders. But adversaries, including newspaper companies that have sought to keep their publications independent during the recent wave of hostile takeovers, defended it as a legitimate and effective tactic. They note that in most cases the creation of separate categories of stock has been approved in votes by the companies’ shareholders.
The proposed rule, and proposed legislation on the same subject currently stalled in Congress, turned out to be extremely controversial. SEC staff officials said the commission Thursday opted for a middle ground by writing in the exceptions.
Among the exceptions was one allowing different voting categories of stock for companies going public. Theoretically, this also would allow companies that now are traded publicly to go private through leveraged buyouts and then make an initial public offering with separate classes of stock.
Another exception will allow the more than 300 companies that currently have multiple classes of stock to issue more stock, as long as the voting rights of the different classes of shareholders don’t become any more disparate than they were before.
The commission also gave the stock exchanges fairly wide latitude in how to implement the new rule. Lawyers said the SEC appeared to leave it up to the exchanges to decide whether to continue to list companies that currently have separate classes of stock. A New York Stock Exchange spokesman said Thursday that officials hadn’t yet seen the rule and declined to comment on how it would be implemented.
Questions Its Authority
Lawyers and academics, however, said they thought it extremely unlikely that the exchange would act to delist some of its most important companies.
Charles C. Cox was the one SEC commissioner to vote against the rule. In an interview, he asserted that the SEC doesn’t have legal authority to regulate voting rights. He said the commission’s decision “was an improper use of our regulation of market listing standards to influence corporate governance.”
On the commission’s decision Thursday not to propose legislation allowing investors greater access to the courts in disputes with brokers, critics of the SEC accused the commission of caving in to pressure from the securities industry and the White House. The Reagan Administration has opposed efforts to impose tighter regulations on brokers.
The SEC instead decided to ask the exchanges and the industry to report on ways of improving arbitration procedures and providing more information about how they work.
The University of Michigan’s Seligman called the SEC decision “dead wrong,” and said “it is a very, very serious matter” for small investors. Brokers now frequently require investors to sign agreements in advance of any transactions, agreeing that any disputes will be resolved by a private arbitrator rather than the courts.
Seligman called the arbitration procedure “inferior” and said settlements for investors are generally small. He said arbitrators almost never award punitive damages, and he charged that many arbitrators are lawyers associated with the stock exchanges.
