Court Hears Arguments on SEC Voting Rights Rule

A federal appeals court heard arguments Tuesday on a challenge to a Securities and Exchange Commission rule that eliminates unequal voting rights among corporate shareholders.

The Business Roundtable, an association representing 200 corporations, claims that the rule interferes with corporate governance, which comes under the jurisdiction of individual states.

But the SEC claims that it has a right to impose the rule as part of its mission under the 1934 law that created it: to protect public shareholders.

Both sides appeared before a three-judge panel of the U.S. Circuit Court of Appeals for the District of Columbia, consisting of circuit judges James L. Buckley, Stephen F. Williams and Harry T. Edwards.

SEC Rule 19c-4, adopted in July, 1988, prohibits publicly traded corporations from weakening the voting power of those who own existing stock by issuing new classes of stock with superior or “super voting” rights.

The SEC may bar an offending company’s stock from being listed on any stock exchange regulated by the SEC or with the National Assn. of Securities Dealers stock quotation system.

Robert D. Rosenbaum, attorney for the Business Roundtable, said although the SEC is trying to protect shareholder voting rights, the rule would prevent company executives from issuing stock that could give insiders the power to thwart a hostile takeover, Rosenbaum said.

The Business Roundtable sought to have the court rule either that the SEC exceeded its authority in imposing the rule, or that the section of securities law that gives the SEC such power should be declared unconstitutional.

But Jacob H. Stillman, associate general counsel for the SEC, countered, “We’re not attempting to do these broad things they claim.”

Without the super voting rights rule, “shareholders could be stripped of their ability to participate in management, and confidence in the securities markets could be impaired,” the SEC said in its legal brief.

The state of Ohio filed a friend-of-the-court brief contending that the SEC was usurping corporate governance authority given to the states. Without a clear indication otherwise by Congress, “the SEC should not be given the authority that Congress, itself, has not exercised,” said Cordelia A. Glenn, an Ohio assistant attorney general.