[Federal Register Volume 59, Number 247 (Tuesday, December 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31728]
[[Page Unknown]]
[Federal Register: December 27, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35121; File Nos. SR-Amex-94-29, SR-NASD-94-45, SR-NYSE-
94-20]
Self-Regulatory Organizations; American Stock Exchange, Inc.,
National Association of Securities Dealers, Inc., and New York Stock
Exchange, Inc.; Order Granting Approval to Rule Changes Relating to the
Exchanges' and Association's Rules Regarding Shareholder Voting Rights
December 19, 1994.
I. Introduction
On June 2, August 5 and 10, 1994, the New York Stock Exchange, Inc.
(``NYSE''), the National Association of Securities Dealers, Inc.
(``NASD''), and the American Stock Exchange, Inc. (``Amex''),
respectively,\1\ submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')\2\ and Rule 19b-4
thereunder,\3\ proposed rule changes that would amend their rules
governing the voting rights of shareholders of common stock listed on
the NYSE or Amex, or in the case of the NASD, included in the National
Association of Securities Dealers Automated Quotation (``Nasdaq'')
System, in order to establish a minimum voting rights policy
(``Policy'').
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\1\The NYSE and Amex are collectively referred to herein as the
``Exchanges.''
\2\15 U.S.C. 78s(b)(1) (1994).
\3\17 CFR 240.19b-4 (1991).
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In addition, on July 11, 1994, and August 8, 1994, the NYSE filed
with the Commission Amendment Nos. 1 and 2, to its proposed rule
change. Amendment No. 1 modifies the NYSE provision regarding the
issuance of non-voting stock and is discussed in more detail below.\4\
Amendment No. 2 is largely technical, and resulted in minor changes in
the text of its new rule.\5\
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\4\See Amendment No. 1 to SR-NYSE-94-20.
\5\See letter from Micheal Simon, Milbank, Tweed, Hadley &
McCloy, Counsel to the NYSE, to Amy Bilbija, Attorney, SEC, dated
August 5, 1994.
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The proposed rule changes were published for comment in Securities
Exchange Act Release No. 34518 (August 11, 1994), 59 FR 42614 (August
18, 1994) (``Proposing Release'').
II. Background
In 1988, the Commission adopted Rule 19c-4, the Shareholder
Disenfranchisement Rule, in response to concerns that had been raised
regarding the practice by some companies of restricting the voting
rights of existing shareholders through the issuance of shares with
multiple, low or no voting rights.\6\ Generally, Rule 19c-4 prohibited
self regulatory organizations (``SROs'') from listing on an exchange or
quoting on an interdealer quotation system an issuer's securities if
the issuer had issued securities or taken other corporate action that
had the effect of nullifying, restricting, or disparately reducing the
voting rights of existing common shareholders. Rule 19c-4 also
specified certain transactions that were deemed non-disenfranchising to
existing shareholders. In 1990, in Business Roundtable v. SEC, the U.S.
Court of Appeals for the D.C. Circuit vacated the Commission's rule on
grounds that the basis on which the Commission had adopted the rule was
beyond the scope of the Commission's regulatory authority.\7\ The
court, however, did not address other statutory provisions on which the
Commission had not relied, but that might provide a basis for
promulgating similar regulation.
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\6\Securities Exchange Act Release No. 25891 (July 7, 1988), 53
FR 26376.
\7\The Business Roundtable v. SEC, 905 F.2d 406 (D.C. Cir.
1990).
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Since Business Roundtable, market participants, the Commission, and
Congress have encouraged the exchanges and the NASD to formulate their
own listing standards regarding shareholder voting rights. Most
recently, Commission Chairman Levitt encouraged establishment of a
minimum voting rights policy. The NYSE, NASD, and Amex have developed
such a Policy and now seek Commission approval pursuant to Section
19(b) of the Act. Although based upon the similar in many respects to
former SEC Rule 19c-4, the Policy is more flexible and seeks to
accommodate shareholder protection concerns with the needs and changing
circumstances of capital markets and issuers.\8\
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\8\In addition, each SRO has proposed to supplement its rule
with interpretations, commentaries, or policy statements in its
respective proposals.
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III. Description
A. The Policy
The SROs are proposing to adopt a minimum voting rights rule that
would prohibit continued listing on the NYSE or Amex, or inclusion in
the Nasdaq System, of companies that disenfranchise shareholders of
public common stock.\9\ The proposed rule states that:
\9\Specifically: (1) the NYSE is proposing to amend its Listed
Company Manual; (2) the Amex is proposing to amend its Company Guide
with respect to common stock voting rights in general as well as
that portion applicable to its Emerging Company Marketplace
(``ECM''); and (3) the NASD is proposing to adopt a voting rights
rule for the Small Cap Nasdaq segment of the Nasdaq System and to
adopt an interpretive policy to be applicable to the voting rights
rules in the Nasdaq National Market System (``NMS'') segment and the
Small Cap Nasdaq segment of the Nasdaq System. The NMS segment
currently has a voting rights rule that mirrors the language of
former Rule 19c-4. By adopting the proposed Policy, the NASD will
acquire more flexibility in interpreting voting rights issues for
Nasdaq NMS companies and create minimum voting rights standards
throughout the Nasdaq System.
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Voting rights of existing shareholders of publicly traded common
stock registered under Section 12 of the Securities Exchange Act of
1934 cannot be disparately reduced or restricted through any
corporate action or issuance of stock. Examples of such corporate
action or issuance include, but are not limited to, the adoption of
time-phased voting plans, the adoption of capped voting rights
plans, the issuance of super voting stock, or the issuance of stock
with voting rights less than the per share voting rights of the
common stock through an exchange offer.
The Policy also contains additional guidelines as well as extensive
interpretive language to supplement and clarify the application of the
Policy to, among other things, (1) issuers with existing dual class
structures; (2) review of past voting rights activities; and (3)
foreign issuers.
The Policy specifies that the restriction against the issuance of
super voting stock is primarily intended to apply to the issuance of a
new class of super voting stock. Companies with existing dual class
capital structures generally will be permitted to issue additional
shares of a class of existing super voting stock consistent with the
Policy.
In addition, under the Policy, the SROs will continue to permit
corporate actions or issuances that would have been permitted under
former Rule 19c-4. In evaluating other forms of actions or issuances,
the SROs will consider, among other things, the economics of the
transaction and the voting rights being granted. The SROs intend to be
flexible in their interpretations under the Policy.
Further, the Policy encourages issuers to consult with their
respective SROs prior to engaging in any action or committing to take
any action that may be inconsistent with the Policy. While the Policy
will continue to permit actions previously permitted under former Rule
19c-4, issuers are urged not to assume, without first discussing the
matter with their respective SRO staff, that a particular issuance of
common or preferred stock or the taking of some other corporate action
necessarily will be consistent with the Policy. The SROs also suggest
that copies of preliminary proxy or other material concerning matters
subject to the Policy be furnished to the appropriate SRO for review
prior to formal filing.
Additionaly, the Policy provides for a review procedure for
companies that apply to list on the NYSE or Amex, or to be included in
the Nasdaq System. Under the procedure, the applicable SRO will review
the issuer's past voting rights actions to determine whether another
SRO has (1) found any of the issuer's actions to have been a violation
or evasion of that SRO's voting rights policy, or (2) been approached
by the issuer for a ruling or interpretation regarding the application
of that SRO's voting rights policy with respect to a proposed
transaction. Based on the above, the SRO may take any action it
findings appropriate in assessing the issuer's listing application.\10\
Moreover, it will consider any such prior interpretations issued by
other SROs in response to any request by the issuer on the same or
similar transaction in making its own determination.
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\10\Such action includes, but is not limited to, the denial of
the listing or the placing of restrictions on such listing. See
Proposing Release.
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Finally, the Policy exempts issuances or actions by non-U.S.
companies. Specifically, the SROs will accept any action or issuance
relating to the voting rights structure of a foreign company that is
either (1) in compliance with the SRO's requirements for domestic
companies, or (2) not prohibited by the company's home country law.
This is consistent with past SRO action acknowledging the need for
separate treatment of foreign issuers under their qualitative listing
standards.\11\
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\11\For example, the NYSE and Amex waive or modify certain
listing standards for foreign issuers when it can be shown that the
foreign company's procedure is based on the laws, customs or
practices of its home country. See Securities Exchange Act Release
No. 24634 (June 23, 1987), 52 FR 24230. See also Securities Exchange
Act Release Nos. 33611 (Feb. 23, 1993), 59 FR 10028 (March 2, 1994);
and 34300 (July 1, 1994), 59 FR 35156 (July 8, 1994) (permitting
foreign issuers to provide shareholders with summary annual reports
in conformance with their home country practices).
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B. Interpretation of the Policy: Presumptively Permitted Transactions
Former Rule 19c-4 enumerated certain corporate actions that
presumptively were not disenfranchising, but nevertheless affected
shareholder voting rights.\12\ Actions presumptively permitted under
former Rule 19c-4 will continue to be presumptively permitted under the
Policy. In addition to these specific provisions of former Rule 19c-4,
in the release adopting Rule 19c-4 the Commission specified that the
rule would not apply in certain circumstances. As discussed below,
these actions also will be permitted under the Policy.
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\12\These corporate actions include the following:
(1) Initial Public Offerings (``IPO'');
(2) Issuances of lower vote stock;
(3) Issuances of securities to effect a bona fide merger or
acquisition with voting rights not greater than the per share voting
rights of any outstanding class of the common stock of the issuer;
and
(4) Actions taken pursuant to state control share acquisition
statutes.
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1. Initial Public Offerings
Under the Policy, companies can issue dual classes of stock with
unequal voting rights in an initial public offering and thereafter
issue additional shares of those classes.\13\ In this regard, the
issuance of disparate voting rights stock pursuant to an IPO is not a
disenfranchising action because there are no existing public
shareholders that are being affected by the transaction. For example, a
company could offer Class A, lower voting stock, and Class B, higher
voting stock, to the public in an initial public offering. Under the
Policy, additional issuances of Class B, super voting stock, could be
issued in the future because the dual class structure resulted from the
IPO. The issuances could be made without additional issuances of Class
A stock. In contrast, if a company offers only Class A stock to the
public in an initial public offering it could not subsequently issue a
new Class B super voting stock.
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\13\The term ``initial public offering'' is intended to mean the
offering of securities by a company by which it goes public.
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2. Lower Voting Stock
Under the Policy, a company that already has gone public may issue
a new class of lower voting rights stock.\14\ Although former Rule 19c-
4 permitted new lower vote issuances, the Policy will provide an issuer
with additional flexibility to issue ``regular vote'' stock following
the issuance of lower voting stock. Specifically, the Policy will
permit such issuances because shareholders purchasing a new issue of
lower voting stock are fully aware of the limits on their voting power,
both individually and collectively, at the time of purchase. Similarly,
existing shareholders of lower voting stock are cognizant of the
possibility that their voting power may decrease through subsequent
issuances of regular or lower voting stock. By restricting subsequent
offerings to equal or lesser voting stock,\15\ no existing individual
or class of shareholder is disenfranchised by this form of
capitalization. Thus, under the Policy, an issuer may continue to issue
new classes of lower voting stock (e.g., stock with \1/2\ vote per
share followed by \1/4\ vote per share, and so on).
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\14\Lower vote stock has voting rights less than the per share
voting rights of any outstanding class of the common stock of the
issuer.
\15\As indicated earlier, a company with an existing structure
composed in part of super voting stock, may continue to issue
additional shares of the super voting stock without being in
violation of the Policy.
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The Policy, however, will clearly prohibit the issuance of a new
class of stock with voting rights greater than the outstanding existing
classes. For example, a company with a one vote class and \1/2\ vote
class could not later issue a new class of super voting stock with
votes higher than the one vote class. There are certain limited
situations, however, where a company with multiple classes may be able
to issue a new class of stock with voting rights higher than one of the
existing classes. For example, a company with classes of one vote and
\1/4\ vote stock outstanding may be able to issue a new class with \1/
2\ vote stock even if it was not part of its original capital
structure. The SROs should analyze such issuances on a case-by-case
basis taking into consideration the information disclosed to
shareholders in the creation of the existing outstanding classes, the
purposes and economics of the issuance of the new class of stock, and
the disenfranchising effect on each outstanding class.
Notwithstanding the above, there are certain issuances of lower
voting stock that would clearly violate the Policy because they are
constructed in a manner to disenfranchise shareholders. For example, if
a company issued lower voting stock with a divided sweetener in
exchange for stock of an outstanding class with higher votes but lower
dividends, this exchange offering would be violative of the Policy.
Thus, the SROs will review issuances of new classes of lower voting
stock to determine if they are consistent with the Policy.
3. Bona Fide Mergers and Acquisitions
The issuance of lower voting rights stock in connection with a
business combination to effect a bona fide merger or acquisition, in
which the voting rights of the securities issued would not be greater
than the voting rights of any existing class of common stock, will be
presumed to be accepted under the Policy. For example, when the lower
voting rights stock is structured so that dividends or other
substantive rights (e.g., election of directors) are based on the
assets or performance of the acquired company, such a recapitalization
generally should be considered bona fide and consistent with the
purposes of the Policy.\16\
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\16\A merger or combination between a company with a disparate
voting rights plan and a company with a one-share, one-vote
capitalization would be scrutinized to ensure that it is being
effected for a bona fide business purpose.
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4. Application of the Policy to Control Share Acquisition Statutes and
Other Takeover Defenses
The Policy will not apply to corporate action taken pursuant to
state law requiring a state's domestic corporation to condition the
voting rights of a beneficial or record holder of a specified threshold
percentage of the corporation's voting stock on the approval of the
corporation's independent shareholders. These statutes generally are
referred to as state ``control share acquisition statutes.'' They are
designed to prevent unwanted acquisitions of the corporations by
limiting the voting rights of large shareholders, unless specifically
approved by the disinterested shareholders or unless the corporation
amends its articles of incorporation or by-laws to opt out of the
statute.
In addition, the Policy will continue to permit issuers to take
corporate action pursuant to other shareholder rights plans such as
``poison pills''\17\ and ``lock-ups.''\18\ Shareholder rights plans
usually are adopted by corporations to discourage tender offers, or to
encourage the development of an auction for the company resulting in
shareholders receiving a higher price for their stock. They are not
adopted to disenfranchise an existing class or classes of shareholders.
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\17\Use of a ``poison pill'' is a strategy, generally employed
by a potential takeover-target company, to make acquisition of its
stock more costly to an acquirer. For instance, a firm may issue a
new series of preferred stock that provides shareholders the right
to redeem it at a premium price after a takeover. Such measures
raise the cost of an acquisition, and cause dilution, hopefully
deterring a takeover bid.
\18\A ``lock-up'' is a privilege offered to a friendly acquirer
by a target company of buying the target's most valuable assets or
additional equity, often at a discount. The aim is to discourage a
hostile takeover by granting such an option to a friendly acquirer.
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Similarly, lock-up options or agreements generally are utilized by
a corporation as a defensive tactic and entered into with a friendly
potential acquirer often referred to as a ``white knight.''
Nevertheless, lock-up effected by the sale of a new class of super
voting preferred stock generally would be prohibited under the Policy
because they would involve an issuance of a new class of super voting
stock. Accordingly, the SROs will have the flexibility to analyze the
facts of each lock-up option or poison pill on a case-by-case basis for
consistency with the Policy.\19\
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\19\For example, if the issuer's existing capital structure
included the super voting class being issued pursuant to the lock-up
agreement, the SRO could find it to be an issuance of an existing
class of stock and thus permissible under the Policy. See
Supplementary Material .10 of the NYSE's proposal.
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C. Interpretation of the Policy: Other Issues
1. Prior Interpretations
Following the initial adoption of former Rule 19c-4, the SROs
issued a number of policy interpretations regarding corporate actions
that they believed were permitted under the rule. These interpretations
will continue to apply under the Policy with respect to the specific
corporations for which the interpretations were issued. In addition,
they will be available as guidance to other corporations seeking
authorization, from the SRO that issued the interpretation, to engage
in similar corporate activity. With respect to the specific company for
which the interpretation was issued, this provision is a reassurance
that its action will not be re-evaluated under the Policy. With respect
to other corporations seeking to implement similar transactions, this
provision grants the interpretation some precedential value to be used
when discussing the potential transaction with the SRO.
2. Adoption of New Voting Rights Structures
In certain circumstances, the Policy also will provide greater
flexibility than Rule 19c-4 for companies initially adopting a new
voting rights structure or altering their existing capital structure in
such a fashion that might otherwise be prohibited under the Policy. For
example, if a company is in financial distress, the company might issue
preferred stock with heightened voting protection necessary to protect
the interests of the preferred stock purchasers. The SROs will evaluate
the application of the Policy to such transactions on a case-by-case
basis. In other situations, issuances of preferred stock that have
special voting rights attached would be reviewed on a case-by-case
basis to determine if they are consistent with the Policy. In this
regard, traditional varieties of preferred stock would be permitted
under the Policy. In contrast, blank-check preferred stock with
unlimited voting rights generally would be viewed as creating a new
class of super voting rights and impermissible under the Policy.
3. Issuers With Existing Dual Class Structures
A number of companies currently have multiple class structures. In
addition, after the approval of the Policy, additional companies may
adopt multiple class structures consistent with the Policy. For
example, a company could have a dual class structure that it
implemented prior to adoption of the Policy, or could have a
permissible dual class structure resulting from an initial public
offering or the issuance of lower voting stock. Under former Rule 19c-
4, such a company generally was prohibited from issuing additional
amounts of the higher voting stock unless such issuance did not further
disenfranchise existing shareholders. In effect, a company's existing
dual class capital structure was permitted only as to securities
previously issued that were then outstanding in the market.
Under the Policy, there will be no restrictions on the ability of a
dual class company to issue additional shares of an existing class of
higher voting stock in a capital-raising transaction, via a stock
dividend, through the issuance of stock options, or in a stock split.
Such a company would not be permitted, however, to adopt a different
capital structure that reduces or restricts voting rights, such as a
time-phased voting plan, or the issuance of a third class of stock with
greater voting rights than shares of any existing class.
4. Grandfather Provision
Under the Policy, the SROs will ``grandfather'' all companies
listed on the NYSE or Amex or included in the Nasdaq System that have
taken action inconsistent with the Policy prior to its approval by the
Commission.\20\ This will cover NYSE, Amex, or Nasdaq companies that
either have (1) issued securities that would have violated the new
Policy, or (2) taken all corporate action necessary to authorize such
an issuance. Such corporate action includes the required shareholder
approval as mandated by the state of incorporation, the corporation's
by-laws or articles of incorporation, or the home market. In addition,
as noted above, contrary to former Rule 19c-4, which grandfathered only
existing securities, the Policy will in effect grandfather a company's
dual class capital structure in its entirety.\21\ Finally, the NYSE
proposal also specifically states that it will grandfather all NYSE
companies that have taken action inconsistent with former Rule 19c-4
since that rule was vacated.\22\
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\20\Because Nasdaq NMS securities have been subject to a Rule
19c-4 standard which was adopted and has been enforced by the NASD
after the adoption of former Rule 19c-4, the NASD will grandfather
only companies included in the Small Cap Nasdaq segment of the
Nasdaq System. See Securities Exchange Act Release No. 28517 (Oct.
5, 1990), 55 FR 41626 (Oct. 12, 1990).
\21\The grandfather provision of the Policy is not limited to
dual class structures, but rather extends to the full capital
structure of the company including for example securities with time-
phased or capped voting rights.
\22\The provisions of Rule 19c-4 were adopted by the NYSE as
part of its rules, and have continued to be its standard even after
Rule 19c-4 was vacated. Securities Exchange Act Release No. 27554
(December 20, 1989), 54 FR 53227.
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D. Implementation of the Policy
1. Interaction With Other Markets
SRO interpretations under the Policy will be flexible, recognizing
that both the capital markets and the circumstances and needs of listed
and Nasdaq issuers change over time. At the same time, the Policy will
give the SROs broad discretion in reviewing past voting rights actions
by companies seeking to list on the Exchanges, or qualify for inclusion
in the Nasdaq System. Subject to the foregoing, the SROs will apply the
following procedures in providing interpretations under the Policy:
An issuer seeking to list its securities on an Exchange,
or qualify for inclusion in the Nasdaq System, may seek advice from the
respective SRO with respect to a proposed transaction. In such a case,
the SRO would not provide advice under the Policy if the issuer already
had sought and received advice from its home market on the transaction.
In that instance, the SRO would honor the home market's interpretation.
If an SRO delists or deregisters an issuer's securities
for violation of the Policy, the other SROs would not subsequently list
or include in Nasdaq the issuer's securities.
The SROs will publish their interpretations under the
Policy.
These procedures essentially ensure that each SRO will have primary
jurisdiction to provide advice to issuers in its own market.
2. SRO Review of Past Issuances
The SROs will have flexibility in reviewing the circumstances of
the original issuance of any class of stock, including non-voting
stock, in determining whether to list such stock or permit its
inclusion in the Nasdaq System. For example, if a company issues stock
shortly before seeking to list or qualify for inclusion, and such an
issuance would have been a violation of the Policy had the issuer been
listed on the Exchange or included in the Nasdaq System, the Exchanges
generally would not list the stock and the NASD would not include the
stock in the Nasdaq System. Similarly, if the issuer voluntarily
delisted from an Exchange or withdrew from the Nasdaq System in order
to effect such an issuance, the SROs also generally would not list the
stock or include it in the Nasdaq System.
There are other situations, however, in which such a prior issuance
would not necessarily be a bar to listing on the Exchanges or inclusion
in the Nasdaq System. For example, a company whose stock is traded
over-the-counter but not included in the Nasdaq System, such as on the
NASD's Over-the-Counter Bulletin Board, might effect such an issuance
well before the issuer contemplated listing on an Exchange or seeking
to be qualified for inclusion in the Nasdaq System. Under certain
circumstances, it may be appropriate for the SRO to permit the listing
or inclusion of such stock. To maintain necessary flexibility, this
area will be left open to the SROs for application to the particular
facts and circumstances of each case.\23\
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\23\Thus, the NYSE's Amendment No. 1 deletes the absolute
prohibition against listing non-voting common stock previously
issued in a manner not in conformity with the Policy. See note 4,
supra.
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IV. Summary of Comments
The Commission received two comment letters regarding the proposed
uniform voting rights policy: one in favor of the Policy\24\ and one
against the Policy because it was not sufficiently restrictive.\25\ In
addition to generally supporting the Policy and favoring the
flexibility accorded to SROs in interpreting the new Policy, the ABA
letter urges regular, periodic, fully informed, and generally
consistent interpretations by the SROs. Further, it favors prompt
publication of any meaningful distinctions in interpretation by the
SROs. The HFRRF letter principally opposes the ability under the Policy
for corporations with dual class structures to an unlimited right to
issue additional shares of super voting stock. The HFRRF letter
believes this aspect of the Policy will permit further
disenfranchisement of lower vote shareholders. It recommended that the
SROs adopt certain structural safeguards for those limited instances
where multiple capitalization is permitted.\26\
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\24\See letter from John F. Olson and Robert Todd Lang, American
Bar Association Section of Business Law, Task Force on Listing
Standards of Self-Regulatory Organizations, to Jonathan Katz,
Secretary, Commission, dated September 8, 1994 (``ABA letter'').
\25\See letter from Jennifer Morales, Executive Director,
Houston Firemen's Relief and Retirement Fund, to Jonathan Katz,
Secretary, Commission, dated August 31, 1994 (``HFRRF letter'').
\26\The recommendation includes: (1) Ensuring the voting
disparity between the classes is not greater than 10-1; (2)
providing the low-vote class with the exclusive right to elect at
least 25% of the board; and (3) at any time the high vote class
represents less than 12.5% of equity, providing the low vote class
shares with the right to vote in the election of the 75% of the
board that they did not elect directly.
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In addition, the NYSE previously solicited comments on an earlier
version of the proposed rule change before it submitted the proposal to
its board of directors. The NYSE received 93 letters supporting, 39
opposing, and 14 taking a neutral position towards the Policy.\27\
According to the NYSE, the negative comment letters generally opposed
the proposal for the following reasons: The NYSE does not have
jurisdiction in this area; the Policy is too restrictive and should
permit any shareholder voting policy that shareholders ratify; the
Policy is too flexible and the NYSE should revert to a strict ``one-
share, one-vote'' standard; and the Policy lacked specificity, thus not
providing sufficient guidance as to what voting rights structures the
Policy would permit. The letters in favor of the Policy supported its
adoption primarily for the following reasons: the Policy protects the
interests of shareholders; the Policy allows issuers responsible
flexibility in the issuance of lower voting stock; the Policy provides
greater certainty in the U.S. capital markets; the Policy provides
publicly traded companies flexibility with respect to formulating their
capital structures; and the Policy and its application will result in
uniformity among the markets, while providing the SROs needed
flexibility in certain circumstances to conduct a case-by-case
analysis. The NYSE circulated a revised draft to various of its
advisory committees to address some of these concerns and received 12
written comments--eight in support, four offering various technical
suggestions.
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\27\See SR-NYSE-94-20.
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Finally, the Commission notes that several commenters to the NYSE
draft proposal expressed concern that it could conflict with the
Business Roundtable decision, although no commenters raised this
concern directly to the Commission. The Commission believes such
concerns are misplaced. Each of the three SROs is adopting the Policy
into its own rules, whereas former Rule 19c-4 was adopted by the
Commission. The Business Roundtable court merely rejected the basis
offered by the Commission in adopting the Rule pursuant to Section
19(c) of the Act, holding that the Commission's justification had
exceeded its statutory authority thereunder. Although the substance of
former Rule 19c-4 is similar to the Policy, this has no bearing on the
validity of SRO action taken pursuant to Section 19(b) of the Act. In
fact, the court in the Business Roundtable decision specifically noted
that exchanges and securities associations have the authority to
propose rules, including listing standards, pursuant to Section 19(b)
of the Act, even through in its opinion the Commission may not itself
impose similar rules under Section 19(c) of the Act.\28\
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\28\See The Business Roundtable v. SEC, 905 F.2d 406, 409-10
(D.C. Cir. 1990).
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V. Discussion
The Commission believes that the proposed rule changes are
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities association
and national securities exchanges and, in particular, the requirements
of Sections 6 and 15A of the Act. Specifically, the Commission believes
that, consistent with Sections 6(b)(5) and 15A(b)(6) of the Act, the
Policy does not unfairly discriminate among issuers and will foster
investor confidence in the markets thereby protecting investors and the
public interest. In addition, the Commission believes that the Policy
and the procedures for its implementation further the maintenance of a
fair and orderly market. Finally, for the reasons set forth below, the
Commission finds that, consistent with Sections 6(b)(8) and 15A(b)(9)
of the Act, the proposal does not impose any burden on competition that
is not necessary or appropriate in furtherance of the Act.
A. Shareholder Protection and the Public Interest
The Commission believes that the issue of shareholder voting rights
has far-reaching implications for shareholder protection and the public
interest, and that an SRO rule ensuring a minimum level of shareholder
protection from disenfranchising actions is appropriate and consistent
with the Act. More specifically, it is reasonable for the SROs, in
providing a market to trade securities, to ensure that shareholders in
that market are treated fairly. Widespread occurrences of shareholder
disenfranchisement could undermine investor confidence in the market
and diminish investor participation. As discussed below, the Policy,
which was independently proposed by the NYSE, Amex, and NASD, and which
will operate through their respective listing standards, is drafted to
provide public shareholders as much protection as possible from
disenfranchisement, while minimizing intrusion into traditional areas
of state regulation and not unduly interfering with the ability of
public corporations to set their own capital structures.
The Commission believes that the minimum standard for voting rights
contained in the Policy will help prevent abusive disenfranchisement of
public shareholders and provide guidance to issuers that either
currently have other than a standard one-share, one-vote capital
structure or that are contemplating a capital reorganization that may
come under the scrutiny of the Policy. The SROs have identified as
narrowly as possible those corporate actions or issuances that would
disenfranchise shareholder voting rights.
For example, as discussed above, the new Policy is similar, in
part, to former Rule 19c-4, which was designed to discourage issuers
from engaging in activity involving corporate issuances or other
corporate actions that nullified, restricted, or disparately reduced
the voting rights of existing shareholders of common stock and would
continue to permit transactions permitted under that standard. Based on
the SROs' experience in applying former Rule 19c-4, and in light of
feedback they have received from various groups, the SROs have designed
the Policy to be more flexible than Rule 19c-4, especially in
addressing certain business or economic situations which would warrant
a corporation to issue disparate voting rights stock.
As a result, the Policy, in addition to permitting transactions
that had been permitted under former Rule 19c-4, generally will permit
corporate actions or issuances that are consistent with the
corporation's existing capital structure in addition to allowing the
SROs more flexibility in evaluating new issuances on a case-by-case
basis. The Commission believes that by assuring the continued
permissibility of those corporate actions permitted under former Rule
19c-4 release and under the interpretations issued pursuant to that
rule, the SROs have provided consistency for issuers.\29\ On the other
hand, the Commission believes that the Policy will provide the SROs
useful flexibility in evaluating transactions on a case-by-case basis
and permitting issuers to adopt certain new voting rights structures
consistent with the Policy.\30\
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\29\In this regard, the Commission has considered the
suggestions presented in the HFRRF letter and does not believe that
the absence of additional ``structural safeguards'' is inconsistent
with any requirements of the Act or the rules and regulations
thereunder. As stated earlier, the Policy recognizes that an
investor in a dual class corporation invests knowing and accepting
the capital structure in place and the possibility of additional
issuances of disparate voting rights securities.
\30\There may be valid business or economic reasons for
corporations to issue disparate voting rights stock. The Policy
provides the SROs with a voting rights standard which will provide
issuers with a certain degree of flexibility in adopting corporate
structures, so long as there is a reasonable business justification
to so doing, and such transaction is not taken or proposed primarily
with the intent to disenfranchise.
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Finally, the Commission believes that the SROs' decision to
``grandfather'' the capital structure\31\ of all listed (or qualified
for inclusion in the Nasdaq System) companies that have taken action
inconsistent with the new Policy is reasonable and, for the reasons
discussed herein, consistent with the purposes of the Act. First, the
Commission believes that it would be unduly burdensome upon issuers to
require them to go back in time and unwind transactions in order to
come into compliance with the Policy. Second, the Commission believes
that the Policy is a forward looking proposal to prevent
disenfranchising transactions and that it would not be equitable to
force issuers to try to undo transactions previously effected. Finally,
the Commission believes that the grandfather provision of the Policy is
necessary to avoid unfair discrimination between issuers, in that
issuers will not be required to change their capital structures in
order to come into compliance with rules to which they were not subject
when creating such a capital structure.
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\31\Under the Policy's grandfather provision, issuers can
continue to issue additional amounts of any security which is a part
of the capital structure being grandfathered. This would include
super voting stock, time phased voting plans, and capped voting
plans so long as the characteristics of such stock remains
unchanged. For instance, if pursuant to an existing time-phased
voting plan, the trigger date is four years, the issuer could not
issue a new class of stock with a different trigger date or change
the trigger date of the existing class.
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B. Statutory Requirements Applicable to Securities Exchanges and
Associations
As noted above, the Commission has reviewed the proposed rule
changes to ensure that they ``are not designed to permit unfair
discrimination between * * * issuers'' pursuant to Sections 6(b)(5) and
15(A)(6) of the Act and ``do not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of [the Act]''
pursuant to Sections 6(b)(8) and 15A(b)(9).\32\ In addition, the
Commission finds that the proposed rule changes are appropriate in the
public interest, and necessary for the protection of investors. For
several reasons, the Commission believes that the Policy fulfills these
requirements.
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\32\15 U.S.C. 78f(5)(5), 78o-3(b)(9) (1993).
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First, the Policy is not designed to permit unfair discrimination
among issuers. As noted above, the Policy will be applicable to all
Section 12 registered securities listed or quoted on the respective
markets. On Nasdaq this includes both Nasdaq NMS and Nasdq Small Cap
companies and on Amex this includes EM listed companies. In addition,
although an issuer participating in a violative transaction may no
longer be listed on any of the three markets, this is not the result of
unfair discrimination. The nature of a listing or eligibility
requirements is to set standards with which all issuers must comply in
order to have ready access to the market. Indeed, the Act recognizes
that U.S. securities markets will develop their own eligibility
standards for securities traded on their markets and duelist those
companies which do not comply. Thus, the Commission believes that the
adoption of the Policy as a listing or eligibility standard for the
respective Eros does not unfairly discriminate among issuers and thus
is consistent with the provisions of Sections 6(b)(5) and 15A(b)(6) of
the Act.
Second, the Commission believes that the Policy will enhance the
ability of the Exchanges and the NASA to fulfill their responsibilities
under Sections 6(b)(5) and 15A(b)(6) of the Act. In particular, the
Commission believes that the Policy is designed to prevent fraudulent
and manipulative acts and practice, and to promote just and equitable
principles of trade. Moreover, the Policy is designed to protect
investors and the public interest.\33\ As discussed above, the Policy
protects investors from disparate voting rights plans that result in
disenfranchisement, which eliminates a shareholder's right to have any
effect on future corporate decisions through transactions that are not
fully subject to market discipline. At the same time, however, the
Policy is crafted to permit disparate voting rights plans that do not
disenfranchise existing shareholders and assure that the creation of
shares with lesser voting rights are subject to market discipline. This
avoids unduly rights are subject to market discipline. This avoids
unduly burdening issuers and allows for flexibility in devising a
corporation's capital structure.
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\33\15 U.S.C. 78f(b)(5), 78o-3(b)(6) (1993).
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Third, the Commission also believes the Policy will not pose an
inappropriate burden on competition among markets because the Policy
only sets a minimum threshold standard common to all three SROs. Each
SRO is free to adopt a stricter standard in competing for listings, if
it chooses to do so. Further, the Policy still permits the SROs to
compete for listings based upon a variety of other factors such as the
quality of their markets, services offered, and fees charged. Finally,
in regard to competition among issuers, the Policy only restricts
issuers to the extent that they act to disenfranchise shareholders but
allows them to adopt a panopoly of non-disenfranchising structures.
C. Implementation Provisions and Commission Oversight
As discussed above, the SROs intend to adopt consistent procedures
on providing advice under the Policy to prevent inconsistent
interpretations that might invite abuse. In this regard, the SROs
intend to publish their respective interpretations and honor each
other's interpretations, with the home market having primary
jurisdiction over transactions proposed by its issuers. Generally, if
the NYSE or AMEX delist or the NASD deregisters an issuer's securities
for violation of the Policy, the issuer will not be accepted
subsequently for listing on the NYSE or Amex or qualify for inclusion
in the Nasdaq System. In addition, during a new listing application
process, each SRO will review past corporate action regarding voting
rights, including action undertaken shortly prior to applying for
listing or inclusion, in an attempt to flag such activity entered into
solely in order to circumvent the Policy.\34\
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\34\As noted above, the Policy will not be applied
retroactively. Nevertheless, the SROs intend to scrutinize closely
any disenfranchising actions taken shortly before a listing request.
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The Commission believes that these consistent interpretative
procedures are necessary to prevent degradation of the Policy and
provide consistency and predictability for issuers.\35\ The SROs would
not be able to proffer issuers an open, flexible voting rights standard
and at the same time retain a meaningful voting rights Policy if they
were open to unlimited issuer pressure to eviscerate the Policy. The
SROs recognize that, with the implementation provisions, there is less
likelihood that issuer pressure could create a ``loophole'' that will
defeat the purpose of the Policy of each SRO. The Commission agrees
that the SROs' action is necessary here to prevent abuse.
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\35\In this regard, the Commission agrees with the ABA letter in
that consistency and reliability of interpretations is fundamental
to the success of the Policy.
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Further, without the implementation procedures, the erosion of the
minimum standard, with the consequent occurrences of shareholder
disenfranchisement, could reduce investor confidence and participation
in these markets. On the other hand, consistent interpretation of the
Policy will increase investor confidence in the quality and reliability
of the securities traded in these markets. Thus, the provisions of the
Policy regarding implementation and interaction with other markets,
including the proposed procedures to honor interpretations under the
Policy, are an integral and necessary means of assuring meaningful
implementation of the Policy.
In addition, the Commission's extensive oversight over the
enforcement of all SRO rules, including listing standards, will help to
ensure that the Policy is not implemented in an anticompetitive or
discriminatory manner. For example, the Commission inspects SROs for,
among other things, compliance with SRO rules, and is authorized to
bring enforcement action against an SRO for failure to comply with its
own rules (including listing standards).\36\ Accordingly, any action by
an SRO to apply and enforce the Policy unfairly or in an
anticompetitive manner could subject the SRO to an enforcement action
by the Commission.
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\36\Under Section 19(h) of the Act, the Commission is authorized
to bring an enforcement action against any SRO that fails to comply
with its own rules. Therefore, failure by an SRO to apply its
listing standards, or action by an SRO to enforce them in a manner
inconsistent with its rules, would subject the SRO to discipline by
the Commission.
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Finally, the Commission's authority in approving delistings and in
reviewing appeals by issuers whose securities are delisted from an
Exchange or terminated from inclusion in the Nasdaq System should
further ensure fair application of the Policy. For example, before a
security can be delisted by an Exchange under Section 12 of the Act,
the Commission must enter an order granting the application to
delist,\37\ and may order a hearing to determine whether such
application has been made in accordance with the rules of the
Exchange.\38\ Moreover, under Section 19(d)(2) of the Act, the
Commission is authorized to review any SRO action that prohibits or
limits any person in respect to access to services offered by the
SRO.\39\ In summary, the Commission's pervasive oversight over the
implementation of SRO listing standards, in addition to the right of
any issuer delisted, terminated from quotation, or denied listing as a
result of an interpretation under the Policy to have the action
reviewed by the Commission, will help to ensure that the Policy will
not be implemented in an anti-competitive or discriminatory manner.
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\37\See e.g., Securities Exchange Act Release No. 32706 (August
2, 1993).
\38\17 CFR 240.12d2-2(c) (1994).
\39\Section 19(f) of the Act sets forth the applicable standard
of review of any such action taken by an SRO, which would require
the Commission to (1) ascertain if the action was taken in
accordance with the rules of the SRO and (2) ensure that such rules
are, and were applied in a manner consistent with the purposes of
the Act.
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VI. Conclusion
The Commission believes that the NYSE's, Amex's, and NASD's
proposals to adopt the Policy as set forth above is an important step
toward increasing shareholder protection, thereby enhancing investor
confidence in the U.S. securities markets. The Commission continues to
encourage the adoption of such standards by the remaining SROs, and
remains confident that such a voting rights listing standard is a
beneficial step toward strengthing the U.S. securities markets.
The Commission also finds that the proposed rule changes are
consistent with Sections 6(b)(8) and 15A(b)(9)\40\ of the Act, which
provide that an SRO's rules must not impose any burden on competition
not necessary or appropriate in furtherance of the purposes of the Act.
The Commission recognizes that, under the Policy, issuers with capital
structures that do not conform to the requirements of the Policy will
not be permitted to list or include their securities on three major
U.S. markets. Nevertheless, the Commission is persuaded by the SROs'
stated objectives--to enhance investor protections\41\; and to provide
investors with the protections the Policy affords and the benefit of
knowing that issuers cannot avoid the effects of a market's voting
rights policy by seeking an interpretation in another market\42\--that
the Policy and procedures for interpretations under the Policy do not
place an undue burden on competition and that any burden on competition
that may result from the Policy is appropriate in furtherance of the
purposes of the Act.
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\40\15 U.S.C. 78f(b)(8) and 15 U.S.C. 78o-3(b)(9) (1993).
\41\See File No. SR-NASD-94-45 at 15.
\42\See File No. SR-NYSE-94-20 at 4, and File No. SR-AMEX-94-29
at 10.
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Similarly, as discussed in this order, the Commission believes the
proposed rule changes do not violate Sections 6(b)(5) and 15A(b)(6) of
the Act,\43\ which provide, among other things, that the rules of an
SRO may not be designed to permit unfair discrimination between
issuers, among others.
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\43\15 U.S.C. 78s(b)(5) and 15 U.S.C. 78o-3(b)(6) (1988).
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For the reasons stated above, as well as the analysis contained in
this order, the Commission believes that the protections afforded
shareholders by the adoption of SRO proposals that will prohibit
certain disparate voting rights plans that disenfranchise existing
shareholders is consistent with the requirements of the Act and the
rules and regulations thereunder pertaining to a national securities
association and to national securities exchanges.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\44\ that the proposed rule changes (SR-NYSE-94-20, SR-Amex-94-29,
and SR-NASD-94-95) are approved.
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\44\15 U.S.C. Sec. 78s(b)(2) (1993).
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-31728 Filed 12-23-94; 8:45 am]
BILLING CODE 8010-01-M
