[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]


=======================================================================
-----------------------------------------------------------------------

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'').
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \8\In addition, each SRO has proposed to supplement its rule 
with interpretations, commentaries, or policy statements in its 
respective proposals.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \13\The term ``initial public offering'' is intended to mean the 
offering of securities by a company by which it goes public.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \27\See SR-NYSE-94-20.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \28\See The Business Roundtable v. SEC, 905 F.2d 406, 409-10 
(D.C. Cir. 1990).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \32\15 U.S.C. 78f(5)(5), 78o-3(b)(9) (1993).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \33\15 U.S.C. 78f(b)(5), 78o-3(b)(6) (1993).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \43\15 U.S.C. 78s(b)(5) and 15 U.S.C. 78o-3(b)(6) (1988).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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