Like the aftershocks that follow an earthquake, the storm of hostile takeovers has touched off a lively debate over the issue of "shareholder democracy."
The chairmen of the three major stock exchanges are scheduled to testify at House hearings this week on a proposal to permit companies listed on the New York Stock Exchange to issue different classes of common stock with unequal voting rights.
The creation of two classes of stock -- with a new class firmly in the control of friendly hands -- has become an increasingly popular strategy by corporate management seeking to fend off hostile takeover attempts. Typically, control over votes on takeover bids and other vital matters is taken away from the class of common stockholders and given to the class of "safe" stock.
Current NYSE rules specify that all of the common stock of companies listed on its exchange must have equal voting rights, but the American Stock Exchange and the over-the-counter market allow companies to have different classes of common stock with disproportionate voting rights.
As a result, some companies that have switched to two classes of stock have moved from the Big Board to the other exchanges.
Securities and Exchange Commission officials said last week they have received preliminary proxy materials from 21 companies that are considering changing to two classes of common stock.
As part of its effort to avoid losing other blue-chip companies, including Dow Jones & Co. and Hershey Foods Corp., which recently have adopted two classes of common stock with unequal voting rights, the NYSE is considering bringing its rules in line with the other exchanges.
To preserve the principle of shareholder democracy, with equal voting rights for all common stockholders, Sen. Howard M. Metzenbaum (D-Ohio) reportedly plans to introduce legislation that not only would prevent the NYSE from lowering its listing standards, but also would force the AMEX and over-the-counter market to raise their standards, sources said.
Some Wall Street experts are concerned that the proposed change would threaten the integrity of the NYSE and the nation's capital markets by encouraging widespread and rapid adoption of different classes of stock by companies interested in preventing unfriendly takeovers.
Bevis Longstreth, a former member of the SEC and a partner at Debevoise & Plimpton in New York, summed up the debate:
"If this recommendation is adopted, will it simply be a coda to the process of separating ownership from control -- the last symbolic nail in the long-closed coffin of shareholder democracy -- or the overture to new and perhaps fundamental change in the character of corporate activity?" he asked.