The Securities and Exchange Commission, grumbling about "adolescent" behavior by the major stock exchanges, moved yesterday to guarantee that American shareholders will not lose their voice in corporate affairs.
The commission voted 4-1 to issue a tentative regulation that would virtually bar public trading in U.S. corporations that disfranchise their shareholders or substantially reduce stockholder authority in management affairs.
The regulation is subject to public comment through mid-July and will be the subject of a public hearing, tentatively scheduled for July 22. It also may be dropped entirely if the major exchanges end an impasse over adopting a voluntary voting rights rule.
But barring the unexpected, the rule could be the subject of a final vote by the commission sometime after Labor Day, said Richard Ketchum, the SEC's director of market regulation.
Yesterday's SEC's vote came a week after talks collapsed among the New York Stock Exchange, American Stock Exchange and National Association of Securities Dealers on a consensus rule. The NYSE currently has a "one-share, one-vote" standard, but the others allow arrangements under which stockholders have unequal voting rights.
The commission earlier had postponed any formal action on the issue, saying it would prefer that the markets work out the matter themselves and that progress was being made. Commissioners also expressed concern about the government being seen as interfering with internal corporate affairs.
But the SEC quickly rescheduled discussion of the matter when the exchanges reached an impasse, and the commissioner who offered the proposed rule indicated he was fed up.
"We are giving a signal . . . of our willingness to do that job if the major markets are either so adolescent or unresponsive or self-destructive or perhaps defensive of their past role as to refuse to do their own job or fulfill their own highest responsibilities," said commissioner Edward H. Fleischman.
The commission's action confronts a recent phenomenon: the desire of some corporations to disfranchise their stockholders as a defense against hostile takeovers.
By persuading shareholders to surrender their voting rights, perhaps by paying an extra dividend, corporate managers feel they can remove the possibility that a raider will buy enough voting shares to stage a takeover.
But critics contend that the efforts turn the concept of ownership upside down. Shareholders, not managers, are the ones who are supposed to own a company, they say.
The issue came to a head when the New York Stock Exchange asked the SEC for permission to drop its 60-year-old rule requiring listed companies to grant shareholder voting rights. The NYSE said it feared that companies would defect to rival exchanges that do not have such a requirement.
The SEC instead deferred action on the NYSE request and approved its own voting rights rule.
The rule as proposed by the commission does not mandate a one-share, one-vote rule but it does virtually end the ability of corporations to use disfranchisement as a defense.
It provides that no exchange or association can list or quote stock from a U.S. corporation that has taken any action to nullify, restrict or disparately reduce the voting rights of existing shareholders. The rule would not apply to actions in progress by May 15.
Ketchum, in a briefing after the meeting, said the SEC would look at corporate actions to determine whether changes in voting authority represent legitimate business activity or an attempt to disfranchise shareholders.
He said corporations can issue so-called "Class B" stock -- without voting rights -- because that does not affect the voting strength of existing shareholders. But "Class A" stock must retain its voting rights, he said.
He also said an arrangement such as General Motors' acquisition of Electronic Data Systems, in which EDS shareholders got GM shares with lesser voting rights, probably would be viewed as a legitimate business activity because it does not disfranchise existing GM stockholders.
But a corporation that bought back its publicly traded voting stock to become a private company, then six months later went public with nonvoting stock, probably would be in violation, he said.
Ketchum said the SEC has postponed action on the original NYSE petition as a moot point for now, partly because the Big Board has signaled its support of the proposed rule. The NASD earlier proposed a rule similar to the SEC proposal.
The SEC's action also was endorsed by T. Boone Pickens Jr., the corporate takeover specialist whose United Shareholders lobbied for a one-share, one-vote standard.
"The exchanges had every opportunity to put their houses in order," Pickens said. "They failed to act. The commissioners made the right decision to draft a standard."