A federal appeals court yesterday overturned the Securities and Exchange Commission's "one-share, one-vote" rule, which was intended to prevent corporations from diluting the voting rights of their shareholders as a tactic to fend off corporate raiders.

The ruling, if allowed to stand, would represent a setback for the SEC, which responded to the takeover craze of the late 1980s by assuming a tougher role in overseeing the way publicly held corporations managed their internal affairs.

The one-share, one-vote rule was intended to prevent schemes in which company officials persuaded shareholders to let them concentrate voting control of the company in the hands of top executives and directors in order to fight off raiders.

Fearing unwanted takeover offers, some companies created two classes of stock -- for example, Class A shares with 10 votes per share and a 20-cent-a-share dividend, and Class B with one vote per share and a 60-cent-a-share dividend. Investors would be inclined to take the shares with the higher dividend while company insiders would take the shares with a greater number of votes, thus increasing their hold on the company.

The U.S. Court of Appeals here, in a unanimous decision, ruled that the SEC went beyond its statutory authority when it adopted regulations preventing corporations from creating classes of stock with unequal voting rights -- even where the firms would have shareholder approval.

The SEC action was based, in part, on the belief that shareholders were often only vaguely aware of what company executives were doing when the dual classes of stock were created. But the appeals court ruled that the one-share, one-vote rule, adopted in July 1988, interfered with traditional powers of the 50 states in setting the rules of "corporate governance" within their boundaries.

The SEC claimed in court that it was empowered to adopt the one-share, one-vote rule under its right to regulate the operations of the various stock exchanges, as well as its power to determine what companies are required to disclose in their formal proposals to shareholders.

The appeals court said, essentially, that while the SEC could tell corporations they must disclose what they are doing, the agency could not tell the companies how to set up their shareholder voting plans.

"We're disappointed with the ruling," said SEC spokesman John D. Heine, "and we are reviewing the decision to determine our further course of action." The SEC could still ask the U.S. Supreme Court to hear an appeal on the case.

The three-judge panel took a swipe at the SEC's claims about the powers it was given by Congress over the stock exchanges and how that power could be extended. "To argue that {the law passed by} Congress ... supports SEC control over corporate governance through national listing standards is to gamble that the court will accept a commission spin on a statutory argument without even a glance at its context. Wrong court, bad gamble," said the judges.

The opinion was written by Judge Stephen F. Williams and concurred with by judges James L. Buckley and Harry T. Edwards.

The two-year legal challenge to the SEC was brought by the Business Roundtable, which represents 200 of America's largest corporations, including American Express Co., Xerox Corp. and General Mills Inc. Robert D. Rosenbaum of Arnold & Porter, who represented the Roundtable, said, "This is a very important decision because it establishes that the SEC does not have the authority to regulate corporate governance." Bruce Atwater, chief executive officer of General Mills, said, "American shareholders won an important victory today."

But the United Shareholders Association denounced the court ruling. USA director Ralph Whitworth called it a "major blow to America's 47 million shareholders and the entire free enterprise system."