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87-32 Request for Comments on Shareholder Voting Rights Proposal For NASDAQ Companies
TO: All NASD Members and Other Interested Persons
LAST DATE FOR COMMENT: JUNE 30, 1987.
The NASD requests comments on a proposed amendment to Schedule D to the NASD By-Laws that would make an issuer ineligible for initial or continued inclusion in the NASDAQ System if it issues securities or takes corporate action that would have the effect of nullifying, restricting, or disparately reducing voting rights of holders of an outstanding class or classes of common stock.
The text of the proposed amendment is attached.
During the fall of 1984 and the spring of 1985, the NASD Corporate Advisory Board, which is currently composed of chief executives of 16 NASDAQ issuers, and the NASD Board of Governors developed an initial set of corporate governance criteria to be applicable to NASDAQ National Market System issuers. This process included a survey of issuers 1/ and publication for comment of proposed rules. 2/ The criteria developed by the Board of Governors are currently on file with the Securities and Exchange Commission3/ and approval is anticipated in the near future.
One area in which the Corporate Advisory Board and the Board of Governors determined not to impose requirements during their initial consideration of the corporate governance issue had to do with allowing issuers to create either multiple classes of stock having unequal voting rights or voting and non-voting stock.
In July 1985, the NASD Board of Governors authorized the solicitation of public comment on the voting rights issue. 4/ At that time, the NASD proposed for consideration two possible concepts for limiting issuers' ability to create disparate voting rights. The NASD received approximately 100 comment letters. The NASD Board reviewed the comment letters at its September 1985 meeting and concluded that the issue of shareholder voting rights required further study. The Board retained an independent outside consultant to study a number of issues raised during the comment process. The NASD selected Professor Daniel R. Fischel of the University of Chicago's Center for Law and Economics to undertake the study.
In that study, 5/ Professor Fischel analyzed the status of multiple classes of common stock in the context of the "race to the bottom" thesis, the economics of shareholder voting, and the evidence developed by other studies of shareholder voting rights. In addition, the study analyzed the costs and the benefits inherent in the imposition of a prohibition on dual-class common stock. Among other conclusions, the Fischel study found that the vast majority of companies opt for a one-share, one-vote structure, but that in appropriate cases, multiple classes may fulfill legitimate business and economic functions.
The issue of voting rights was again brought to the fore by the filing of a proposed rule change by the New York Stock Exchange in September 19866/ which would have eliminated the exchange's long-standing one-share, one-vote requirement. Using a procedure reserved for only the most critical of policy issues, in December 1986, the SEC held two days of public hearings on the proposal. Approximately 50 witnesses, including representatives of the NASD, testified. A common theme in those hearings was that some uniformity among the marketplaces is appropriate in this area, with some witnesses suggesting that there may be a need for federal legislation.
In March 1987, at the request of the NASD Corporate Advisory Board and the Board of Governors, the NASD suggested, in a letter to SEC Chairman John S. R. Shad, 7/ the framework of an approach to voting rights that would allow the creation of disparate voting or non-voting stock if it would be accomplished in a manner which would not disenfranchise existing securities holders. NASD President Gordon S. Macklin also stated in that letter that "the Association would like to suggest that all equity securities markets should have a uniform rule for domestic securities which would emphasize the principle of equal voting rights but allow for legitimate variations."
As a result of this initiative, the SEC convened several meetings among representatives of the New York and American stock exchanges and the NASD. Based upon discussions at these meetings, the Corporate Advisory Board recommended and the NASD Board of Governors authorized solicitation of comments on the rule proposal which accompanies this notice to members.
The rule proposal takes the form of an amendment to the provisions of Schedule D to the NASD By-Laws that sets qualification standards for domestic NASDAQ securities. The general premise of the proposal is to prohibit issuers of NASDAQ securities from issuing any class of securities or taking any other corporate action that would nullify, restrict, or disparately reduce the voting rights of holders of an outstanding class or classes of publicly traded securities of the issuer.
The proposed rule creates two sets of presumptions as to transactions which do, or do not, have the effect of restricting, nullifying, or disparately reducing voting rights. These are, however, only presumptions and the ultimate decision as to whether the issuance of a class of greater, lesser, or non-voting securities violates the rule must be based upon a determination of whether the action restricts, nullifies, or disparately reduces voting rights.
The following transactions are presumed not to restrict, nullify, or disparately reduce voting rights:
This provision (Subsection (2)(D)) is intended to clarify that companies are permitted to issue new classes of securities with greater or lesser voting rights so long as such issuance is not contrary to the prohibition of Section 3.o., but that any such issuance must meet the requirements of Subsection (2)(D) in order to enjoy a presumption of compliance. Any company deviating from the criteria of Subsection (2) would bear the burden of demonstrating compliance with Section 3.o.
The following transactions are presumed to restrict, nullify, or disparately reduce voting rights:
The proposed rule would be prospective in its application and would "grandfather" issuers that currently have outstanding multiple classes of stock with disparate voting rights or that are in the process of implementing such a structure for which proxy materials have been filed with the SEC on or before May 15, 1987. Issuers that have had multiple class capitalizations authorized but that have not issued securities pursuant thereto before May 15, 1987 would not be grandfathered. However, if the issuer had on file with the SEC before May 15, 1987 a registration statement or offering circular for the issuance of securities of a previously authorized class, authorized securities of that class would be grandfathered. Subsequent offerings of new classes of securities of grandfathered issuers would have to comply with the rule.
REQUEST FOR COMMENTS
The NASD is requesting comments on the foregoing proposal, as well as other constructive alternatives and suggestions which commentators may offer. In particular, the NASD requests comments on the effect the proposal would have on the ability of issuers to adopt so-called "fair price" and other charter amendments that would operate in the context of a two-tier tender offer. An example is an amendment to a corporate charter that requires that shareholders in the second phase of a tender offer receive substantially the same form and amount of consideration as those in the first. These provisions are frequently adopted in conjunction with a super-majority provision requiring a vote of a higher percentage of shareholders to approve the second step of a tender offer where equivalent compensation is not going to be paid. The NASD understands that there are several variations of such provisions. Commentators are requested to identify and address these variations in the context of the proposed rule and its impact, if any, upon them.
The NASD also requests comments with respect to any areas of the voting rights issue which have not been addressed in this notice, but which commentators feel are pertinent.
All comments received will be reviewed by the NASD Corporate Advisory Board and the Board of Governors. Comments should be addressed to:
Mr. Lynn Nellius
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
All comments must be received by June 30, 1987. Questions regarding this notice should be directed to either the undersigned, at (202) 728-8319, or John F. Guion, Senior Vice President, NASDAQ Company Services, at (202) 728-8379.
Frank J. Wilson
Executive Vice President and General Counsel
PROPOSED AMENDMENT TO PART IIB, SCHEDULE D OF THE NASD BY-LAWS*
QUALIFICATIONS FOR AUTHORIZED SECURITIES
* * * *
B. Rules for Authorized Domestic Securities
* * * *
* * * *
1/ This survey was mailed to all NASDAQ companies on May 13, 1985.
2/ Notice to Members 85-20 (March 28, 1985).
3/ SEC File Nos. SR-NASD-85-20 and 86-27.
4/ Notice to Members 85-49 (July 19, 1985).
5/ D. Fischel, Organized Exchanges and the Regulation of Dual Class Common Stock (March 1986).
6/ SEC File No. SR-N YSE-86-17.
7/ Letter from NASD President Gordon S. Macklin to Chairman John S. R. Shad, dated March 13, 1987.
* New language is underlined