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85-49 Request for Comment on Shareholder Voting Rights for NASDAQ National Market System Companies
TO: All NASD Members, NASDAQ Companies and Other Interested Persons
LAST DATE FOR COMMENT: AUGUST 30, 1985.
The National Association of Securities Dealers, Inc., is requesting comment from NASD members, NASDAQ issuers and other interested persons on certain concepts related to voting rights of the shareholders of companies whose securities are included in the NASDAQ National Market System (NASDAQ/NMS). The NASD Board of Governors is considering various approaches to the regulation of voting rights and has not yet determined which approach to pursue. Accordingly, it is seeking comments to assist it in reaching a determination on this important issue.
HISTORY AND BACKGROUND
This solicitation of comment is part of an overall study of corporate governance standards for NASDAQ/NMS first undertaken in the fall of 1984. This study was conducted primarily through the NASD Corporate Advisory Board, a body consisting of chief executive officers of NASDAQ companies that reports to the NASD Board of Governors. The Advisory Board has played an important role in the evolution of NASDAQ as the fastest-growing and the second-largest securities market in the United States and in the continued development of NASDAQ/NMS.
Since its inception in 1982, NASDAQ/NMS has grown steadily in size and stature. In November 1984, the Securities and Exchange Commission approved a change to NASDAQ/NMS inclusion criteria that has resulted in a further enhancement in the quality of NASDAQ/NMS companies, The new standards shifted the emphasis from transactional volume to financial considerations. As of the end of 1984, the average NASDAQ/NMS company had assets of over $570 million and equity in excess of $84 million. Revenues averaged $181 million with net income of over $8 million. The average price per share for NASDAQ/NMS issues was in excess of $15, and the average issue had almost 8 million shares outstanding and a market value in excess of $120 million. NASDAQ/NMS had an average of 11.5 broker-dealer firms making a market per security.
As NASDAQ/NMS matured, the Corporate Advisory Board believed it was appropriate to consider the quality of corporate governance of NASDAQ/NMS companies. This concern was heightened by numerous state securities administrators who had noted the differences in approach to corporate governance by NASDAQ/NMS and certain of the exchanges. Thus, the Corporate Advisory Board developed rule proposals relating to a number of corporate governance issues which, upon authorization by the Board of Governors, were published for comment in March of this year 1/. These proposals were the subject of generally favorable comments and were approved with minor amendments by the NASD Board of Governors on July 12, 1985. They were thereafter filed with the Securities and Exchange Commission and final approval is expected shortly 2/. Upon effectiveness they will govern the future activities of NASDAQ/NMS companies.
In their study of corporate governance issues, the Corporate Advisory Board and the Board of Governors both determined that the issue of shareholder voting rights should be considered separately. It was therefore considered appropriate to survey NASDAQ issuers to obtain additional information on the number of NASDAQ issuers having multiple classes of common stock with different voting rights and the nature of such voting .rights provisions. The survey, which was mailed to issuers on May 13, 1985, 3/ was undertaken in an environment where several Congressional committees, the New York Stock Exchange and the California Corporations Department were conducting reviews of existing policies with respect to voting rights.
Completed surveys were returned by 1,005 NASDAQ companies, including 588 NASDAQ/NMS companies. At their July 1985 meetings, both the Corporate Advisory Board and the NASD Board of Governors reviewed the results of the survey and discussed the possible imposition of common stock voting rights requirements on NASDAQ/NMS issuers. During the time between the mailing of the survey and the July meetings, bills had been introduced in both the United States Senate and the House of Representatives that would impose voting rights requirements on all securities quoted in the NASDAQ System or traded on any registered securities exchange.
The Corporate Advisory Board and Board of Governors have carefully considered the overall issue of shareholder voting rights and have reached certain preliminary conclusions. However, they determined it would be inappropriate to adopt a final resolution of this important issue without soliciting comment on possible alternative approaches.
Preliminarily, both Boards have concluded that any restrictions on voting rights adopted by the NASD should apply only to securities included in NASDAQ/ NMS and should not apply to non-NMS NASDAQ securities. They have also concluded that it would be unfair to deprive shareholders of existing rights or to require issuers to engage in potentially impossible attempts to obtain shareholder approval of changes in capital structure. Therefore, it has been preliminarily determined that any restrictions on voting rights should not apply to issues of securities presently outstanding, that is, existing NASDAQ/NMS issues with disparate voting rights would be "grandfathered" under any new rule.
Given these preliminary conclusions, two different approaches to voting rights restrictions are being considered without any determination as to which approach is preferable. Comments are therefore being solicited on both approaches as well as other approaches that may be suggested by commentators. Such alternative suggestions will be welcomed and are encouraged. The approaches presently being considered by the Board are as follows:
The first proposal would impose a one-share, one-vote standard for the common stock of all NASDAQ/NMS companies. Existing NASDAQ/NMS issues of securities would be grandfathered to avoid the unfairness which would result from the prohibition of voting rights provisions that were permissible at the time they were adopted by the issuer. No company would subsequently be included in NASDAQ/NMS under this proposal unless all classes of its common stock had equal voting rights. A grandfathered NASDAQ/NMS company would not be permitted to issue a new class of stock with other than equal voting rights.
The second proposal would set a general requirement of one vote per share, but would allow the creation of different classes of common stock with disparate voting rights if such provisions were approved by the holders of at least two-thirds of the shares outstanding. The differential in voting rights could not exceed ten votes to one and a "sunset" provision on the voting rights differential of a period not to exceed ten years would be imposed. In order to continue the voting rights differential upon the expiration of the ten-year period, the issuer would be required to obtain a favorable vote from the holders of two-thirds of all common stock outstanding. Thus, in the "sunset" vote, all shares including the lesser voting shares would vote equally. Failure to obtain an affirmative vote of two thirds of all shares to continue the two classes of stock with unequal voting rights would result in all shares of each class having an equal vote. As with the first proposal, existing issues of NASDAQ/NMS securities having voting rights other than one vote per share would be grand-fathered and there would be no "sunset" provision as to those shares. Subsequent issues of common stock would have to conform to the requirements of this proposal.
REQUEST FOR COMMENTS
The NASD is requesting comments on the foregoing proposals as well as other constructive alternatives and suggestions which commentators may offer. In particular, commentators may desire to comment on the portability of disparate voting rights from other marketplaces and on enabling the lessor voting shareholders to elect a portion of the Board.
All comments received during this period will be reviewed by the Corporate Advisory Board and the Association's Board of Governors. All written comments should be addressed to:
James Cangiano, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006
All comments must be received by August 30, 1985. Any questions regarding this notice should be directed to either Frank J. Wilson at (202) 728-8319 or Dennis C. Hensley or T. Grant Callery at (202) 728-8294.
Gordon S. Macklin
1/ See NASD Notice to Members 85-20 (March 28, 1985).
2/ See SEC File No. SR-NASD-85-20.
3/ See Notice to All NASDAQ Companies, "Survey on Certain Corporate Governance Issues," May 13, 1985.