NEW YORK — THE CHALLENGE TO SHAREHOLDER RIGHTS A vast array of restrictions on shareholder rights is producing perhaps the greatest shift in control of American business since the Great Depression. Executives say the restrictions are needed to fend off destructive takeovers. Critics say they leave shareholders powerless and management unassailable. This special report examines the controversy and the consequences, beginning with a story on Page 1, Part I.
Like the corporations whose shares cross its trading floor by the hundreds of millions every working day, the New York Stock Exchange is a business. Lately its chairman, John Phelan, has had to face the question of whether competition is forcing the Big Board to give up its tradition of quality control.
As early as next month, the NYSE will ask federal regulators to approve the most significant change in its standards for listed securities since those standards came into being in 1926. The request may become the focus of the most important public debate in half a century over the issue of shareholder rights.
At issue is a NYSE plan to end its 1926-vintage prohibition on the issuance of common stock with unequal voting rights. That might sound less than earthshaking, given that the turnout on corporate votes often falls short of that in off-year primary elections.
But the principle of one share, one vote has become a rallying cry for the growing number of shareholder-rights activists. When the Council of Institutional Investors, a confederacy of government pension plan sponsors organized by California state Treasurer Jesse Unruh, convened in March to write a "shareholders' bill of rights," the preservation of one share, one vote was Article I.
Institutional investors increasingly sense that corporate managements are creating multiple-class stock issues with unequal votes to curtail their authority as stockholders over directors and executives.
In the last two years, scores of corporations have implemented, proposed or contemplated dilutions of the one share, one vote rule. Generally their goal is to discourage hostile takeovers by concentrating control in the hands of small groups of insiders aligned with management.
Of companies now listed on the NYSE, 17 already have plans or proposals to create unequal voting classes. Some professionals estimate that as many as 200 of the nation's largest companies may join this line if the NYSE changes its listing standards.
Some people consider this trend to be an adulteration of the common share's traditional status in a corporation's capital structure.
Although stockholders get a share of corporate profits through the payment of dividends, they have to stand in line for that money behind all other creditors and investors, including lenders, bondholders and the owners of preferred stock.
To make their junior status more palatable, common stockholders have traditionally been given the status of owners through the voice in corporate affairs that they can exercise by voting to elect directors and on other issues.
With unequal voting shares, common stockholders will be left with a diminished capacity to safeguard their more risky investment.
"If you let me create the world, I'd create one class of common stock," NYSE Chairman Phelan said in a recent interview. But the exchange now finds itself in a world not of its own making.
With their less stringent standards, the American Stock Exchange and the over-the-counter market run by the National Assn. of Securities Dealers have been able to attract several companies tossed off the NYSE for violating its dual-class prohibition.
Faced with the prospect of ejecting, or "delisting," such important companies as General Motors and Dow Jones & Co. for creating stock with unequal voting rights, the Big Board in 1984 suspended such delisting proceedings and asked a blue-ribbon committee to review its rules.
Under former Securities and Exchange Commissioner A. A. Sommer Jr., the panel recommended that companies be permitted to issue common stock with unequal voting rights as long as the change was approved by two-thirds of existing stockholders and by a majority of outside directors, and provided that one class of stock has no more than 10 times the voting power of another class. The proposal is the model for the NYSE's submission to the SEC.
But more than just the nature of common stocks traded on the NYSE would change if the SEC gives its approval. At the core of the exchange's proposal is its contention that it can no longer afford to be, on the SEC's behalf, the sternest policeman of the stock market.
"Our listed companies are saying, 'you should have been in the (regulation) business in 1900, but you shouldn't be now,' " Phelan said.