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Let The Holders Vote On A Device To Defeat Raiders

January 18, 1987|A. A. SOMMER Jr. | A. A. Sommer Jr. is a former member of the Securities and Exchange Commission and a lawyer who has represented companies seeking the repeal of the one-share, one-vote rule.

In 1926, the New York Stock Exchange began articulating a policy that became increasingly hostile to companies that had two classes of common stock with different voting rights.

At that time, the American Stock Exchange was still known as "the Curb" because it had been operating indoors for only five years.

In addition, a sizable number of regional and city exchanges traded the stocks of local companies, and the over-the-counter market was an ill-regarded orphan.

A listing on the "Big Board" was the goal of the management of every publicly held company, the mark that the company had achieved the pinnacle, the badge of excellence and integrity.

In that environment, with that cachet, the NYSE could stiffen its listing requirements without fear that companies might desert it for another market for their stocks and bonds.

And defiance of the exchange could result in ignominious expulsion from that exclusive list that included virtually all the important names of corporate America: Radio Corp. of America, General Motors, Chrysler, General Electric and the like.

The NYSE could be the intrepid arbiter of corporate governance. It had the only game in town, at least the only one that aspiring companies wanted to play. Thus, it came to pass that the major companies of America all marched to the refrain of "one share, one vote."

Now, come forward to 1987. The Amex has achieved respectability and acceptance. Most astonishingly, the NASDAQ over-the-counter market is the fastest-growing and most computerized market in the land, where many securities eligible for NYSE or Amex listings are traded.

Now add another ingredient: the uninvited tender offer.

During the early 1980s, this plague swept the land. Managements sought means of warding off the scourge, but one by one, the devices they adopted perished, killed by the courts, undone by the ingenuities of investment bankers and lawyers or trampled by the Securities and Exchange Commission.

State statutes intended to hamper hostile bids were killed by the Supreme Court; margin restrictions on "junk bonds" were immediately nullified by new ways of doing business; restrictions on two-tier offers were made passe by "any and all" bids financed with junk bonds; "poison pills" suffered a lingering death at the hands of the courts and selected issuer tender offers were scuttled by the SEC.

Surprising Frequency

Faced with these futile attempts to stop the onslaught, managements increasingly turned to the one means that offers near-certain immunity from hostile offers: two classes of common stock structured in various ways to assure that voting control would rest with management and its allies.

Such recapitalizations, of course, require shareholder approval, but with a frequency surprising to many, shareholders have approved such arrangements by substantial majorities.

Beginning in 1983, a trickle of NYSE-listed companies began submitting to their shareholders proposals for recapitalizations involving two classes of common stock.

By 1985, a handful had gone that route, notwithstanding expressions by the exchange of an intention to delist them, and there were rumors that dozens of others were considering the same course.

With the Amex and NASDAQ enjoying enhanced respectability, the choice between the continued satisfaction of a NYSE listing and exposure to the dangers of a hostile takeover was for many an easy one to make.

Faced with the likelihood of a significant exodus from its ranks, the exchange appointed a committee to study the problem, and it eventually asked the SEC for permission to eliminate the one-share, one-vote rule.

In December, 1986, the SEC held two days of hearings on the matter, and Wall Street and corporate America anxiously await the outcome of their deliberations.

Unlike the poison pill and other defenses against tender offers that can be put in place by the directors acting alone, two-class recapitalizations require shareholder approval under the laws of every state, and the NYSE proposal would require approval by a majority of the shares excluding those held by management and others having close relationships to management.

Many of those opposed to the NYSE proposal regard it--and rightly so--as possibly a formidable obstacle to their ability to take over exchange-listed companies by hostile tender. But it is by no means clear that all shareholders yearn for the windfall of a takeover. Institutions certainly do.

Under constant pressure to achieve better-than-average performance and devoid of any long-term interest in the fates of portfolio companies, they leap at the prospect of a takeover bonanza.

Often early in the struggle, they unload their stock into the waiting hands of the arbitrageurs who then, with the most insidious of short-term interest, quickly become the gods of the market, to be placated by the willingness of management to assume horrendous debt burdens, corporate dismemberment, shelving of long-term plans, else they deliver the company to the invader.

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