Institutional investors are miffed at a proposal by the country's three largest stock exchanges allowing companies with multiple classes of stock to issue more shares with super voting rights.
The uniform voting rights standard - recently submitted by the New York Stock Exchange, the American Stock Exchange and the NASDAQ stock market to the Securities and Exchange Commission for approval - could cost investors dearly by letting companies with several classes of stock issue more shares of super voting stock, without correspondingly issuing more lower voting stock.
The proposal also would allow new companies to create different classes of stock with unequal voting rights when they go public or issue non-voting stock.
Moreover, foreign companies would be free to issue shares with unequal voting rights as long as their countries permit such a capital structure. Under the proposal, the three markets also would deny a listing to a company that previously had violated the other markets' voting rights policy.
The rule also would permit companies to issue alphabet stock - different classes of shares linked to the performance of specific business lines, with voting rights based on the relative market values of the classes of stock.
And under special circumstances, such as for financially distressed companies, they would be allowed, for example, to issue preferred stock where voting protection issued to investors is considered necessary in case the company goes bankrupt. The stock exchanges, however, would evaluate each such transaction separately.
The proposal also recognizes the ability of companies to issue different shares with unequal voting rights under any anti-takeover policies they may have, or under existing state laws.
The proposal could give investors that hold super-voting stock, especially insiders, a huge advantage over other investors, and could determine the outcome of takeover battles or proxy contests.
More than 100 companies have multiple classes of stock with varied voting rights.
"We applaud the effort to get a uniform voting right ... so you don't have a race to the bottom," said Jon Lukomnik, deputy comptroller for pensions of the $50.7 billion New York City pension funds. But he criticized as "overly lax," the provision that allows companies with many classes of stock to issue more super-voting shares.
New York City Comptroller Alan G. Hevesi is even blunter. "I believe this not only legitimizes outlaw policies, but legitimizes the continuation of the crimes. Moreover, this type of grandfathering can be viewed as penalizing those companies which have treated all owners equally," he wrote to NYSE Secretary James E. Buck when the exchange first announced its proposal in February.
"So we have a common standard. On the other hand, it's weaker than we would like it to be," noted Jamie Heard, president of Institutional Shareholder Services Inc., a Bethesda, Md., consulting firm. "It's OK when companies go public to let them issue shares with disproportionate voting rights, because everyone knows what they are getting into. But I would prefer to see the exemption for additional shares to be tighter."
Sarah Teslik, executive director of the Council of Institutional Investors, Washington, wrote to the NYSE: "There are dangers created by disparate or complicated equity structures that do not seem to be fully appreciated or protected by the proposed rule."
What's more, Dale M. Hanson, former chief executive of the $78 billion California Public Employees' Retirement System, Sacramento, commented to NYSE in February that the proposed changes "could exacerbate the disparity in voting power between classes of shareholders, and thus further disenfranchise holders of lower vote shares."
But Howard Kramer, associate director of the SEC's market regulation division, said the proposal gives companies more flexibility. "The new rule recognizes that companies that go public under a particular structure need to do different financings under that structure. It's only when you try to change the deal that shareholders bought into that you would run afoul of the rule," he said.
The SEC gave up its efforts to require companies to adopt a one-share, one-vote standard years ago.
In 1990, a federal court threw out the SEC's subsequent rule governing voting rights after The Business Roundtable sued the agency, arguing it had no authority to tell the stock exchanges what voting rights they should require from listed companies.