In addition to federal and state corporate law, companies which trade on public markets are also subject to institutional regulation. In other words, your publicly-traded company must follow rules created by the exchange on which you trade. It is simply the price of playing ball. The most relevant exchanges are NASDAQ and the New York Stock Exchange (NYSE).
Broadly speaking, regulations created by these marketplaces are meant to create safe environments for investing. This is especially true when it comes to shareholder voting rights. In that arena, there are two rules of thumb. The first is to avoid any unsanctioned reduction in shareholder voting power. The second is to always allow shareholders to vote on matters that directly and substantially influence their investment outlook. Following both rules will keep you in compliance nine times in ten. To cover yourself the remainder of the time, consult the rules of the marketplace in which you trade. Below are a few regulations of note.
NYSE and NASDAQ Shareholder Voting Rules
NASDAQ rule 5635 and NYSE company guide sections 711-713 are good references for those wondering when shareholder approval is needed to issue securities. Generally, shareholder approval is needed whenever there is a change in office, a change in equity distribution (including adjustment of stock benefits to employees, officers, directors, etc.), a change in company equity (say, if your company is purchasing stocks or assets from another entity), or any other non-IPO transaction.
NASDAQ states that “voting rights of existing Shareholders of publicly traded common stock registered under Section 12 of the Act cannot be disparately reduced or restricted through any corporate action or issuance.”
NYSE returns, slightly more verbose, with the statement that “voting rights of existing shareholders of publicly traded common stock registered under Section 12 of the Exchange Act cannot be disparately reduced or restricted through any corporate action or issuance.”
Section 12 of the Exchange Act
Section 12 of the Exchange Act, referred to in both above rules, is the law which requires companies to first register their stock with the SEC before trading in national marketplaces. Essentially, both rules state that stock traded in their marketplaces cannot be reduced in relative value by any company action. The NYSE rule goes on to list examples of such value-reducing action. Such cases, it says “include, but are not limited to, the adoption of time-phased voting plans, the adoption of capped voting rights plans, the issuance of supervoting stock, or the issuance of stock with voting rights less than the per-share voting rights of the existing common stock through an exchange offer.”
The exchanges tend to be very careful with these regulations. If companies in their markets were able to reduce the voting power of existing shareholders, then confidence in the power of the share might fluctuate, and trust in the exchange may collapse at the first scandal. For this reason, the attitude of the exchanges is essentially this: that a company’s shareholders may be yapping and biting at their heels, but the company itself is not allowed to remove their teeth.
Dual Classes of Stock
To some, it is controversial when a company issues dual classes of stock. However, the practice is far from forbidden or unheard of. A dual-class stock structure, also referred to as a super-voting structure, occurs when a company issues two stocks. The more valuable and powerful of these two stocks is referred to as the “super-voting” stock. It represents a larger proportional voting authority than the other, normal stock. Famously, Berkshire Hathaway issues supervoting stock. Their superior class of stock yields thirty times the interest of the standard. It also possesses two hundred times the voting power.
NASDAQ does not allow companies with dual-class stock systems to trade in their marketplace, but NYSE does. However, companies which are already listed on the NYSE are frozen in their current state of share distribution. That is to say, they cannot issue an additional share class once they have already begun trading. The two classes must be issued when the company begins trading.
If you have any questions about the particularities of NASDAQ or NYSE regulations, regulations in other markets, or about operation as a public company in general, Colonial Stock Transfer is able and willing to answer. Go to our website to find information about our comprehensive transfer agent services, or contact us by phone or e-mail to set up a consultation.