Voting Rights Common shareholders are generally granted rights to

Voting Rights Common shareholders are generally granted rights to

■ Elect members of the board of directors ■ Vote on the merger of the corporation with another corporation ■ Authorize additional shares of common stock

■ Vote on amendments to the articles of incorporation The number of votes granted per share of stock is determined by the

articles of incorporation and the particular class of common stock. Dif- ferent classes of stock may have different numbers of votes per share, or different classes as a whole may have specified percentages of the votes. For example, with Ford Motor Company, Class B gets 40% of the vote and Class A 60%, even though there are more than twelve times the number of Class A shares as Class B shares.

Special classes of common stock with better voting rights (that is, more votes per share than the common shares already outstanding) were created during the 1980s as a defense against takeovers. By issuing a class of common stock with superior voting rights—say, ten votes per share instead of one vote per share—to a friendly party, the manage- ment of a corporation could derail a takeover attempt.

Supervoting shares have been used since the 1990s by many compa- nies in IPOs to insure that the controlling shareholders prior to going public remain in control following the IPO. 4 Examples of companies going public with dual classes include Estee Lauder, Intimate Brands, and Revlon.

The proliferation of multiple classes of common stock during the 1980s, along with the potential to take control of the firm from current shareholders, raised concern over whether there should be different classes of stock with different rights. Suppose a firm has one class of stock with 1,000 shares outstanding, where each share has one vote. If you own 100 shares, you have 10% of the stock with 10% of the votes. Now suppose the firm issues 1,000 shares of a new class of stock, with each share having 10 votes per share. What happens to your control of the firm? After it issues these shares, you have 5% of the outstanding

4 In many cases, the firm was taken private by a management or investor group in the 1980s and then went public in the 1990s with dual classes, with the management

or investor group retaining the supervoting shares.

FINANCING DECISIONS

shares of stock, but only 100/[1,000 + (10 × 1,000)] = 0.91% of the votes. No federal securities law prohibits multiple classes of stock with different rights, though some state laws prohibit them.

The markets where the stock is traded may prohibit the listing of multiple classes of stock. For example, the New York Stock Exchange (NYSE) and the National Association for Securities Dealers Automated Quotation (NASDAQ) system require each share to have one vote for common stocks traded in their markets. The only exceptions are for (1) classes already outstanding at the time this rule went into effect, and (2) multiple class of stock as part of an initial public offering. The Ameri- can Stock Exchange (ASE), however, allows companies to list classes of stock with different voting rights.

Shareholders exercise their voting rights by either voting directly at annual meetings and special shareholder meetings or by giving their vote to another party through a proxy. A proxy is a written authoriza- tion for someone else to vote for the shareholder in the manner the shareholder prescribes. Corporations whose stock is publicly-traded are required by the Securities Exchange Act to send a proxy statement, detailing the issues subject to shareholder voting, along with the proxy card, the document on which the shareholder indicates her or his vote.

The use of proxies is governed by the Securities Exchange Act of 1934. 5 Though intended to encourage corporate democracy though greater disclosure of information, the regulation of the proxy system resulted in the creation of barriers among shareholders and limits on shareholder proposals. For example, the Securities and Exchange Com- mission instituted rules (Rules 14a-6 and 14a-7) intended to enhance the disclosure of information to shareholders, but instead slowed down the process, inhibiting shareholder-to-shareholder communication and increasing the expense of communications among shareholders.