All Shares Are Not Created Equal

A separate class of low-voting stock lets you go public without losing control of your company -- but the tactic could backfire.

For nervous founders and insecure managers of public ompanies, the best defense against a hostile takeover is to outvote the pillaging scoundrels. Thus it is that 39 New York Stock Exchange (NYSE) companies have sought and received stockholder approval to issue shares with unequal voting rights and are awaiting NYSE permission to recapitalize. By recapitalizing -- altering the nature of the equity instruments that underlie a business structure -- insiders can assure themselves of continued control undisturbed by profit-hungry predators, dissident stockholder, or whatever other intimidation might someday come down the pike. The recent spate of recapitalization has involved creating a second class of common stock that bears drastically less electoral clout than the original. Insiders, of course, retain the high-vote shares.

The spate is not a surge, to be sure, but it constitutes enough unrest to perplex the NYSE, an unswerving if unexpected champion of the rights of Wall Street's little guy. For more than 60 years, the Exchange has clung to a one-share, one-vote ideal, but in July 1986, the Big Board jettisoned its position and "reluctantly" (at least, so said chairman and chief executive officer John Phelan) sought Securities and Exchange Commission approval to trade corporate stock with however many votes management needed.

Since the NYSE's chief competitors, NASDQ and the Amex, have listed such multi-class equities for a number of years, the decision, expected this spring, is apt to be favorable. If that happens, businesses recapitalizing on the NYSE will attempt to persuade their stockholders to accept second-class citizenship by dressing up the inferior shares with such nominal incentives as extra dividends, superior standing versus the higher-voting common in the event of liquidation, or the right to elect a minority portion of the board of directors.

Fat-cat companies with NYSE visibility aren't the only ones taking evasive steps. In 1985, slimly capitalized (735,651 shares) Keithley Instruments was among several low-profile corporations in the over-the-counter market amending their articles of incorporation to provide for multiple-class common. Keithley's method was to issue a Class B common that, in what is by now a typical ratio, outvoted the old common 10 to one. Keithley stock-owners were given a 45-day window in which to convert their old common holdings into the new, higher-voting Class B, which, all else being equal, they would.

All else was not equal, however. As a lure to convince them not to convert, part of the stipulation was that the old common would get at least 25% more in cash dividends. Stockholders were diligently advised by mail that if no shareholder but founder Joseph F. Keithley were to make the exchange, his 51.7% voting representation would increase to "approximately 91%." And that was not far off: when all the conversions were in, the then-69-year-old founder wound up owning more than 80% of the votes. The low-vote common, listed on NASDAQ, can be used for stock options, for fresh financing, or in merger negotiations, without significantly diluting the family's eternal hold on control.

Maybe Keithley Instruments wasn't the immediate apple of some lusting raider's eye. But, asked chief financial officer Ron Rebner, why wait? "Acquisitions are causing problems in other companies, and we had a good thing going. Now, we don't need to worry about someone coming along and buying us out. I wouldn't want to be the guy sitting here when someday they have to worry about control of the corporation." On the other hand, the seat might be equally uncomfortable if family control fell to Keithley kin who disdained interest in the soundness of the company's operations.

Along with staggered boards, super-majorities, fair-price provisions, and a few other antitakeover dodges, corporate caste systems have come into stark prominence in this dark day of the raider. But undemocratic equity structures are hardly novel. In 1975, the founder of Wang Laboratories Inc. boldly delisted his company from the restrictive NYSE and went on the Amex, where he was free to float lower-vote common to raise working capital. Wang's maneuver is a fine example of how to keep control and ward off unwanted Wall Street suitors, yet have financing flexibility. Unfortunately, the company's downturn is an equally fine example of what might happen when outside stockholders are rendered powerless to challenge entrenched management: on the heels of a $30-million quarterly loss, Wang was forced to restructure this January.

Striking the proper imbalance is mostly a matter of apportioning a small fraction of a vote to the outs for every vote the ins retain. But a few variations on that theme have emerged. The J.M. Smucker Co., a venerable, vulnerable, and largely family-held NYSE listee, for example, has a restricted-vote common that rewards loyal stockholders. Only those holding the stock for four years earn full voting power -- an effective antitakeover measure, as no marauder since Genghis Khan has had the patience to wait that long.

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