Professor Gordon argues that the Securities and Exchange Commission (SEC) should adopt a rule enabling the New York Stock Exchange (NYSE) to maintain its traditional rule forbidding NYSE firms from recapitalizing with dual class common stock After critically evaluating the purported justifications for dual class recapitalizations, Professor Gordon presents empirical data to demonstrate that such recapitalizations may have a negative impact on shareholder wealth. He then describes the collective action and strategic choice problems in shareholder voting that allow managers to win approval for such wealth-reducing recapitalizations. The traditional NYSE rule is a means by which shareholders and managers have bonded a promise to avoid such recapitalizations, in which managers can exploit defects in shareholder voting. Such a "bonded non-renegotiation right" lowers the cost of capital to the firm. Today the NYSE can sustain this bond only with SEC intervention. Professor Gordon thus considers possible regulatory responses to the dual class recapitalization problem and concludes that the proposed SEC rule to permit dual class recapitalization in some circumstances should be modified to bar the American Stock Exchange and the National Association of Securities Dealers from listing the stock of firms delisted by the NYSE for violating its single class common rule or firms that undertake a dual class recapitalization after switching their listing from the NYSE. This approach will preserve the NYSE's ability to bond a firm's promise not to renegotiate its capital structure while enhancing the flexibility of the three exchanges' different rules regarding dual class common stock.
Law | Securities Law
Jeffrey N. Gordon,
Ties that Bond: Duel Class Common Stock and the Problem of Shareholder Choice,
Calif. L. Rev.
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/3137