December 23, 2005
NYSE Decision on Sovereign: Technical Evasion Works
The NYSE decision that Sovereign Bancorp's decision to issue 19.9% of its shares to Banco Santander Central does not trigger the NYSE's voting requirements is a victory for technical evasion of the NYSE rules. The NYSE Listing Company rules, unlike the Nasdaq rules, require a shareholder vote whenever a company issues 20% or more of its securities to a purchaser. The key word is "issue." Some states, including Delaware, have an old method of recording repurchased stock as treasury shares; treasury shares are still "issued" but not "outstanding" and can be resold without being "reissued." Treasury shares can be held by the company or canceled. When canceled the treasury shares are no longer issued. Most states, following the Model Business Corporation Act (MBCA), deem repurchased shares to be automatically canceled -- the sensible modern system. So under NYSE rules a company can issue 19.9% new shares to a purchaser and also sell to the same purchaser another 5% of its treasury shares and not trigger the voting requirements. The key is that Delaware has the old rule on treasury shares. For corporations incorporated in MBCA states this is not possible because treasury shares are canceled and must be reissued; hence the trick is unavailable. The so called "treasury exemption" at the NYSE comes from the misreading of another rule on how to count outstanding shares for the purpose of calculating the 20% (it is 20% of outstanding shares, excluding treasury shares). The treasury exemption is sensible here (in the calculation of outstanding shares) but not sensible in its extension to the term "issue" in the calculation of the shares sold to the purchaser. This is sophistry at its best and the NYSE should be ashamed of itself. The hope the SEC gets involved and comes down hard on such decisions.
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