From this Law360 article, I learned that Clearway Energy proposes to simplify a complex capital structure. It has two classes of stock that trade on the NYSE: A and C. The A’s have 1 vote per share; the C’s have 1/100th of a vote per share.

It also has B and D shares, held exclusively by CEG, who as a result controls 55% of the company’s voting power.

Clearview proposes a charter amendment to convert the A shares into C shares and, recognizing that this would cause CEG’s own voting power to increase, proposes to fix that problem by putting a bunch of CEG’s shares into a Voting Trust in a mirror voting arrangement that ensures CEG’s voting power does not rise above 55% as a result of the reclassification.

Here is the proxy explaining the proposed changes. As required under Delaware law, for the amendment to take effect, the Class A shareholders must vote in favor.

Anyway, the Law360 article is about a lawsuit filed by the New England Teamsters Pension Fund challenging the scheme as a conflict transaction, because the scheme will allow CEG to sell down its stake while maintaining its voting power. That’s because shares move in and out of the voting trust, to ensure that CEG always controls 55%.

This is not the first time a controller has altered a corporation’s capital structure to allow sales of the controller’s stock while maintaining the controller’s voting power – but here’s the thing.

NYSE Listed Company Manual 313 states:

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. Examples of such corporate action or issuance include, but are not limited to, the adoption of time phased voting plans, the adoption of capped voting rights plans, the issuance of super voting 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.

This is a really important provision! The NASDAQ’s version of it is the reason, for example, that Tesla couldn’t just give Musk 25% voting power – which the board said it wanted to do – the only way to confer those votes on him was to give him the associated stock.

So I was tearing my hair, trying to figure out how Clearway Energy could possibly propose to reduce the voting power of the A shareholders, specifically.

And then I found this 2010 NYSE interpretation of its rules, which was apparently the template for Clearway’s proposal:

A Company has a grandfathered triple-class voting structure with Class A, Class B and Common Shares outstanding. The Common Shares and Class B Shares are both listed on the Exchange and have one and 0.1 votes per share, respectively. The Class A Shares have three votes per share and are all held by the controlling shareholder (“Controlling Shareholder”). The Controlling Shareholder also owns Common Shares and controls 76% of the voting power of the outstanding capital stock. None of the classes are by their terms convertible into any of the other classes. There are significantly more Class B Shares outstanding than Common Shares. Consequently, the trading market for the Class B Shares is significantly more liquid and they trade at a higher price than the Common Shares. Holders of the Common Shares have expressed an interest in exchanging their Common Shares for the more liquid Class B Shares. The Company proposes to make an exchange offer (the “Exchange Offer”) in which all
Common Shares would be exchangeable for Class B shares at the option of their holders on a
one-for-one basis.

The Controlling Shareholder has agreed that the percentage of the total voting power of the
Company’s capital stock that he controls following the completion of the Exchange Offer will be
limited to the percentage he controlled immediately prior to its completion. This limitation will be accomplished by a combination of (i) participation in the Exchange Offer by the Controlling
Shareholder (i.e., reducing his voting power by exchanging Common Shares into Class B
Shares) and (ii) an exchange of Class A Common Shares by the Controlling Shareholder for
either Common Shares or Class B Shares with a corresponding reduction in voting power. The
Company understands that consummation of the Exchange Offer may lead to the Common
Shares falling below the Exchange’s continued listing standards for distribution and shares
outstanding and lead to that class being delisted.

313.00 Issue: Would the Exchange Offer of the lower-vote Class B Shares for Common Shares
cause a disparate reduction in voting prohibited by Para. 313?

Determination: The Exchange Offer is permissible under Para. 313….

The Exchange Offer provides for the exchange of Common Shares with one vote for Class B Shares that have 0.1 votes per share, and thus would appear inconsistent with the quoted language of Para. 313….However, in the proposal under discussion here, the Controlling Shareholder has committed to limit his voting power to the percentage of the total voting power he held before the Exchange Offer (76%), by exchanging Class A Shares for Common Shares or Class B Shares to the extent necessary to achieve that result. Therefore, the Exchange Offer does not have the intention or effect of disenfranchising the holders of the Common Shares or the Class B Shares by further entrenching the control of the Controlling Shareholder. While participants in the Exchange Offer other than the Controlling Shareholder will reduce their individual voting power, the actual effect of doing so is de minimis, as the Controlling Shareholder retains a significant majority …

I think Clearway may have modeled its proposal on this guidance, right down to the rationale for the conversion:

Historically, the price of our Class A common stock on the NYSE has generally been below the price of our Class C common stock, despite the greater voting powers of our Class A common stock and the otherwise identical rights of the two classes.

But CEG is maintaining its voting power not by selling a proportionate share of its own stock, as the guidance suggests, but by creating a voting trust that will precommit the votes of its existing stake to ensure its real voting power stays at 55%.

Except that means – and once again, this is what the plaintiff is objecting to in Delaware – due to the structure of the Trust, CEG can sell down its equity stake and maintain its voting power. That wasn’t true before the proposed conversion, and it’s not a feature of the NYSE guidance, either.

My concern is that, if Clearway is permitted to do this, then you can imagine future manipulations. Controllers will be incentivized to create new low vote stock (just as Google did), and then later propose the exact same transaction. As a result, the controller gets a new benefit: maintaining control while selling its stake.

Anyhoo, I’ll add the caveat that this is how I read things but I’m not a listing rules maven so if there’s more that I’m missing, like further NYSE guidance, drop an email and I’ll update this post.

And another thing. New Shareholder Primacy podcast! This week, me and Mike Levin talk about all the recent guidance and proposals coming out of the SEC. Note: We recorded before the Chubb opinion issued. Here at Spotify; here at Apple; and here at Youtube.