While the

New York Stock Exchange

(NYX)

muscles its way into a merger with European counterpart

Euronext

, a side battle is brewing among some of its shareholders.

The problem: restrictions, or "lockups," that former NYSE seatholders have on roughly $6.2 billion worth of shares they still own in the parent. Some long-standing seatholders are griping about their inability to cash in now that a dilutive merger with Euronext looks likely to occur.

NYSE CEO John Thain has said the company would consider eliminating the lockup if and when a merger with the Euronext closes. The key word is "consider," because eliminating rules meant to prevent a deluge of new shares from hitting the market would have its opponents.

'Traffic Control'

"The people who bought into the secondary were doing so, in part, because they thought that there would be some traffic control in which some of the original insiders could sell," says Roy Smith, finance professor at NYU's Stern School of Business. "Thain wants to be fair to everyone if he can. But if he were to amend the lockup period, it may create a problem for the rest of the shareholders."

Before the NYSE went public in early March, the former seat holders, whose seats turned into shares when the company completed its merger with Archipelago, agreed to a three-year lockup period during which shares would gradually be registered for trading. While the lockup exists, the holders can't sell the stock publicly, and are restricted from taking certain hedging positions on the stock.

This particular lockup period is uncharacteristically long, Smith says, but most shareholders were willing to live with it at the time of the secondary offering, which priced May 4. But with the NYSE now on the verge of issuing another $10 billion of stock for Euronext, the calculus has changed.

"If this deal

with Euronext were to go forward, you can't expect the existing shareholders to be locked up and the rest of the shareholders to not be," said Thomas Caldwell, an outspoken NYSE shareholder who has criticized the company's decision to merge with Euronext. "Unlocking the shares, in my opinion, is non-negotiable."

Caldwell, historically among the most vocal shareholders, isn't alone in his complaint.

"The lockup period is much too long," says Fran Blum, a seat holder for 14 years. "It is very unfortunate that it was negotiated."

Even those who support the merger are concerned. Some note that dawdling on the lockup front could lead to perceptions of a conflict of interest when shareholders are asked to approve the Euronext transaction.

"Two weeks before

the merger, are they going to announce the restrictions will be lifted? That's like throwing a bone to a dog," said Danny Mook, who was a floor broker at the NYSE from 1973 to 1998 and who transferred his seat into his wife's name in 1992. "People will have much more confidence in what

the management has done if they unlock the shares before. They will be in a position that they aren't voting for the restrictions, they are voting on the merger."

'Milk and Eggs'

Last week, at the company's first-ever shareholder meeting, Thain fielded numerous questions about the lockup period for the insiders. At the meeting, Thain tried to appease critics by noting that they had ample opportunity to enrich themselves in last month's secondary.

Shareholders have "$1.7 billion to buy milk and eggs," he said in response to one question, noting that the company filed for the secondary offering "as close as we possibly could" to the close of the merger with Archipelago. "We were trying to be very responsive to a number of members that wanted to have access to liquidity as quickly as possible," he said.

Later, he said that if the company completes a merger with the Euronext, it might reconsider the lockup rules it has in place now.

"If the transaction with the Euronext goes forward, we would have a combined company worth over $20 billion," and the float would be significantly larger than it is now, he said. "It is a fair point" that the company might want to revise or eliminate share restrictions, Thain said at the meeting.

Some shareholders say Thain has no choice but to lift the lockup after the NYSE entered its definitive agreement to merge with Euronext, which operates cash and derivatives securities trading business.

'Material Economic Change'

"A material economic change has occurred with this merger. Therefore, the shareholders think the original lockup should be lifted," Smith explained. "There is some fairness to that argument, but the stock exchange is not obliged to do it."

One thing is clear: The NYSE, after more than two centuries as a private organization, has wasted little time availing itself of the benefits of a public listing. After using a reverse merger to go public, it took just three months before it was plotting a transatlantic transaction that will double its market cap if consummated. As a result, there are few parallels with which to judge its behavior.

Howard Horowitz, director of research at the Arbitrage Fund, an investment firm that specializes in mergers, says the NYSE's situation most resembles that of certain newly public technology or biotech companies. Occasionally, longtime owners of such companies will seek permission to shorten lockup periods after an IPO, particularly if an acquisition is afoot.

"But you have people that bought in that were under the impression some of the shareholders were going to hold onto their shares," Horowitz said. "IPO buyers would have an issue with that."