Welcome to North Dakota!
Delaware has long been home to a wide range of corporations, and according to the state’s own site, over 60% of the Fortune 500 are incorporated in the state, even though the vast majority are technically based somewhere else.
But this year, Delaware is getting some competition from a seemingly unlikely place: North Dakota, which enacted what is widely considered to be a shareholder friendly law in 2007, called the North Dakota Publicly Traded Corporations Act. According to this article in the WSJ back in December, the new law makes it easier for shareholders to nominate their own slate of board members and vote on things like executive pay.
When that WSJ article appeared, just four companies were being targeted. But a quick skim of the current crop of proxies shows that it’s now up to 11. Just this past Friday, shareholders at Southwest Airlines (LUV) proposed reincorporating that company in North Dakota to take advantage of the new rules, according to Southwest’s proxy. Other companies being targeted include Exxon Mobil (XOM), Lowes (LOW), and Marsh & McLennan (MMC), Amgen (AMGN), Sempra Energy (SRE) and footnoted regular, Qwest Communications (Q). That’s in addition to the ones cited in the WSJ article: Oshkosh Corp. (OSK), Hain Celestial (HAIN), Whole Foods (WFMI), and PG&E (PCG). Longtime shareholder activist John Chevedden has either introduced the proposals directly, as he did at Southwest and two other companies, or is involved with other groups that have introduced the proposals at the companies this proxy season.
Most of the management responses to reincorporating in North Dakota run along the lines of Southwest’s response:
The Board of Directors believes reincorporation to North Dakota is not in the best interests of the Company, its Employees, or its Shareholders. The Company has been incorporated in Texas since its inception in 1967, has located its headquarters in Texas, has based a significant percentage of its Employees in Texas, and has developed significant business and other relationships in Texas. In addition, the Company has a well-developed understanding of the laws of Texas. On the other hand, the Company has no business connection to North Dakota, nor is North Dakota a well-known jurisdiction for business corporations. Furthermore, the Proponent is requesting that the Company subject itself to the provisions of the North Dakota Publicly Traded Corporations Act, which has been in effect only since 2007. Neither the Company nor its Shareholders can therefore predict the impact on the Company of being subjected to this relatively untested set of laws.
How many more companies will be asked to pick up stakes — figuratively at least, since few have other than a post-office box in Delaware — remains to be seen this proxy season. But my guess is that several more will, though few of these resolutions will pass. There’s also the not insignificant matter that just because a resolution wins a majority of shareholder votes, the company isn’t required to do anything. Still, it remains interesting to watch whether Delaware is in any danger of losing its corporate crown.
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Posted in Tags: activist investing, proxy |
 5 Comments » |
April 21st, 2009 at 10:36 am
DE is only in danger of losing its corporate crown if ND, or some other state, gives real incentives to corporations to reincorporate there, not incentives to gadfly shareholders, so I wouldn’t hold my breath on this one. However, if there were a company that wanted to demonstrate leadership and uproot to ND, I think RiskMetrics Group would be a prime candidate! Actually, this whole idea of DE vs. ND law brings up a great issue, which is the diversity of state law. This is actually how things like proxy access should be handled, instead of having the Feds (i.e., Congress and the SEC) come in and dictate how all companies should implement proxy access, majority voting, special shareholder meetings, etc. Let the marketplace of corporate law figure out what the standards should be, as it has done so since the inception of the federalist system.
April 21st, 2009 at 6:46 pm
Thanks for highlighting this issue. I had the proposal at Whole Foods. No, I don’t expect many corporations to move their postal box to ND. However, this one resolution can send the board a message on several “best practices” at once, such as proxy access, split chair/CEO, majority vote, annual elections, etc.
I agree with the other comment that diversity is a great thing in corpgov. Unfortunately, there is far too little of it with DE so dominant. Unfortunately, because of management’s firm grip, incorporation to shareowner friendly states is still a race to the bottom. Many of us hope to change that.
April 22nd, 2009 at 12:13 pm
The best state by far is Wyoming. Wyoming invented the LLC concept, you can be a foreign national and not even live in the state yet be incorporated there. Check out the advantages of incorporating in Wyoming:
* No State Income Taxes
* No information collected to be shared with IRS
* Privacy allowed
* Shareholders are not listed with the state
* Best Asset Protection Laws
* Nominee officers are legal
* Citizenship not required
* State tax not being considered
* Wyoming draws little attention
* No Nevada “Stigma”
* Lower Start up Costs
April 22nd, 2009 at 9:09 pm
North Dakota…Just north of South Dakota…Way out there man, way out there..
April 27th, 2009 at 12:35 pm
The real advantage to incorporation in DE is their chancery court, not just their corporate structure law.
That said, directors should get off their asses. Shareholder fury with the incompetence of boards is building.
The single best change that the US government could make for public corporations would be to limit the number of boards on which a person may sit to two. These “professional directors” who sit on a half-dozen boards are useless rubber-stamp voters, completely unconcerned with the best interests of shareholders and ignorant of the business issues of the company. No person can competently discharge the duties of a director on any more than two large corporations these days – the business environment is so complex that they really could handle only one competently unless they have an analysis staff to back them up.