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Reincorporation proposal seeks to address ?major issues in corporate governance?Submitted by: Subodh Mishra, Governance Institute

A new shareholder proposal filed this week calls on The Hain Celestial Group to reincorporate to North Dakota in light of legislation there requiring companies to provide for an advisory vote on pay, majority voting in director elections, and other shareholder-friendly measures.

?The North Dakota law is far ahead of any other state corporation law in providing rights for stockholders,? wrote proposal proponent Kenneth Steiner in the resolution?s supporting statement. ?It addresses each of the major issues in corporate governance.?

The North Dakota statute, which took effect on July 1, 2007, is among the friendliest to shareholders, according to those familiar with the resolution. The law mandates the separation of the chairman and CEO positions, annual election of directors, and the right of 5 percent shareholders owning stock for two years or more to nominate corporate directors, as well as another half-dozen or so measures widely seen as empowering shareholders.

?It?s an intriguing idea and someone was bound to do it sooner or later,? said Cornish Hitchcock, an attorney for the Amalgamated Bank?s LongView fund. ?It will be interesting to see how it plays out in terms of shareholder approval.?

Advocates of the North Dakota statute believe the measure will generate measurable support among investors should it come to a vote. ?I would think any shareholder who understands the benefits of the North Dakota law would support this proposal,? said William H. Clark, Jr., a Philadelphia-based attorney with Drinker Biddle & Reath.

Clark, who served as president of the North Dakota Corporate Governance Council, which drafted the statute, also noted that the law required shareholders nominating director candidates not nominated by management to be reimbursed for their proxy expenses ?to the extent they are successful.? That automatic right of reimbursement for solicitation expenses has gained added import in light of the Securities and Exchange Commission?s decision late last year to bar proxy access proposals and a pending decision by Delaware?s judiciary as to whether or not a reimbursement proposal filed at Long Island-based CA would violate Delaware law.

The proposal also may fare well based on support given to other recent proposals to reincorporate to another jurisdiction. The United Brotherhood of Carpenters and Joiners of America filed proposals at a handful of Ohio-based companies? 2007 annual meetings calling for their reincorporation to Delaware. At the time, Ohio law required companies to use a plurality voting standard, and the proposals served to eventually pressure local lawmakers to amend Ohio corporate law statutes to allow for a majority voting standard in director election. The proposal was voted on at FirstEnergy, DPL, and Convergys, according to RiskMetrics records, where it received 34.9, 32.6, and 59.5 percent support of the ?for? and ?against? votes, respectively.

But the view that the North Dakota reincorporation resolution will be well received by shareholders is not shared by all, with some observers arguing incorporation in Delaware is more beneficial to investors. ?Ultimately, it comes down to the judiciary, and the view is that the Delaware judiciary is investor protective,? said Delaware University professor Charles Elson. ?There is no corporate judiciary in North Dakota dedicated to the resolution of corporate disputes.?

That underlying premise is flawed, argues Clark, because the need to rely on the Delaware judiciary effectively concedes that the Delaware corporation law is fundamentally ?not protective? of investor rights. ?My preference as an investor would be to make sure the law is clear, rather than having to run to the courts to establish my rights,? said Clark. ?The Delaware judiciary is limited by the statute in the rights it can provide investors. There?s no way, for example, that the Delaware judiciary could create a right of proxy access, which North Dakota has.?

Hain officials did not immediately respond to requests for comment on receipt of the resolution and whether they would seek to challenge it at the SEC. Of 17 proposals relating to reincorporation over the past decade, just three were omitted at the SEC, according to RiskMetrics records. Hain held its 2007 annual meeting on April 1 of this year and will hold its 2008 annual meeting sometime this fall.

Shareholder activist John Chevedden, who worked with Steiner on drafting and filing the proposal, said he had so far not engaged in any dialogue with the company on governance concerns. Chevedden also said he will be looking into filing the proposal at other companies as deadlines approach for submissions for 2009 annual meetings.

To view the proposal, please Download file.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on July 02, 2008 (boomark / email).