Corporate Governance

Shareholder Proposals and the North Dakota Public Corporations Act

By J. Robert Brown

North Dakota, as we have written about on this Blog, has taken a unique approach to the corporate governance race.  Rather than following Delaware in the downward spiral (the so called race to the bottom), it has tried to go in the other direction.  The state has essentially provided expanded rights for shareholders in companies that register under the Act.  The impetus for the law apparently came from a group of activists, including Carl Icahn. The group hired William H. Clark from Philadelphia (who, by the way, has commented on this Blog) to draft the law.

The effort contains some good ideas but they will only become operative if companies reincorporate in North Dakota and elect to come under the Act.   Since the decision to reincorporate must first be approved by management and this lessens management's authority, the prospects look dim.

Nonetheless, shareholder proposals at four companies are seeking to force management's hands.  According to the WSJ, several companies are about to be subjected to shareholder votes on whether they should reincorporate in North Dakota.  Shareholders have submitted reincorporation proposals at:  Oshkosh, Hain Celestial Group, Whole Foods and PG&E. 

It can be expected that some or all of these companies will try to get the SEC's permission to exclude them from the proxy statement.  Unless there is some kind of technical violation, the likelihood of this occurring is slim.  The SEC has a relatively consistent history of not allowing reincorporation provisions to be excluded.  A waive of provisions arose ironically to encourage companies to move to Delaware to avoid states that prohibited the election of directors by majority vote.  The Commission staff has already denied Hain Celestial's request to omit the reincorporation proposal. 

Nonetheless, the provisions are unlikely to have much impact.  The shareholder proposals are non-binding.  As the Hain Celestial proposal reads:

• Resolved: That the stockholders of The Hain Celestial Group, Inc. ("Company") hereby request that the board of directors initiate the appropriate process to change the Company's jurisdiction of incorporation from Delaware to North Dakota and to elect that the Company be subject to the North Dakota Publicly Traded Corporations Act.

Thus, the board is free to ignore the provision even if it passes.

The focus on the North Dakota law is an interesting exercise.  The North Dakota Law Review is working on a symposium on the law and will have a conference on the subject in the Spring (I'll be there).  As my paper, Returning Fairness to Executive Compensation, notes, the problem with the North Dakota law is not in what it does but in what it does not do.  As we have written often on this Blog, corporate governance is weakened by the fiduciary standards (or lack of standards) set by the Delaware courts.  It is this lack of standards that is resulting in the current waive of nausea over the system of executive compensation.  Yet the North Dakota law does little to alter these fiduciary duty standards.

Full post as published by The Race to the Bottom on December 12, 2008 (boomark / email).