Corporate Governance

North Dakota may be cold this time of year, but shareholder activists are looking to make it a hot destination for public companies.

©iStockphoto.com/csreed

Last year, partly as a result of a campaign I backed, North Dakota changed its laws to strengthen shareholder rights at public companies incorporated there.

Now some shareholders have proposed resolutions to be placed on corporate ballots in 2009 to relocate their companies to the state. More are expected to follow.

Long-time shareholder activist John Chevedden, for instance, said he has filed relocation proposals to be included on proxy statements at 15 public companies.

For Chevedden, the move is a no-brainer. Historically, states like Delaware, where a majority of U.S. public companies are incorporated, give shareholders little power to influence company affairs and strategy. But last year, North Dakota became the most shareholder-friendly state in the nation.

"If a company moved to North Dakota, it could cure five items of corporate governance at once," Chevedden told the Icahn Report.

The move is likely to meet opposition from company managements, since it erodes their control over companies that shareholders own. And when shareholders make proposals managements don?t like, they typically ask the SEC for a ruling to exclude these proposals from the company?s annual meeting proxy statement, in an effort to keep shareholders from supporting the measure.

The SEC, however, hasn?t previously shown much willingness to challenge shareholder resolutions to reincorporate in other jurisdictions, according to Race to the Bottom, a legal blog.

Chevedden said the SEC has already rejected one company request to discard a shareholder proposal from its proxy materials relating to jurisdictional relocation.

Still, under current law, to be binding, a corporate relocation resolution must be approved by the board. Therefore, the proposed shareholders resolutions being pressed by Chevedden are merely "precatory," or advisory, meaning that managements don?t have to adopt any shareholder proposal they don?t like. But Chevedden said if such proposals win widespread shareholder support, managements ignore them at their peril.

What?s different about North Dakota corporate law? Lots. And the state is looking to use the provisions to attract lucrative business from corporations that incorporate there, just as Delaware gains a substantial portion of its state revenue from companies incorporated in that state.

If companies choose to sign up in North Dakota under the provisions of the new law, they are limited from instituting anti-takeover provisions like poison pills and staggered boards. Such provisions thwart a company from being taken over and have its assets better redeployed under different managements.

In addition, it requires that the board chairman and CEO jobs be separated, and requires advisory shareholder votes on executive compensation.

It also allows shareholders owning five percent of the outstanding shares for two years or more to nominate directors and they must be put on a company?s proxy statement.

These rules and a number of others in the North Dakota statute vary significantly from Delaware?s and would go a long way to give shareholders more rights to bring accountability to managements.

There are numerous long-standing reasons why these changes are essential. But most importantly, they come at a time when shareholders need to exercise more influence at companies which have suffered massively this year as a result of the market meltdown.

Clearly, much of the meltdown occurred as a result of the failure of boards to properly clamp down on managements who took excessive risks that brought down their companies, particularly those in financial services.

This is unacceptable and must be changed. This is why I have founded United Shareholders of America ? to give shareholders more power over the companies they own. It is only when large numbers of stockholders unite that we can push back against the entrenched and unresponsive boards and managements in this country.

Sign up for USA on my blog, The Icahn Report. www.icahnreport.com.