North Dakota takes on Delaware as law-making state
Delaware, California, New York. These are the states that generally come to mind when thinking about influential corporation law. Now there is a new player on the block. North Dakota, one of the mostly thinly populated states in the US. And with only two publicly listed companies, it is hardly the bastion of corporate development.
But lawmakers in the state are hoping this will change with the passing of new laws that are being touted as the most investor friendly in the US.
The new legislation is due to take effect July 1 and combines many of the hottest issues in corporate governance. Among other things, all company directors will need to be elected by majority vote and shareholders who have held at least five percent of the company for two consecutive years will have the right to nominate board candidates on the proxy ballot. Executive compensation packages are subject to an advisory vote by shareholders and companies must separate the role of chairman and CEO. Perhaps the most aggressive feature of the law is that companies will be forced to reimburse costs for shareholders who conduct successful proxy campaigns.
Legislators in the state are hoping the rules will attract more companies to list, but most observers believe the opposite will occur. A spokesman for proxy advisory firm Glass Lewis says ‘I can’t see this encouraging any company to incorporate in North Dakota.’
The author of the laws believes the change will have a positive effect. William Clark says it will put pressure on legislators in corporation-friendly Delaware – home to over half of all listed companies in the US – where courts often favor businesses over shareholders.
The other effect is to get shareholders to put pressure on companies to reincorporate in North Dakota, though this is unlikely given the lack of facilities.
That argument is somewhat undermined by the fact that the two listed companies in North Dakota are grandfathered out of the rules and will not be made to adopt it in the future. Also, the rules are optional for any newly listing companies. It is unlikely any company will choose to operate under the law. Clark, however, optimistically suggests that ‘There may be some companies choosing to incorporate in ND because they wish to be seen as being shareholder friendly, but mostly it will be driven by shareholder demands.’
There is some feeling that by adopting the new rules, North Dakota will be the first domino in the line, leading to the creation of more shareholder-friendly regimes in other states. It is worth noting that change has been taking place prior to this new law. Despite its business-friendly reputation, the Delaware courts have in recent years been seen handing down stronger penalties and the Chancery Court is leading the push against options backdating and other inappropriate board activities.
It remains to be seen whether the North Dakota law will have any real impact, but it will certainly add more fuel for the activist community in its fight for a greater voice and representation in the governance process at US companies.
