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.