Those fed up with Delaware’s cozy link to corporate America are fighting back in an unexpected location: North Dakota, where state lawmakers passed the nation’s first shareholder-friendly law.
Investor groups have long complained that Delaware, where more than half of U.S. public companies are incorporated, favors corporate management over shareholder rights. That’s why they’ve been cheering for North Dakota’s new law, which gives them greater say over such things as executive pay and easier proxy access.
But their real motive in applauding North Dakota’s renaissance as a shareholder-focused state may be to pressure state legislators in Delaware to get religion, too.
Delaware doesn’t hide its links to business. Its official state Web site touts the business-friendly and accessible government, while its 215-year-old Court of Chancery has written most of the modern U.S. corporation case law. Sixty percent of Fortune 500 companies are incorporated in Delaware.
There have been attempts in the past to loosen Delaware’s grip, including the Sarbanes-Oxley corporate reform law passed by the U.S. Congress in 2002, which established governance and accountability rules that companies nationwide must follow.
There is also legislation currently before Congress that would give shareholders at public companies a formal say in executives’ compensation packages.
Biased Government
But for the most part, Delaware still holds great sway over corporate America’s dealings and is often perceived by shareholder groups as having a bias toward business. That’s troubling since corporate boards have a fiduciary duty to put investors’ interests first.
Enter North Dakota, which has had largely a nonexistent role in corporate America. Only two public companies are incorporated there.
Those behind the new law actually took the idea to Vermont first, where it didn’t get far. Success came in North Dakota this year — it passed the state legislature and was signed into law this month. It takes effect in July.
The new law wraps together many governance issues being pushed by shareholder groups this year. Among them is the required election of directors by majority voting. That means candidates must receive a majority of “yes” votes to be elected.
Shareholders also get advisory votes on executive compensation, and there is now a requirement for the separation of the chairman and chief executive roles.
The new law siphons control from corporate boards by forcing companies to include any proposals on their proxy statements put forth by shareholders who hold 5 percent or more of stock for at least two years.
Two-Fer
Should the shareholders win their proxy contests, the companies must reimburse them for the percentage they are successful. For instance, if they look to elect three directors and two win, then the board reimburses two-thirds of the cost of the proxy contest.
North Dakota’s two existing public companies are grandfathered out of such requirements, but new companies incorporating in the state can opt into the new law or follow the previous standards.
The law’s proponents tout that the built-in governance requirements will likely lead shareholder groups to press companies to reincorporate in North Dakota in the coming years. No one is predicting a mad dash north, but it could certainly be an often-raised proxy issue.
