Legal News

North Dakota Sends Delaware a Wake-Up Call on Corporate Governance

By Dan Slater

Delaware corporate law under siege!

It’s a hot-button issue we’ve hit before. In March, for instance, we asked whether Congress might ever consider creating a federal corporate law as a reaction to alleged corporate favoritism in Delaware. Well, Congress hasn’t done so (yet), and shareholder activists are instead taking their pleas for corporate governance reform to other states — namely, North Dakota, as the WSJ reports today.

Only two publicly traded companies are incorporated in the state, notes the Journal, but last year North Dakota lawmakers — prodded by out-of-state activists including Carl Icahn — enacted the nation’s most shareholder-friendly corporate-governance law.

The law prescribes rules that companies incorporating in North Dakota can adopt as a package, including requiring an annual shareholder advisory vote on executive pay and the naming of a chairman who isn’t an executive. The rules also provide for the annual election of directors and make it easier for shareholders to nominate their own director candidates.

So who’s behind the effort? A lawyer, of course. In 2005, a group of activists, including Carl Icahn, hired Philly lawyer William H. Clark Jr. to draft a pro-shareholder governance model. Clark first took the legislation to Vermont, home to only five public companies in 2005. But one company objected, and the bill died in committee.

The following year, North Dakota removed a provision from its constitution that had discouraged companies from incorporating there. Clark then began building support for a revamped corporate-governance bill.

Secretary of State Al Jaeger, who thinks the law might attract business to North Dakota, supports the effort. “Our position was … we will build it,” Jaeger told the Journal. “If somebody wants to come and play in our ball field, that’s great.”

The North Dakota law is unlikely to draw much business to the state soon, experts say. But activist investors say the North Dakota law adds fuel to the debate over shareholder rights and oversight, which has intensified during the financial crisis.

Full post as published by Law Blog - WSJ.com on December 08, 2008 (boomark / email).