Corporate Governance

The North Dakota Publicly Trade Corporations Act: A Race to the Top?

By J. Robert Brown

We have commented on this Blog about the North Dakota Publicly Traded Corporations Act, an attempt by North Dakota to elevate the standards of corporate governance for public companies.  Companies that incorporate under the Act must extend to shareholders rights rarely if ever in Delaware.  For example, shareholders would have the right to propose amendments to the articles of incorporation, taking away some of the managerial domination of the amendment process. 

We praised some of the provisions but criticized a serious omission:  the Act does not tamper with fiduciary duties and therefore leaves the pro-management standards adopted by Delaware largely unchanged.  Thus, for example, the standards for determining executive compensation are likely to be the same in North Dakota and Delaware.  (Take a look at the paper, Returning Fairness to Executive Compensation).   On the other hand, the Act does facilitate shareholder elections to the board.  Our conclusion was that no company would incorporate under the Act in part because management would oppose any effort and not take the necessary steps to reincorporate (a transaction usually accomplished by a merger which requires board approval). 

There have been a number of companies where shareholders have proposed reincorporation (for a discussion of one of them, go here) but these bylaws may not be mandatory and, in any event, are likely to fail.

We now learn from Footnoted.org that there is an exception.  American Railcar Industries has indicated in its most recent proxy statement that it intends to reincorporate in Delaware.  What would make management agree to do this?  The shareholder advocate, Carl Icahn.  Icahn owns more than 50% of the company and presumably controls the board.  We highly recommend a perusal of the proxy statement, primarily for a discussion of the benefits of reincorporating in North Dakota. 

The proxy statement addressed the disadvantages.  The only one of any significance concerns the lack of judicial interpretation of the terms of the corporate code.  As the proxy statement notes:

• Notwithstanding the belief of the Company's board of directors as to the benefits to shareholders of the Reincorporation, it should be noted that reincorporation in North Dakota to take advantage of the North Dakota Publicly Traded Corporations Act has been criticized by some. There is a concern that the North Dakota Publicly Traded Corporations Act, unlike the Delaware Corporate Law, is untested and less predictable and that such lack of predictability could be detrimental to shareholders. The North Dakota Publicly Traded Corporations Act was only recently enacted, to the knowledge of the Company no other companies are yet subject to its provisions and interpretations of its likely application are scarce. In addition, the Company believes there are no reported cases regarding the North Dakota Publicly Traded Corporations Act to date. In contrast, the Delaware Corporate Law is revised regularly and Delaware offers a system of specialized Chancery Courts to deal with corporate law questions. These courts have developed considerable expertise in dealing with corporate issues as well as a substantial and influential body of case law interpreting the Delaware Corporate Law. Delaware has become a preferred domicile for many major American corporations and the Delaware Corporate Law has become comparatively well-known and widely understood.

• In this respect, as noted above, the North Dakota Publicly Traded Corporations Act specifically provides that its provisions must be liberally construed to protect and enhance the rights of shareholders in publicly traded corporations. Further, Delaware case law frequently addresses shareholder rights issues that required interpretation of provisions of the Delaware Corporate Law that were not clear from a plain reading of the statute. In contrast, the North Dakota Publicly Traded Corporations Act was drafted to minimize the need for such judicial interpretation by expressly providing shareholder rights in a straight-forward, streamlined manner. The Company believes that the clear framework and approach of the North Dakota Publicly Traded Corporations Act is more advantageous to shareholders than any guidance that may be offered by the Delaware court system in interpreting provisions of the Delaware Corporate Law.

There is no question that the North Dakota law removes some of the interpretive issues that continue to exist in Delaware (for example by resolving that advance notice bylaws cannot require notice more than 90 days before the meeting). 

One company does not make a trend, particularly when it is owned by a shareholder activist.  Nonetheless, it is one more company than we thought would actually reincorporate in North Dakota.

Full post as published by The Race to the Bottom on April 27, 2009 (boomark / email).