O---H---I---O is a chant familiar to alumni and fans of The Ohio State University to support their Buckeyes and proclaim their belief that Ohio State Athletics reign supreme. While such a proclamation may not be outlandish or surprise many that follow college athletics—it is seldom made in relation to Ohio Corporation Law. However, Abercrombie & Fitch has done just that.
In a surprise move to many, Abercrombie & Fitch has recently filed a proxy statement for a special meeting of its stockholders to consider and vote on reincorporating from Delaware to Ohio where its corporate headquarters are located. This proposal has led many commentators to speculate as to what they believe is the impetus behind such a move—regardless of what Abercrombie & Fitch disclosed in its proxy statement.
Commentators have focused on perceived concerns of potential takeover bids, which are gaining steam in the retail industry, and the additional protections of Ohio’s anti-takeover statute as the reasons for the proposed reincorporation. (Ohio laws require a vote of shareholders to approve an issuance of shares in an acquisition transaction in which the issuer intends to issue stock representing one-sixth of its voting power. As stated in O.R.C. 1701.83 and Ohio’s Control Share Acquisition Statute (O.R.C. 1701.831))
One of the reasons that Abercrombie specifically states for the reincorporation—that few commentators have focused on—are the additional protections that Ohio law provides by statute to the corporate directors of Ohio corporations.
Ohio’s corporate statutes codify directors’ fiduciary duties and by doing so, Ohio has created certainty for directors in knowing how their respective decisions will be evaluated and adjudicated. This differs from how fiduciary duties for directors of Delaware corporations are created. In Delaware, directors’ duties are created by the courts. While the Delaware Chancery Court is the gold standard for commercial courts across the country, and considered by many to be a “pro” for incorporating in Delaware, its ability to alter or change the fiduciary duties of directors, depending on the circumstances and facts at issue, is a “con” for directors of such corporations.
In Ohio, a corporate director knows what his or her fiduciary duties are, it is not left up to the courts which at times could leave directors scrambling. As such, Ohio law enhances a corporation’s ability to attract and retain highly qualified individuals to serve as directors because Ohio law provides a clearer balance of corporate governance rights and obligations than Delaware law.
For example, decisions of Delaware courts have resulted in director uncertainties regarding their rights to indemnification for having served as directors. Most states’ corporate laws give directors various forms of protection to shield them from liability for their actions as a corporate director. Key to these protections are indemnification rights and advancement of expenses so directors do not have to pay out of their own pockets for their defense during the course of a litigation.
Prior to early summer 2008, conventional wisdom was that indemnification rights, which existed at the time a director served on the board, would remain in effect protecting the direction after termination if the director quit service on the board. Delaware Chancery Court surprised the corporate world in Schoon v. Troy by allowing a corporation to eliminate former directors' advancement rights, after a their service. As result, directors of Delaware corporations had to divert their attention from their organization’s businesses to review and amend their governing documents and enter into a separate indemnification agreement.
Ohio provides directors of an Ohio corporation with more favorable indemnification, protecting directors against lawsuits, in obtaining indemnification and retaining advancement of such indemnification. In particular, Ohio law places the burden on the plaintiff to prove with “clear and convincing” evidence that a director’s actions violate the statutory standards. Further, Ohio law limits the obligations of a director to return an advancement of costs by requiring proof by “clear and convincing evidence . . . that his actions or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the corporation or undertaken with deliberate disregard for the best interests of the corporation.” (O.R.C. 1701.13(E)(5)).
Further, Delaware courts have created a heightened level of review of directors’ actions in evaluating business transactions involving mergers and acquisitions, including disposition of substantial assets. This heightened level of review, commonly referred to as the Unocal and Revlon duties, require scrutiny greater than that required by the business judgment rule that is otherwise applicable.
Ohio has not adopted the Unocal or Revlon duties. Ohio is clear that a director retains the benefit of the business judgment rule even in a corporate takeover situation (O.R.C. 1701.59(c)). By doing so, Ohio does not alter the standard of review of directors’ decisions, but retains the presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.
One reason for rejecting these Delaware standards is that Ohio does not exclude, as Delaware does, consideration of other constituencies beyond the shareholders of the corporation when making decisions. Ohio permits directors, in determining what the director reasonably believes to be in the best interests of the corporation, to take into account:
- the interests of the corporation’s employees, suppliers, creditors, and customers;
- the economy of the state and the nation;
- community and societal considerations; and
- the long-term as well as the short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation. (O.R.C. 1701.59(E)).
True, the impetus behind the Ohio corporate statutory scheme is to protect its own. So it should not surprise many that most of the publicly traded companies that are incorporated in Ohio call Ohio home. Their corporate headquarters are here and a good portion of their employees and operations are here. Thus, Ohio has a key stake in the game to protect its economy and its jobs, therefore, also has a vested interest in providing strong director and corporate anti-takeover protections. However, such protections codified in the Ohio statutes are not limited or restricted to only home grown corporations, such protections can serve the interests of many corporations. Couple these protections with the costs to be an Ohio corporation versus the annual costs of incorporation in Delaware and it reasons that more corporations should consider Ohio as their state of incorporation. In doing so, O—H—I—O may be a rallying cry for more than collegiate athletics.