September 2009

Two years ago the North Dakota Legislature enacted the North Dakota Publicly Traded Corporations Act (NDPTCA). This Act grants shareholders corporate governance rights far beyond those typically found in companies incorporated in more popular incorporation states, such as Delaware. Publicly traded corporations that incorporated in North Dakota after July 1, 2007, can elect to be governed by the NDPTCA. While the initial response to the Act was largely academic, interest has grown recently as several large corporations have had reincorporation proposals filed by shareholders and at least one corporation has reincorporated in North Dakota. The NDPTCA has also garnered recent attention as the U.S. Securities and Exchange Commission (SEC) and the U.S. Congress have considered rules and legislation that would mandate the adoption by all publicly traded corporations of certain corporate governance concepts present in the NDPTCA.

What are the significant provisions of the NDPTCA?

The NDPTCA provides a corporation’s shareholders expanded corporate governance rights, including:

  • Executive Compensation: The corporation’s compensation committee must report to the shareholders at each shareholder meeting, and shareholders are entitled to place an advisory vote on whether they accept the report of the committee.
  • Election of Directors: If the Articles of Incorporation do not provide for cumulative voting, each share may be voted for or against each candidate for board election. To be elected, a candidate must receive the affirmative vote of at least a majority of the total votes cast for or against such candidate. A candidate who is not elected may not be appointed by the board of directors to fill a vacancy at any time thereafter, unless the individual is subsequently elected as a director by the shareholders.
  • Appointment of Officers: The board of directors must elect one of its members as its board Chair; however, the board Chair may not also serve as an executive officer of the corporation.
  • Nomination of Directors: The NDPTCA permits a corporation to require that a shareholder notify the corporation in advance of nominating a director candidate. The NDPTCA restricts, however, both the time period relating to the notice of shareholder proposals and the requirements placed on a shareholder regarding the information provided with such notice.
  • Proxy Contest Fees: If a shareholder is successful in a proxy contest, such shareholder is entitled to reimbursement of expenses incurred during such process.
  • Restrictions on Use of Poison Pills: The NDPTCA allows corporations to adopt antitakeover devices, commonly referred to as “poison pills”; however, the NDPTCA places significant restrictions on the use of poison pills designed merely to entrench management.

Recent Developments

Since NDPTCA’s adoption, shareholders have filed reincorporation proposals with at least fifteen companies, including: Southwest Airlines Co., Exxon Mobil Corporation, Marsh & McLennan Companies, Inc., Amgen Inc., Sempra Energy, Qwest Communications International Inc., Oshkosh Corporation, The Hain Celestial Group, Inc., Whole Foods Market, Inc., The Coca-Cola Company, and Verizon Communications, Inc. While some of these corporations were successful in barring the reincorporation proposal from their proxy materials, late last year the SEC ruled against a “no action” petition by Hain Celestial to exclude such a shareholder proposal from that company’s proxy materials.

Shareholders of American Railcar Industries, Inc. (American Railcar), a corporation based in St. Charles, Missouri, voted on June 10, 2009, to change the company’s state of incorporation from Delaware to North Dakota. On June 30, 2009, American Railcar became the first corporation to reincorporate in North Dakota under the NDPTCA. Investor Carl Icahn, who played a significant role in the development of the NDPTCA, also owns a controlling interest in American Railcar.

While shareholders have not yet successfully caused a significant number of companies to reincorporate in North Dakota, many of the shareholders rights present in the NDPTCA are gaining support as evidenced by recent changes in Delaware law and proposals being considered by the SEC and Congress. In particular, Senator Charles Schumer’s proposed “Shareholder Bill of Rights Act of 2009” has generated considerable press about corporate governance issues.

Takeaway

Shareholder proposals to reincorporate in North Dakota under the NDPTCA have increased. The NDPTCA grants shareholders significant corporate governance rights not typically found in other states’ corporate laws. It is critical, therefore, that corporations understand the NDPTCA and the manner in which corporations have dealt with such shareholder reincorporation proposals. Companies should also understand the corporate governance issues that form the basis for the NDPTCA as these issues are increasingly being addressed by legislation or administrative authorities. Knowledgeable legal counsel can play an important role in assisting corporations with developing corporate governance issues.