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North Dakota's shareholder law may pressure Delaware

Published May 3, 2007


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 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.

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 before Congress that would give shareholders at public companies a formal say in executives' compensation.

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 because corporate boards have a fiduciary duty to put investors' interests first.

"It was long believed that investors need to be protected and management was the best to do it, " said Charles Elson, director of the Weinberg Center for Corporate Governance at University of Delaware. "But now there is growing sentiment that investors don't need as much protection, and there is great caution about management agendas" after all the corporate scandals.

Enter North Dakota, which has had largely a nonexistent role in corporate America. Only two public companies are incorporated there.

Leading the charge was a group called the North Dakota Corporate Governance Council, which bills itself as a nonprofit group organized to support the enactment of the law and to advance the discussion of shareholder rights in public companies.

The 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 chairman and CEO roles must be separate.

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.

Should that happen, it could be used as leverage to get Delaware to begin to soften its business-friendly stance.

"Delaware will initially scoff at North Dakota, " said William Clark, a Philadelphia lawyer who authored the law as the head of the North Dakota Corporate Governance Council. "But it will eventually feel the pressure."

[Last modified May 3, 2007, 00:31:51]

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