The North Dakota Experiment: Bundle Up!

Posted by Lawrence A. Hamermesh, Ruby R. Vale Professor of Corporate and Business Law, Widener University School of Law, Wilmington, Delaware, on Thursday April 26, 2007 at 4:44 pm
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Editor’s Note: This post is by Lawrence A. Hamermesh of the Widener University School of Law.

With the able assistance of Bill Clark (one of the finest business legislation drafters around), North Dakota has adopted legislation that permits public companies to opt into a legislative scheme that includes a whole bunch of rules that are reported to be “shareholder friendly.”  Mark Roe says (and I think he’s right) that we shouldn’t expect to see companies reincorporating in North Dakota; more likely, he says, is the possibility that IPO companies will use the new North Dakota option (although Mark wisely doesn’t put money down on this either).  Some say, in any event, that this puts a whole lot of pressure on us in Delaware to do something similarly “shareholder friendly.”

The logic of this escapes me.  I’m pretty confident that if anyone thought that this North Dakota package of rules was really a good thing for a public company, they could create the same package by incorporating in Delaware (or lots of other states, for that matter) under a Certificate of Incorporation that adopted all of the North Dakota provisions.  (Section 102(b)(1) of the Delaware General Corporation Law would permit any company incorporated there to do so.)  Or, if you thought that one or two of these provisions was a bad idea, you could simply leave them out.  Some people, for example, don’t think it’s a good idea to have a permanent statutory compulsion to separate the Chairman and Chief Executive Officer positions; others might want a threshold lower than 5% (the North Dakota rule) to qualify as a shareholder eligible to get access to management’s proxy statement.

As far as I can tell, however, it’s not clear that you can pick and choose pieces you like and throw out the ones you don’t like if you adopt a corporate charter that elects to be governed by the “shareholder friendly” North Dakota statutory package.  In terms of freedom of choice, this is pretty thin soup.  Can you imagine how a good shareholder activist would respond to a board-proposed charter amendment that provided for proxy access and mandated majority voting, but at the same time created a staggered board?  You’d hear howls of unfair bundling so fast it would make your head spin.  (Unless, of course, the SEC shot it down first under Rule 14a-4 for just that reason.)  Why should bundling accomplished by the North Dakota act be viewed as more benign?

So if you’re heading off to “shareholder friendly” North Dakota, bundle up!  (What, you thought I was referring to the weather?  With global warming, they don’t even have to take the “North” out of the State’s name and it will still feel like Nebraska.)  Or, just stay in Delaware, or in any number of other states for that matter, where you can dress up your charter in whatever suits you.  Shareholder choice at the IPO stage is quite alive and well under Delaware law, if anyone wants to use it.  If you think you can attract equity capital more cheaply by using rules like those in the North Dakota act, go for it!  Let a hundred flowers bloom!  The fact that IPO companies rarely put in the “shareholder friendly” North Dakota rules, however, may well say a lot about how “friendly” those rules really are, and how likely it is that we’ll be seeing a lot of IPOs of companies incorporated in North Dakota.

A few other cautionary questions about the North Dakota experiment:

–Will the State of North Dakota provide the human and capital infrastructure to support the day-to-day administration of corporate affairs required to be responsive to business needs?  (These include, among other things, near-instantaneous filing of charter amendments, certificates of designation, and merger agreements, and a host of administrative services.) 

–Will the North Dakota legislature faithfully assemble year after year to consider and accept, on a devoutly nonpartisan basis, statutory refinements that will be necessary to clear up statutory ambiguities or fix unanticipated glitches?  I’m sure that Bill Clark would cheerfully concede that not even his legislative drafting is perfect.  Will he, or an indigenous North Dakota corporate bar, be willing to spend thousands of unpaid hours to do the necessary drafting work going forward?

–Will North Dakota’s judiciary, when called upon to decide the fate of a multi-billion-dollar merger that hinges on a complex question of corporate law, refer the case to a judge who (1) is constitutionally empowered to decide the case herself or himself rather than submit it to a jury; (2) has already heard and decided hundreds of other corporate law cases and is thoroughly versed in the history and policy of corporate law; and (3) is able and willing to put aside all other matters so that the case can be briefed, argued, and decided in time to be of use to the parties?

  1. It’s not surprising to see a Delaware lawyer respond so quickly. It’s also not surprising to see the Delaware response focus on the perspective of corporate managements. Managements have, of course, not drafted their certificates of incorporation and bylaws to provide the rights that shareholders now have under the North Dakota law. Who would really expect them to? Managements knew that, prior to the North Dakota becoming available, the only option shareholders had was to seek discrete amendments which would take a long time and a lot of effort.

    The cautionary questions at the end of this Delaware response also miss the mark:

    The North Dakota Secretary of State’s office is one of the most efficient in the country. They offer turn-around times of a few hours when processing filings. And, unlike Delaware, they don’t ask for additional fees to provide faster processing.

    The North Dakota legislature has one of the most open processes in the country. Every bill that is introduced must be voted on. There is no way for a committee chair or legislative leadership to bury bills they don’t like.

    But it is the question about the North Dakota court system that most misses the mark. If North Dakota had simply copied the Delaware General Corporation Law, there would indeed be no reason to incorporate in Delaware and give up having the Delaware courts available. But from the perspective of a shareholder: Would you rather invest in a North Dakota corporation and have all the additional rights being in North Dakota provides you to protect your investment? Or would you rather invest in a Delaware corporation and not have the North Dakota rights and be forced instead to rely on the Delaware judges to protect your investment? I think shareholders will find North Dakota to be an easy choice.

    Comment by William H. Clark, Jr. — April 30, 2007 @ 11:16 am

 

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