Shareholders Ponder North Dakota Law

A new front in the battle over corporate governance is emerging in an unlikely place: North Dakota.

Only two publicly traded companies are incorporated in North Dakota. But last year lawmakers there -- prodded by out-of-state activists including Carl Icahn -- enacted the nation's most shareholder-friendly corporate-governance law.

Associated Press

Carl Icahn

The law prescribes rules that companies incorporating in North Dakota can adopt as a package, including requiring an annual shareholder advisory vote on executive pay and the naming of a chairman who isn't an executive. The rules also provide for the annual election of directors and make it easier for shareholders to nominate their own director candidates.

Now, shareholders at four companies are offering resolutions urging those companies to reincorporate in North Dakota. Experts say the proposals, while unlikely to pass, could lead to pressure for more shareholder-friendly corporate-governance rules in other states.

John Chevedden, a longtime activist investor in California, filed a proposal urging Oshkosh Corp. to move its incorporation to North Dakota from Wisconsin. Mr. Chevedden also helped shareholders at Hain Celestial Group Inc., Whole Foods Market Inc. and PG&E Corp. draft and file similar proposals.

Mr. Chevedden says he picked those companies because of what he considers to be their weak governance and the timing of their annual meetings. "We wanted to get early feedback ... to see what level of support this will generate," he says.

In October, Hain Celestial, a Melville, N.Y., organic-food maker incorporated in Delaware, unsuccessfully petitioned the Securities and Exchange Commission to dismiss the proposal on procedural grounds. A company spokeswoman declined to comment.

Brian Hertzog, a spokesman for California-based and incorporated PG&E, says shareholders are well served by the utility's current corporate-governance rules. "It's unlikely that we would support" the proposal, he says. "We've been a California company now for over 100 years."

Representatives at Oshkosh and Whole Foods declined to comment.

The North Dakota law is part of an effort by shareholder advocates to generate competition among states for company incorporations based on governance rules. More than half of publicly traded companies are incorporated in Delaware, which has long courted such business. Critics say Delaware law favors management over shareholders.

In 2005, a group of activists, including Mr. Icahn, hired William H. Clark Jr. -- a Philadelphia lawyer who has helped write corporate laws in Pennsylvania -- to draft a pro-shareholder governance model. Mr. Chevedden says he isn't affiliated with that group.

"I think it was prescient," says Mr. Icahn. "If you look at the companies on Wall Street and the problems you have there, it's because nobody is accountable."

Mr. Clark first took the legislation to Vermont, home to only five public companies in 2005. But one company objected, and the bill died in committee.

The following year, North Dakota removed a provision from its constitution that had discouraged companies from incorporating there. Mr. Clark then began building support for a revamped corporate-governance bill. He recruited local lawyers, a prominent businessman and the former mayor of Bismarck as backers. The group then hired a well-known Bismarck lobbyist, Joel Gilbertson.

Republican State Rep. Duane DeKrey says he has known Mr. Gilbertson for years and agreed to co-sponsor the bill, although he had no "burning desire one way or another" and didn't expect it to pass.

The Greater North Dakota Chamber of Commerce and Integrity Mutual Funds Inc., the larger of two companies incorporated in the state, opposed the bill. But Integrity dropped its objections after learning it could stick with its traditional rules, Mr. Clark says. Integrity Chief Executive Bradley Wells declined to comment.

Al Jaeger

The group also won the support of longtime Secretary of State Al Jaeger, who thinks the law might attract business to North Dakota. "Our position was ... we will build it," Mr. Jaeger says. "If somebody wants to come and play in our ball field, that's great."

The North Dakota law is unlikely to draw much business to the state soon, experts say. The four reincorporation proposals are nonbinding and unlikely to win approval, says Carol Bowie, director of the Center for Corporate Governance at proxy adviser RiskMetrics Group Inc.Activist investors say the North Dakota law adds fuel to the debate over shareholder rights and oversight, which has intensified during the U.S. financial crisis.

"This is more a wake-up call for Delaware to modernize than any significant attempt to attract business in North Dakota," says Richard Ferlauto, head of corporate governance and pension investment at the American Federation of State, County and Municipal Employees.

Write to Cari Tuna at cari.tuna@wsj.com

source: wsj.com

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