North Dakota Challenges Delaware for Business Incorporations

The American State of Delaware is famous for two things. It was the first state to ratify the Constitution, and it is the home of around half of the corporations operating in the US. The real business of America is in New York, Los Angeles, Miami, Dallas, Chicago and a million small towns, but Dover and Wilmington, Delaware are the homes of convenience for tax and governance reasons. North Dakota has decided it wants to take on Delaware, and this can only be good for shareholders.

Delaware’s incorporation laws are heavily weighted in favor of management against shareholders. Indeed, the New York Stock Exchange has harsher disclosure rules than Delaware. Shareholders can often vote only “yes” or withhold their votes at shareholder meetings. And Delaware benefits to the tune of $3,000 per household for the fees directly generated from these rules.

North Dakota’s corporation law, signed by Republican Governor John Hoeven on April 12th, offers many things that Delaware’s doesn’t. Perhaps this stems from the fact that Governor Hoeven has an MBA from the Kellogg School at Northwestern and used to be a banker; from 1993 to 2000, he was the president and CEO of the state-owned Bank of North Dakota. Under the new system, North Dakota-incorporated companies must allow shareholders to vote “no” when it comes to electing boards of directors and directors need a majority of “yes” votes. Shareholders who mount successful proxy fights will receive reimbursement from the company. Executive compensation will be subject to an advisory vote by shareholders. Best of all, a CEO can’t serve as chairman of the board under the North Dakota rules.

Naturally, Delaware won’t take this lying down, and there’s no reason to believe that there will be a mass exodus from Delaware to the Flickertail State. First of all, the Delaware rules favor the management when it comes to relocation, so moving could take years. Secondly, some shareholders may prefer the devil they know. Finally, Delaware can always change some of its rules to diminish North Dakota’s advantage.

Nevertheless, if Bismarck’s new rules appeal to shareholders, initial incorporations under North Dakota’s law (which enters into force on June 1, 2007) should increase. A bit more money flowing into the state can’t hurt, and it could well spark interest in better corporate governance outside both Delaware and North Dakota. The strength of the federal system lies in the ability of the states to experiment and compete. In this case, the result may be better transparency and more efficient corporate governance.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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