State Law, Staggered Boards, and Reducing the Role of Shareholders (Part 3: The Oklahoma Variation)

States are putting in place provisions that require public companies to have staggered boards.  In doing so, they avoid the messy need for shareholder approval and largely eliminate shareholder proposals on the subject. 

Oklahoma has become a second state to follow the Inidana lead and mandate staggered boards.  The provision is, however, slightly different from the one used in Indiana. 

Staggered boards are required for companies traded on an exchange or with securities registered under Section 12(g) (500 shareholders of record and $10 million in assets).  The full text is included after this post.  The definition may catch some small public companies so the state also limited the requirement to companies with 1000 shareholders (presumably of record).  The specifics (number of classes for example) need not be in the articles but can be implemented through a bylaw.  

As with Indiana, there is an opportunity to opt out.  It is a process that may only be initiated by the board of directors.  Moreover, rather than apply a short 30 day period do decide, the Oklahoma legislature simply delayed the right to opt out until January 1, 2015.  In other words, staggered boards are legally mandated for certain public companies and that cannot be changed until 2015.  

The provision mandating staggered boards would seem likely to draw objections from at least some public companies that view the mechanism as in consistent with the interests of shareholders.  So how big of an impact will this provision actually have? 

There are a modest number of NYSE companies with headquarters in the state.  As is the case everywhere, however, most are incorporated in Delaware.  This list of companies includes Dollar Thrifity (Delaware), Global Power Equipment (Delaware), Helmerich & Payne (Delaware), Heritage Propane (Delaware), Unit Corp. (Delaware), and The Williams Companies, Inc. (Delaware). 

Pre-Paid Legal Services is a NYSE traded company that is incorporated in Oklahoma.  The Company, however, is in the process of merging with MidOcean Partners, a private equity firm.  Once the merger is complete, the Company will cease to be public and, as a result, not subject to the mandatory staggered board provision.  See Proxy Statement, at 12 ("If the merger is completed, our common stock will be delisted from and no longer be traded on the NYSE and deregistered under the Securities Exchange Act of 1934, as amended, or the Exchange Act. As such, we would no longer file periodic reports with the SEC on account of our common stock."). 

Oneok Partners is also a public company incorporated in Oklahoma and traded on the NYSE.  The company currently does not have a staggered board.  With more than 1000 shareholders of record ("At February 14, 2011, there were 15,979 holders of record of our 107,021,170 outstanding shares of common stock."), it will presumably have to put one in place.  See Form 10-K, at 33. 

OGE Energy is another NYSE traded company incorporated in Oklahoma.  OGE has had to deal with shareholder ire over staggered boards.  Shareholders were presented with proposals in 2008 and 2009 that called for the declassification of the board.  In both instances, the proposals passed, with about 60% of the shares that voted.  While the proposals were nonbinding, management reacted and, in 2010, submitted to shareholders an amendment to the articles to eliminate the classified board.  The 2010 proxy statement is here.  The proposal passed overwhelmingly, receiving over 95% of the shares cast (81.978 for; 1.152 against; .685 abstentions). 

The Company, therefore, was in the process of unraveling the staggered board provision when the Oklahoma legislature acted.  As a result, things may change.  The Company observed in its most recent proxy statement:  

• Subsequent to the approval of the above-described amendments to the Company’s Restated Certificate of Incorporation by the shareowners at last year’s Annual Meeting, however, Oklahoma corporate law was amended to mandate that large public Oklahoma corporations such as the Company have a classified board.  Under the new law, if a corporation’s certificate of incorporation does not divide the board into classes, the board of directors will be deemed to automatically be divided into three classes consisting of a number of directors as nearly equal in number as possible, with the directors placed sequentially into each class alphabetically by last name.  After January 1, 2015, a corporation can elect to opt out of this provision if approved by a majority of the outstanding stock.  The Company is currently evaluating the actions it may take in response to the new law.

While the Company may be thinking about it, the statute seems clear.  OCE Energy will have to put the staggered board back in place.  Moreover, rather than reject the recommendations of shareholders, the Company is doing so under a statutory mandate.

Chesapeake Energy, an Oklahoma company, is also incorporated in Oklahoma and traded on the NYSE .  The Company also meets the ownership thresholed contained in the statute. See Form 10-K, at 29 ("At February 24, 2011, there were approximately 2,050 holders of record of our common stock and approximately 398,250 beneficial owners.").  Chesapeake already has a staggered board in place, so this provision will not change much.  On the other hand, the Company has been criticized for its corporate governance practices, particularly the payment of a $75 million bonus to the CEO in 2008 and the decision to repurchase his collection of antique maps and watercolors. 

The Company represented a potential target for a shareholder proposal calling for a repeal of the staggered board.  To the extent one surfaces, however, it will be subject to exclusion under Rule 14a-8(i)(2), at least until 2015.

The impact of the provision will, therefore, be small, in the greater scheme of things.  The state to watch in this area, as always, will be Delaware.  We'll talk about that in the next post.   

 2.   a.   Any domestic corporation with both:

(1)  a class of voting stock listed or traded on a national securities exchange or registered under Section 12(g) of the Securities Exchange Act of 1934, 15 U.S.C. Section 78a et seq., as amended, and

(2)  one thousand (1,000) or more shareholders of record, shall have a board of directors that is divided into two or three classes, as set forth in the certificate of incorporation or bylaws of such corporation, the term of office of each such class to expire as provided in paragraph 1 of this subsection.  If such a domestic corporation does not have a certificate of incorporation or bylaw dividing its board of directors pursuant to this paragraph, the board shall automatically be divided into three classes consisting of a number of directors as nearly equal in number as possible, with the directors of such corporation placed sequentially one at a time into each class beginning with the first class, alphabetically by last name.

b.   This paragraph shall cease to apply to any domestic corporation after such corporation either:

(1)  ceases to have any class of voting stock listed or traded on a national securities exchange or registered under Section 12(g) of the Securities Exchange Act of 1934, 15 U.S.C. Section 78a et seq., as amended, or

(2)  ceases to have one thousand (1,000) or more shareholders of record on the last business day of each month for a consecutive twelve-month period.

3.  On or after January 1, 2015, an election not to be governed by paragraph 2 of this subsection may be made by a resolution adopted by the board of directors and approved by a vote of the shareholders at a special or annual meeting.  Approval by shareholders shall require the favorable vote of a majority of the outstanding stock entitled to vote thereon, and a majority of the outstanding stock of each class entitled to vote thereon as a class, or such greater number or proportion required to amend a provision in the corporation’s certificate of incorporation or bylaws that divides the board of directors into classes.