The North Dakota Publicly Traded Corporations Act, Shareholder Proposals and the Securities and Exchange Commission

We have been discussing the North Dakota Publicly Traded Corporations Act and the efforts of North Dakota to attract corporate charters by providing shareholders with more authority, the opposite approach of Delaware.  What is the likelihood that public corporations will actually incorporate under the provisions of this Act?  It wouldn't take much to rule the experiment a success.  Right now, North Dakota has two publicly traded companies incorporated in the state. 

Management won't want to do it.  There will be few if any public companies where management will want to cede additional authority to shareholders.  Nor will they want to incorporate under a law that increases the likelihood of their removal, whether by facilitating contested board elections or limiting the use of antitakeover devices, including poison pills. 

It will only happen, therefore, if largely forced on them.  Is there an avenue to do this?  Reincorporation (in North Dakota or anywhere else) generally requires a merger with a subsidiary formed in that jurisdiction.  As a result, the merger must be approved by management and shareholders.  Can shareholders induce management to take this step?

The shareholder proposal rule, Rule 14a-8, represents a possible mechanism.  See 17 CFR 240.14a-8.  Under the rule, shareholders can submit proposals for inclusion in management's proxy statement.  Shareholders could, therefore, use the rule to propose that the company reincorporate in North Dakota.   As we have discussed, however, the rule contains a number of exceptions.  The one applicable to the election of directors has received the most publicity.  For purposes of reincorporation, however, others are more important.   

A handful of proposals have sought to initiate the process of reincorporation.  Ironically, a number of them seek reincorporation into Delaware, with management objecting.  The recent ones usually involve Ohio companies, apparently because the corporate statute mandates a plurality voting system for directors.  By moving to Delaware, the companies can be required to adopt a majority voting system. 

During the 2007 proxy season, the SEC generally looked favorably on provisions that would require the board to initiate a process to reincorporate.  Specifically, the Agency declined to allow DPL, Inc. to exclude the following proposal:

• "Resolved: That the shareholders of DPL Inc. (the "Company") hereby request that the Board of Directors take the measures necessary to change the Company's jurisdiction of incorporation from Ohio to Delaware, so as to enable the Company to establish a majority vote standard for the election of directors."

DPL Inc. (Feb. 5, 2007).  DPL argued mostly that the proposal was misleading and excludable as a violation of the proxy rules.  Rule 14a-8(i)(3).  See also Convergys Corporation (Dec. 29, 2006)(reincorporation proposal not excludable under as violation of proxy rules).  The staff has also rejected challenges to reincorporation proposals under Exception 1 (improper under state law), see ProLogis Trust (March 28, 2002).  Unresolved is the treatment under Exception 7 (deals with "ordinary business operations").  See Wendy's International, Inc. (Jan. 29, 2007)(no action letter on reincorporation proposal withdrawn; company argued proposal would violate Rule 14a-8(i)(7) because it would interfere with management functions).  But see Nabors Industries Ltd. (March 9, 2005)(proposal to require a "reincorporation impact statement" to be excluded under 14a-8(i)(7)). 

Thus, while it is not completely clear, the position of the staff seems to favor inclusion of reincorporation proposals in the proxy statement.  The rule could, therefore, be used for proposals that a company reincorporate in North Dakota.  Whether they would pass is another story.  Making them nonbinding would likely ensure their inclusion and possibly garner additional support but would likely result in management ignoring them.