April 25, 2007 / 6:59 PM / 11 years ago

Delaware beware: North Dakota wants your business

NEW YORK (Reuters) - The U.S. state of North Dakota, better known for its cold winters and abundant farmland, wants to supplant Delaware as the official home to corporate America.

But don’t expect a rush of large companies to the sparsely populated state, which earlier this month passed what proponents have called the country’s first shareholder-friendly corporation law. It gives investors more say over how companies are run, allowing for things such as shareholder advisory votes on chief executives’ pay that many corporations oppose.

The measure was signed into law by the state’s governor, John Hoeven, two weeks ago. It is optional for companies, and only would affect those that incorporate in the state after July 1 -- meaning that the two public companies now incorporated in North Dakota would not be affected.

Delaware, where about half of all publicly traded U.S. companies are incorporated, has long been criticized by shareholder activists as too friendly to business interests. The state earns valuable revenue from franchise fees paid by companies that set up business there.

William Clark, a partner at law firm Drinker Biddle in Philadelphia who drafted the new law, said he knew of no companies that are now planning to reincorporate in North Dakota, but he thinks that will happen in time.

“There will, at least initially, be two types of companies that consider going to North Dakota,” said Clark, who said he represents activist investors interested in the new law. “One type would be those companies that are really very committed to shareholder rights ... also, companies that are pushed to go there by their shareholders.”

Under the legislation, companies would agree to provide for majority voting of board members and to give shareholders an advisory vote on the pay awarded to top executives. The U.S. House of Representatives has approved a so-called “say on pay” bill, though the White House has said it opposes it.

Corporations also must agree to reimburse the expenses incurred by shareholders who conduct successful proxy contests, and to split the roles of chairman and CEO among different people rather than having the same person hold both jobs.

At a legal education forum in New York on Wednesday, Delaware-based corporate lawyer Gilchrist Sparks said the North Dakota law was a wish-list of things that governance activists would like to see companies adopt. He said that the law was part of a pattern of moves spearheaded by activist academic experts who have called for things such as CEO pay reforms.

“This is another way of promoting that in a slightly more real world way,” said Sparks, a partner at Morris, Nichols, Arsht & Tunnell in Wilmington.

Clark said proponents of the law did seek some input from a university professor in pushing for the new measure but “this certainly does not have its genesis in the academic community. It comes from the investor community.”

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