Friday, September 3, 2010

Proxy Access: The Added Wrinkle of the North Dakota Corporations Law

Back in 2007, North Dakota passed the North Dakota Publicly Traded Corporations Act (ND Act), which became Chapter 10-35 (Publicly Traded Corporations) of the North Dakota Century Code.  The ND Act provided a shareholder friendly alternative to the state's Business Corporations Act, Chapter 10-19.1 for companies that were so inclined.  (Find the referenced North Dakota laws here.)

Before the state could pass the law, the state constitution needed be amended, and voters approved the necessary changes in 2006 (for more on the history of the ND Act, see pdf here). A North Dakota-based publicly traded corporation is not subject to the ND Act unless it opts-in, essentially by reincorporating in the state. None of the state's public corporations existing before the ND Act was passed have done so.  

One of the main provisions of the ND Act gave proxy access for purposes of nominating candidates for election to the board of directors for a "qualified shareholder" of the publicly held corporation subject to the law. N.D. Cent. Code 10-35-08.  A qualified shareholder is a person or group of persons holding 5% of the company's shares authorized to vote for directors, and each person or member of the group must have held the shares for at least two years. N.D. Cent. Code 10-35-02(8).

As has been well documented, now comes the SEC amendments to Rule 14a-11, which allows such access for persons or groups of persons holding 3% of such shares who have owned those shares for three years. The SEC revisions allow the use of state or foreign law for nominations in addition to those permitted under Rule 14a-11, under 14a-19. Thus, as I read it, companies subject to the ND Act will now have to permit proxy access to two sets of qualified shareholders:  (1) the SEC-mandated 3%/three-year ownership shareholders and (2) the ND Act-mandated 5%/two-year ownership shareholders. 

Is this a big deal? As to ND Act companies, probably not. The only company subject to the ND Act is a public company already controlled by Carl Icahn. Thus, this issue is largely moot.  However, there is an indirect North Dakota connection that could loom larger. 

At least fifteen companies -- including Staples, Exxon Mobil, and Whole Foods -- have considered and defeated shareholder proposals to reincorporate under the ND Act.  Of those companies defeating the proposal, reports indicate that at least seven companies garnered at least 3% of the vote in support of the change.  This probably indicates that there is already a group of shareholders with 3% of the ownership ready to nominate directors.  And because of the ND Act, they should be relatively easy to find.  

http://lawprofessors.typepad.com/business_law/2010/09/proxy-access-the-added-wrinkle-of-the-north-dakota-corporations-law.html

Business Associations, Corporate Governance, Corporations, Joshua P. Fershee, Securities Regulation | Permalink

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