June 10, 2009
About That North Dakota Statute ...
Posted by Gordon Smith

The North Dakota Publicly Traded Corporations Act is getting some play here at the AALS Conference on Business Associations. In a previous post about the statute, I wrote about the value of the statute to shareholder activists:

While North Dakota won't reap any financial benefits without actual reincorporations, my view is that the statute is already a success with shareholder activists. They have managed to place the statute on the ballots of 11 major corporations with more to follow. The North Dakota venture seems designed as a symbolic gesture, rather than as a real threat to Delaware, and it seems to me that it has already served that function.

Now Josh Fershee of the University of North Dakota School of Law weighs in with a new paper on the statute to be published a symposium sponsored by the North Dakota Law Review. Josh's paper contains a useful history of the passage of the statute, plus some analysis of the current uses of the Act. While I was evaluating the effect of the Act from the standpoint of shareholder activists (who seem to be using North Dakota), Josh is understandably interested in whether the Act inures to North Dakota's benefit. His take:

The idea was to create a “brand” of corporate governance that sends the message that a North Dakota publicly traded corporation is a corporation that values shareholder input. However, that is not the “brand image” that seems to be emerging.

[T]he Act is shaping up to be a leverage point used by shareholders to urge some modifications to their current corporate governance procedures. Over time, there could be a negative impact (i.e,
negative brand image) if the Act is the only forward-looking or unique business-related law passed in the state in the near future. If no other innovative laws are passed in the near future—thus branding North Dakota as the “State With the Small Population, But Big Ideas”—the state runs the risk of becoming the corporate equivalent of sending a child to his or her room. That is, shareholders are essentially telling managers, “If you can’t get your act together, we’ll send you to North Dakota.” So, naturally, managers are likely to want to avoid North Dakota.

Although shareholders can’t generally make this change happen on their own, it is hard to imagine any boards of directors (other than those controlled by people like Mr. Icahn) thinking of North Dakota corporate governance in anything other than a negative way. Thus, even if the board were inclined to make some concessions to appease shareholders, as it stands, incorporating in North Dakota will likely be at the bottom of the list of options.

If you find this legislation interesting, Josh's paper is worth a look.

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