North Dakota v. Delaware

The Financial Times' Tracy Alloway tackles the story of how David (North Dakota) is going up against Goliath (Delaware), observing that:

From a Wall Street Journal story in December:

 

Only two publicly traded companies are incorporated in North Dakota. But last year lawmakers there — prodded by out-of-state activists including Carl Icahn — enacted the nation’s most shareholder-friendly corporate-governance law.

 

The law prescribes rules that companies incorporating in North Dakota can adopt as a package, including requiring an annual shareholder advisory vote on executive pay and the naming of a chairman who isn’t an executive. The rules also provide for the annual election of directors and make it easier for shareholders to nominate their own director candidates.

She continues:

[J]ust because North Dakota is appealing to shareholders via strengthened corporate governance and Delaware tends to appeal to management because of its company-friendly policies and bottom line-friendly tax exemptions, doesn’t mean this is a clear-cut shareholder vs management conflict.

University of California law professor Stephen Bainbridge, for instance, offers a nuanced discussion of the subject in relation to the North Dakota/Delaware competition, in the form of this paper. Selected extract (emphasis ours):

Those who believe that state competition results in a race to the bottom believe that Delaware’s corporate statute is skewed to favor the interests of corporate managers rather than those of investors. As the story goes, because it is corporate managers who decide on the state of incorporation, Delaware caters to management, allowing them to exploit shareholders.

An alternative view claims that state competition leads to a race to the top. According to this account, investors will not purchase, or at least not pay as much for, securities of firms incorporated in states that cater excessively to management. Likewise, lenders will not lend to such firms without compensation for the risks posed by management’s lack of accountability. As a result, those firms’ cost of capital will rise, while their earnings will fall. Among other things, such firms thereby become more vulnerable to a hostile takeover and subsequent management purges. Corporate managers therefore have strong incentives to incorporate the business in a state offering rules preferred by investors and, as a result, competition for corporate charters should lead to statutes that maximize shareholder wealth. …

Nuance. Our specialty.

Anyway, as my paper argues, this is one fight Goliath is going to win.