The Benefits of Incorporating Outside of Delaware

Delaware is management friendly.  But only 60% of the largest public companies have incorporated in the state.  Ever wonder why the percentage isn't higher?  

There are any number of reasons.  But one of them is influence.  Any single public company incorporated in Delaware has only limited ability to influence the state legislature.  After all, one company, no matter how large, is a small presence in the state.  Moreover, most of these companies (Du Pont excepted) do not have their headquarters in the state, further reducing their influence.

Large public companies incorporated in smaller states, however, will often have greater influence with their own legislature.  Most other states have only a modest number of incorporated public companies, enhancing the voices of those that remain in the state.  Moreover, as a practical matter, public companies not incorporated in Delaware are, for the most part, incorporated where they have their headquarters.  This provides a powerful economic voice in the state.  In those circumstances, public companies may well have accentuated influence with their local legislature. 

With that in mind, we turn to Oklahoma and the potential influence of Chesapeake Energy.  As we have noted, Oklahoma adopted a law that requires public companies to put in place staggered boards (following a brief opt out opportunity).  The law no doubt has a number of justifications.  But one practical result is that it reduces shareholder pressure to eliminate the staggered board through the mechanism of Rule 14a-8.  The rule allows shareholders to submit proposals for inclusion in the company's proxy statement.  Proposals can, however, be omitted if they would result in the violation of state law.  A proposal calling for the elimination of a staggered board in a state where staggered boards were mandatory would arguably fall within this exclusion. 

As the WSJ reports, the law in Oklahoma was written with the participation of Chesapeake Energy, a public company incorporated in the state.  At Chesapeake disclosed: 

• "As one of Oklahoma's largest corporate employers, we were consulted during the legislative process," the company said. "Ultimately, state leaders believed the measure was important enough for Oklahoma's economic development to pass it after weighing the pluses and minuses, including the effect it would have on public companies in Oklahoma."

The company contended that it favored the approach in the new law because staggered boards "promote continuity of management and leadership." As the article further noted:

• The main architect of the bill's language on corporate boards, according to people involved in the process, was Chris Coleman, an Oklahoma City attorney who has represented Chesapeake in the past, according to securities filings. Last year, Mr. Coleman proposed the provision on corporate boards to a committee of the state bar association that was working on the limited partnership bill. Chesapeake declined to say whether Mr. Coleman was representing it in the process.

Not everyone in Oklahoma agrees with the legislative change.

• John W. Gibson, Oneok's chief executive, said the company was "disappointed" in the Oklahoma Legislature's action, and that it didn't have the "opportunity to participate in the debate regarding the advisability of this legislation." He added that corporations and their shareholders should be able to determine how a company is governed. OGE Energy, which owns an electric utility and operates natural-gas pipelines, also learned of the new corporate board requirement after it became law. . . ."We view it as a setback," said OGE spokesman Brian Alford. "We were disappointed. A lot of work had gone into making this transition." The company is continuing to evaluate how to comply with the law.

Whatever the actual role played by Chesapeake in the formulation and adoption of the statute, one thing is certain.  The company would likely not have had the same level of participation had it been incorporated in Delaware.