The effort contains some good ideas but they will only become operative if companies reincorporate in North Dakota and elect to come under the Act.   Since the decision to reincorporate must first be approved by management and this lessens management's authority, the prospects look dim.

Nonetheless, shareholder proposals at four companies are seeking to force management's hands.  According to the WSJ, several companies are about to be subjected to shareholder votes on whether they should reincorporate in North Dakota.  Shareholders have submitted reincorporation proposals at:  Oshkosh, Hain Celestial Group, Whole Foods and PG&E. 

It can be expected that some or all of these companies will try to get the SEC's permission to exclude them from the proxy statement.  Unless there is some kind of technical violation, the likelihood of this occurring is slim.  The SEC has a relatively consistent history of not allowing reincorporation provisions to be excluded.  A waive of provisions arose ironically to encourage companies to move to Delaware to avoid states that prohibited the election of directors by majority vote.  The Commission staff has already denied Hain Celestial's request to omit the reincorporation proposal. 

Nonetheless, the provisions are unlikely to have much impact.  The shareholder proposals are non-binding.  As the Hain Celestial proposal reads:

• Resolved: That the stockholders of The Hain Celestial Group, Inc. ("Company") hereby request that the board of directors initiate the appropriate process to change the Company's jurisdiction of incorporation from Delaware to North Dakota and to elect that the Company be subject to the North Dakota Publicly Traded Corporations Act.

Thus, the board is free to ignore the provision even if it passes.

The focus on the North Dakota law is an interesting exercise.  The North Dakota Law Review is working on a symposium on the law and will have a conference on the subject in the Spring (I'll be there).  As my paper, Returning Fairness to Executive Compensation, notes, the problem with the North Dakota law is not in what it does but in what it does not do.  As we have written often on this Blog, corporate governance is weakened by the fiduciary standards (or lack of standards) set by the Delaware courts.  It is this lack of standards that is resulting in the current waive of nausea over the system of executive compensation.  Yet the North Dakota law does little to alter these fiduciary duty standards.

There may well be a need for a more active market for corporate control.  The market has been shut down by the Delaware courts, leaving to management almost unlimited authority to rely on poison pills to stop unwanted ventures.  Thus, even the worst managers can remain in office, behind the poison pill shield.  Once again, the explanation rests with the Delaware courts.

But those who push an active market for corporate control as a solution often ignore the negative consequences of the approach.  One of them is that it discourages risk taking.  Companies wanting to enter a new market generally have two choices.  They can acquire an existing participant, purchasing market share and income streams, or develop their own capacity.  The risk of failure (and, presumably a hostile takeover), is greater with the development of capacity.  There is a chance that the entire venture will fail (smokeless cigarettes by RJR back in the 1980s for example), result in damage to profitability and a fall in share prices.  Buying an existing participant entails less risk of failure (and, concomitantly, a takeover).  But is this the best approach?  Let's take a look at the auto industry in the US.

Back in the 1980s, when hostile acquisitions raged, many car companies decided to go up market, to distribute a premium brand.  In the US, GM bought Saab (acquiring a 50% stake in 1990 and now for sale), Ford bought Jaguer, Aston Martin, Land Rover (all three subsequently sold), and Volvo (Ford is currently exploring "strategic alternatives" for Volvo, "including divestiture").  The Japanese auto makers, where hostile acquisitions were almost impossible, approached the same issue from an entirely different perspective.  They developed their own premium brand, with Toyota developing the Lexus, Honda the Acura, and Nissan the Infiniti.  A ranking of the luxory brands by customer loyalty in 2008 showed Lexus at the top with Land Rover, Jaguar and Saab at the bottom. 

In other words, an active market for corporate control could easily have been one factor in US companies uniformly expanding into a market through the least risky method, buying existing brands rather than starting their own.  In other words, it is no panacea to say that takeovers result in the removal of inefficient management.  They also arguably result in a risk averse strategy in business, something that has real and long term costs.