Archive for January, 2011

Why Delaware?

January 29, 2011

As a non-lawyer I’ve wondered why so many companies – regardless of where they do business or actually are located – incorporate in Delaware.

The little state that is barely a whistle-toot on a fast New York-to-Washington train ride practically makes an industry of playing host to corporations. More than 850,000 companies make their home there, including the majority of US publicly traded companies, according to the Delaware Division of Corporations.

So I was intrigued by “Boardroom Justice,” an interview with William B. Chandler III, chancellor (top judge) of Delaware’s Court of Chancery, in the December-January issue of Directorship, the National Association of Corporate Directors magazine.

The Court of Chancery – and the Delaware Corporation Law it interprets – have a lot to do with why lawyers tell companies to incorporate there. Delaware law gives flexibility to companies in governance matters, and the court itself has a long history of case law on issues like fiduciary responsibilities of directors.

What’s more, the judges (a chancellor and four vice-chancellors) on the Court of Chancery specialize full-time in corporate matters. And they decide the cases, with no jury trials. Chandler explains:

The reason Delaware is viewed as the center of the universe for corporate law is that a defendant (or a plaintiff) can be guaranteed—no matter which judge you get—to have a jurist acutely familiar with this body of law; a judge who works with corporate law issues day in and day out, seven days a week. That’s the uniqueness of the Court of Chancery.

Contrast that with, say, Texas or California: A complex shareholder lawsuit may be presided over by a judge with more experience in bank robbery or debt collection cases than corporate law – and it may be decided by a jury of folks who, well, aren’t really the peers of the CEO, members of the Board of Directors or the shareholders.

I’m sure I’ve oversimplified. But if you’re curious, have a look at your 10-K or your client’s and see where the company is incorporated. Then ask a lawyer why.

© 2011 Johnson Strategic Communications Inc.
(oddly enough, a Kansas corporation)

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SEC has its say on pay

January 25, 2011

The Securities and Exchange Commission adopted final rules on “Say on Pay” and other executive compensation requirements under the Dodd-Frank Act of 2010.

Starting now, most companies must get an advisory vote of shareholders on executive compensation at least every three years. And ask stockholders how often they want to offer their say on pay. And get input on “golden parachute” arrangements to take care of execs in mergers. And add disclosures, of course.

Only the smallest public companies (less than $75 million in float) get a reprieve: They won’t have to implement say on pay votes for two years, in 2013.

The SEC website provides a good summary of the provisions and a video of Chairman Schapiro’s comments today, and the text of the final rule. Look for more explanations from law firms and comments from corporate governance gurus.

More than just studying up, investor relations officers should talk through say on pay – and all issues around executive compensation – with their senior management and legal teams. This is the thrust of the National Investor Relations Institute’s counsel in a NIRI “Executive Alert” today:

Since President Obama signed Dodd-Frank into law on July 21, 2010, NIRI has reinforced its long-standing advice that members become more involved in their companies’ corporate governance process. Investor relations professionals are the primary conduit between companies and Wall Street, and are ideally suited to provide the executive team and board of directors the insight into shareholders that will be critical as these shareholders become more active and influential in corporate governance matters.

Executive pay and your company’s plans for putting these issues before shareholders will likely come up in conversations with investors, especially institutions, in the coming days. Preparing a Q&A or “talking points” would help keep management and IR on the same page with the legal beagles.

The say on pay rule isn’t surprising. In my mind, it’s not terribly helpful, either. But let’s face it: Astronomical paydays for high-visibility CEOs are tremendously unpopular. I hear gripes about fat cats’ pay from all kinds of people, including bankers, institutional investors, high net worth people and – gasp – Republicans.

The SEC rules for say on pay are a classic case of Washington’s reflex to “do something” each time the economy goes through a crisis. So … we’ll implement.

© 2011 Johnson Strategic Communications Inc.