Shareholders Should Decide Where Companies Incorporate

One big reason our economy is in crisis is because self-serving corporate managements and boards failed to provide sufficient risk controls over their finances. The credit crisis was largely preventable and it just shows the extent of mismanagement in corporate America today.

One of the big reasons why this greed and recklessness is allowed to flourish is that many states enable corporate managers and boards to perpetuate themselves in office, no matter how incompetent they are. Most shareholders can’t fight back effectively.

One of these states is Delaware, which generates about 20 percent of state government revenues, or about $550 million annually, from companies that make the state their legal home. A majority of U.S. public companies incorporate in Delaware and many major business decisions are made in its courts.

Delaware courts, which are justifiably respected and adept at making speedy decisions, are often hamstrung by a pro-management bias that emanates from the Delaware legislature, which regularly passes laws that favor managements over stockholders in an effort to attract more businesses to incorporate in the state.

However, other states, such as North Dakota, offer many more rights to shareholders. It is ludicrous that shareholders, who are the true owners of corporations, do not currently have the legal right to move their company to such a jurisdiction if they so choose.

The Delaware courts have allowed almost all of the most egregious anti-takeover devices in existence. Topping this list is the poison pill, a device which allows boards to effectively block hostile takeovers no matter how much they are needed to root out bad managements.

Delaware law has also given a green light to staggered board elections, meaning only a minority of new board members can be elected in any one year. This protects the status quo on a board, no matter how inept the board and management is.

Obviously, the law should be clear that any legitimate offer for a company should be put to stockholder for a vote, whether the board likes the offer or not. But in Delaware it isn’t.

And there’s more. In Delaware, unless the purchase is approved by the incumbent board, a shareholder cannot buy more than 15 percent of a company’s shares without facing a barrage of restrictions on future transactions involving the company.

For instance, if you propose a transaction with the company, the board and two-thirds of shareholders must approve it, and your 15 percent-plus stake doesn’t count towards that vote. That’s about as anti-democratic as it gets.

Or how about this one? Delaware law allows for many “change of control” provisions that actually can hurt the company and only serve to protect entrenched managements. These provisions can impede an offer no matter how beneficial it is for shareholders. They simply serve to cast a chill over the M&A environment. In fact, Delaware allows just about every pro-management, anti-shareholder provision in existence today.

Thus it is no surprise that many managements, which currently have the sole right to determine where their company incorporates, choose Delaware – it is in their self-interest.

For our economy to recover from this downturn, we need corporations to be more accountable to shareholders, who own them. Through my new advocacy initiative, United Shareholders of America, I intend to push for new federal legislation that will give shareholders the right to move their company’s state of incorporation. I believe it is long overdue. But we need more people to join this cause by signing up on my website, Icahn Report.

The right to redomicile a company may seem like an arcane corner of corporate law with little relevance to anyone outside of legal circles. But it has everything to do with how well companies are managed these days. And better management of companies would improve our entire economy and national well-being, particularly after the latest fiasco on Wall Street.

The capitalist system on which we all depend is best when it runs efficiently. And efficiency depends on companies having their assets managed to maximize their potential and profit, so profits can be redeployed to grow businesses. This is fundamental.

The net effect of these Delaware provisions is that they inhibit the natural processes of Darwinian corporate evolution, which culls out weak companies and favors managements that can make companies run more efficiently and profitably. Corporate takeovers, whether hostile or friendly, are often highly beneficial to shareholders and our common economic good.

An estimated 100 million citizens hold shares, either directly or indirectly. Shouldn’t they have more rights than corporate managements, which often own very few shares? Shouldn’t shareholders, the true owners of companies rather than the entrenched board, make the final decision to accept or reject a bona fide offer? It is not only unfair, but unconscionable.

Join United Shareholders of America. Our national well-being depends on making changes. We must show the government how we feel. Only with many people can we do this. It is only when we unite against corporate incompetence can we thrive as an economic nation.

About Carl Icahn 29 Articles

Carl Icahn is an American billionaire financier, corporate raider, and private equity investor.

Mr. Icahn is the Chairman of Icahn Enterprises, a diversified holding company engaged in a variety of businesses, including investment management, metals, real estate, and consumer goods. He has been the Chairman of American Railcar Industries since 1994 and a Director of Blockbuster since May 2005. He became Chairman of ImClone Systems in 2006. In January 2008, he became the Chairman of Federal-Mogul.

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