Billionaire investor Carl Icahn has found a new corporate home for a railroad car manufacturer he controls in North Dakota. Stockholders of American Railcar Industries Inc., a St. Charles, Mo. based company, voted on Wednesday to change the company's incorporation from Delaware to North Dakota. It will be the first business to take advantage of a North Dakota law, approved by the state Legislature two years ago, that requires companies to make it easier for shareholders to challenge management.
However, stockholders of at least 15 companies, from Exxon Mobil to Whole Foods Market, haven't been willing to make the switch. Most of these shareholders prefer incorporation in Delaware, which has attracted the most companies because of the state's hospitable laws and a court system that specializes in resolving business disputes.
Shareholders of Continental Airlines Inc. and office-supply company Staples Inc. this week defeated proposals to reincorporate in North Dakota. American International Group Inc., the financially troubled insurer, and The Pep Boys-Manny, Moe & Jack, an auto parts and repair company, will decide the question later this month.
In at least seven instances, the defeated idea drew support from at least 3 percent of the voting shareholders, which is enough to allow its advocates to submit the proposal for a second vote next year. "We'll have to take a look at whether to do that, when it is closer to the date we have to get those proposals in, later this year," said John Chevedden, a Redondo Beach, Calif., investor who has put the issue on the proxy ballots of seven companies, including Continental, Staples and Pep Boys.
Icahn is a controlling shareholder in American Railcar, which manufactures and repairs railroad tanker and hopper cars. Aside from American Railcar, Icahn has unsuccessfully lobbied shareholders of two drug companies, Amylin Pharmaceuticals Inc. and Biogen Idec Inc., to endorse reincorporating in North Dakota.
Icahn was among a group of activist investors who hired William H. Clark Jr., a Philadelphia attorney and specialist in corporate law, to write the original legislation. He did not respond to requests for comment. The proposal has drawn opposition from the management of most companies, Securities and Exchange Commission filings say. Some worry that reincorporating in North Dakota will make it tougher to recruit directors, while others say the state is not considered a business center. "North Dakota is not a well-known jurisdiction for business corporations," says a management statement from Pep Boys, whose shareholders are deciding June 24 whether to make the switch. The Philadelphia-based company is incorporated in Pennsylvania.
"We are concerned about the consequences to director recruitment, investor interest, and banking relationships associated with incorporating in a jurisdiction that is largely unfamiliar," the statement says. According to SEC filings, North Dakota has only four publicly traded companies that are incorporated in the state _ a real estate trust, a pasta manufacturer, a mutual funds company and a farmers' cooperative that was organized to grow and process sugar beets. All are also based in the state.
Among other things, the North Dakota law requires a corporation to hold annual shareholder advisory votes on how much a company's executives are paid, which activists say may act as a brake on lavish compensation. Delaware has no "say on pay" rule.
North Dakota law also mandates that a company's chairman be independent of its chief executive officer, and says each of its directors must be elected annually, rather than giving them terms of up to three years. Delaware allows corporations to give directors three-year terms, and combine the jobs of chairman and CEO.
Company arguments against the move said it would require expensive and largely pointless paperwork, and suggested the changes mandated by North Dakota's law could be made without reincorporating there. North Dakota's secretary of state, Al Jaeger, called American Railcar's switch "a rather significant development."
"One of the things that was our goal from the beginning was to provide corporations with an option, and here is one company that is exercising that option," Jaeger said.