DealLawyers.com Blog

Over on The M&A Law Prof Blog, Prof. Brian Quinn looked at the recent amendments to Texas’s corporate statute and came away unsure about whether the state has any idea what it’s doing. He points out that The Lone Star State claims to be competing with Delaware, but he doesn’t think that’s really the case:

In fact, they aren’t competing against Delaware, they are competing against Nevada! The corporate law amendments they recently adopted mimic the law of Nevada and not the law of Delaware. For example, in order to sustain a shareholder claim against a director you have to have Nevada-like facts:

To prevail in a cause of action claiming a breach of duty, the claimant must (a) rebut one or more of these presumptions and (b) prove (i) the act or omission was a breach of the person’s duties as a director or officer and (ii) the breach involved fraud, intentional misconduct, ultra vires acts, or knowing violations of law.

That’s Nevada, right? Fraud, intentional misconduct, ultra vires or knowing violations of the law. What signal does it send to investors if the board proposes to move from Delaware (especially after SB 21) to Texas? Nothing good for minority investors, that’s for sure.

Based on my own experience, I think Prof. Quinn’s commentary hints at a potential problem looming for Nevada and Texas, and that’s institutional investor hostility toward states that are perceived to be overly protective of incumbent directors. Long, long ago, in a flyover state far, far away, the Ohio legislature adopted what came to be known as the “Goodyear Amendments” to the state’s corporate statute.  These were put into place as part of a frantic and ultimately successful effort to fend off Sir James Goldsmith’s hostile bid for Goodyear.

One of the changes to Ohio’s statute adopted as part of these amendments was a provision holding that directors could only be liable in damages for breaches of fiduciary duty if a plaintiff could prove, by clear and convincing evidence, that the challenged actions were undertaken with the “deliberate intent to cause injury to the corporation or undertaken with reckless disregard for the best interests of the corporation.” Does that look sort of familiar? Well, when you added that to a panoply of antitakeover statutes that Ohio adopted, institutional investors came to be very wary of Ohio as a jurisdiction of incorporation.

Perhaps the best example of that is Abercrombie’s failed attempt to move from Delaware to Ohio in 2011. The company took a lot of heat from its investors and the media for this effort and ultimately abandoned it.  To my knowledge, no large Ohio-headquartered public company has tried to reincorporate in The Buckeye State since Abercrombie’s aborted attempt.

Ohio’s sweeping antitakeover statutes have contributed to its toxic reputation among institutional investors, and recent evidence suggests that opting out of takeover statutes may help get companies looking to move from Delaware to Nevada or Texas over the line with their stockholders. But even if Delaware’s recent moves to insulate boards and controlling stockholders make investors more open to reincorporation pitches, Ohio’s experience suggests that there’s a line when it comes to insulating insiders that Nevada and Texas should be careful not to cross.

– John Jenkins