Wall Street bill targets Nevada incorporations

(John Berlau) – Over the past year, Senate Majority Leader Harry Reid has made pointed efforts to show Nevadans his advocacy on their behalf. In defending new federal spending that would benefit the state, a news release issued by his Senate office was entitled “No Apologies for Fighting For Nevadans.”

But a real opportunity to fight for Nevadans will soon come to Reid by way of a major threat to Nevada’s economy, contained in the “financial reform” bill that was just sent to the Senate floor. The justification of this voluminous financial regulation by Senate Banking Committee Chairman Chris Dodd, D-Conn., is to better police the banks on Wall Street. But the Silver State will get caught in its crosshairs.

Tucked into the 1,336-page “Restoring American Financial Stability Act of 2010,” which was sent out of committee on a party-line vote in March, are provisions that would shackle Nevada and the entrepreneurs who set up corporations in the state. A small section of the bill with the stated aim of “strengthening corporate governance” would put states like Nevada at a competitive disadvantage by federalizing state rules for incorporation.

For about 150 years, states have made laws governing a corporation’s structure and have competed on the efficiency of their incorporation processes. In the early 20th century, New Jersey led the pack. Then Delaware got the lead and remained the top incorporation state.

Starting in the ’90s, Nevada began positioning itself as the “Delaware of the West.” It is now second to Delaware in the incorporation fees it receives. Those fees have recently totaled $83 million a year.

The businesses that incorporate in Nevada range from tiny firms to publicly held companies that trade on stock exchanges and the Nasdaq Stock Market. On WhyNevada.com, the Web site created by Democratic Secretary of State Ross Miller, the state government advertises the advantages of incorporating here, including the fact that “Nevada grants directors more flexibility.”

But the Dodd bill would take much of this flexibility from states like Nevada and those public firms that incorporate there. Section 971 of the bill mandates that a public company’s directors be elected by a majority of shareholders, rather than the plurality standard that Nevada and Delaware have.

And Section 972 pushes through a scheme called “proxy access,” in which public companies would be forced to subsidize the campaigns of alternate corporate directors nominated by a little as 1 percent of the firm’s shareholders. Firms would be required to put the names of these director nominees on the official proxy ballots they mail out to shareholders.

If this federal takeover of corporate law goes into effect, there will be fewer reasons for out-of-state firms to incorporate in Nevada. Why should they, when they would still have live with the federal government’s new rigid rules regarding director elections?

But the bill wouldn’t just hurt states like Nevada and the firms that incorporate here. The bill would harm the very shareholder interests it is claiming to protect.

Buying a stock is a choice, and shareholders benefit from having a variety of corporate structures to choose from. If they wanted to, they could choose a firm that requires majority votes for a board of directors. But they might also want go with a firm that uses the plurality standard, which is younger and more entrepreneurial.

The “proxy access” provisions are especially detrimental, as they would give leverage to activist shareholders who pursue special interest political agendas at the expense of ordinary investors.

Union pension funds, for instance, could use the threat of a director nomination to get concessions from a firm such as a “card check” election that would end secret ballot in unionization votes. And the radical animal rights group People for the Ethical Treatment of Animals buys stock at many firms for the sole purpose of introducing shareholder resolutions to stop animal research.

In the end, these provisions would hurt not just Nevada but the United States by imposing a one-size-fits-all mandate for director elections that would reduce options for entrepreneurs and investors. This could hurt the country’s international competitiveness.

(John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute, a free-market think tank based in Washington, D.C.)