U.S. incorporation shopper given slap it deserved

February 28, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Lisa Lee

Incorporation shopping just got the slap it deserved. Cologne-reeking U.S. retailer Abercrombie & Fitch called off a vote on reincorporating in shareholder less-friendly Ohio after investors balked. Arbitraging corporate domiciles happens infrequently because it’s usually designed to deliver more benefits to managers than owners. Abercrombie’s climb-down should keep the practice rarer still.

No question, American corporate governance has its deficiencies. But the state of Delaware has created a formidable legal system where investors feel relatively comfortable that their interests are held in high standing. That’s why the state claims 13 times the number of incorporated companies as the next biggest, Maryland.

So it was curious to see Abercrombie attempt to convince its shareholders to move its state of incorporation to Ohio. For one, it’s been incorporated there for decades. What changed? Well, for starters rival retailer J Crew had just succumbed to a controversial management buyout. And it so happens that Ohio’s laws offer managers more leeway to steer the course of a deal, including a buyout, than do Delaware’s.

Abercrombie naturally said that had nothing to do with its decision to move to Ohio. It stated other motives, like reducing taxes. But shareholders didn’t buy it. Rather than face an ignominious defeat, the company called off the vote indefinitely. It’s surely embarrassing for a company to misread the desires of its shareholders. But if Abercrombie’s experience discourages others with flimsy arguments for incorporation shopping, then some good has come from this flap in apparel land.

One comment

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Wow, Delaware was not “free” enough for Abercrombie? Delaware is very friendly as you no doubt know. How many GE Capital subsidiaries are here?

What are the specifics in Ohio law that they were after?

Alan Coffey
Corporate Consulting, Inc.
619 New York Ave.
Claymont, DE 19703

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