The Republic of the Marshall Islands receives millions of dollars in revenue every year from the corporate registry services it provides to businesses headquartered around the world.
Unlike many offshore jurisdictions, Marshall Islands corporations have experienced tremendous success in IPOs and on public exchanges worldwide. Dozens are traded on the New York Stock Exchange and Nasdaq.
A main reason for this success is the reliability and integrity of the domestic Business Corporations Act, which is modelled on the corporate code of the US state of Delaware and specifically states an intention to follow Delaware’s legal jurisprudence.
The Marshall Islands’ standing as an offshore jurisdiction of choice may be at stake in a case pending in the republic’s High Court, Sphinx Investment v Tsantanis.
The case concerns allegations that the board of Seanergy Maritime Holdings, a Marshall Islands-incorporated shipowner headquartered in Greece, took control of the company from its public stockholders by creating a new class of super-voting preferred shares and issuing them to its chief executive, Stamatis Tsantanis, for only $250,000, a tiny fraction of the company’s value based on its assets.
According to the plaintiff, the issuance increased the CEO’s voting power from about 2% to 49.99% and gave the incumbent board collectively a majority of the voting power, making it impossible to defeat it in virtually any vote.
The plaintiff is seeking an order of the court declaring the super-voting shares void. Although the issuance of super-voting shares in these circumstances would almost certainly not stand in Delaware, which is highly protective of the stockholder franchise, how the High Court will rule on the matter remains to be seen.
In my opinion, if the super-voting shares are permitted to stand, it would have very negative consequences for the Marshall Islands and its economy.
Investor fear?
Investors, fearful that they too could lose their voting power at the behest of the company’s board, may no longer be willing to invest in Marshall Islands corporations. No rational investor will invest in an entity when management can act in such a manner.
It is simple: if investors are afraid to invest in a Marshall Islands corporation, they won’t. Without investor confidence, Marshall Islands corporations would no longer be viable on public exchanges. IPO activity involving Marshall Islands companies, which has been an important source of revenue for the country in recent years, would grind to a halt.
The Marshall Islands has stiff competition among offshore jurisdictions and there are no guarantees that its recent successes will continue.
Indeed, many other offshore jurisdictions offer stable, dependable corporate law and services for business entities. Investors will undoubtedly flock to those jurisdictions if the Marshall Islands signals that it is not willing to protect the stockholder franchise. Years of carefully crafted legislative policy could be undone, and the Marshall Islands could become uninvestable.
The Seanergy board’s alleged conduct is not unique: the boards of other Marshall Islands corporations have taken similar actions in recent years, and more would undoubtedly follow suit if its courts bless that type of behaviour.
The Seanergy case presents an opportunity for the courts to ensure that companies in their jurisdiction follow good corporate governance practices and act in the best interests of their stockholders.
What happens in the Marshall Islands courts over the next weeks and months will be closely watched by investors and boards alike. Will the Marshall Islands stand up for shareholders, or will it support director entrenchment? The economy of an island nation may depend on the outcome.
Charles Elson is the retired Edgar S Woolard Jr chair in corporate governance at the University of Delaware and founding director of its John L Weinberg Center for Corporate Governance
