Staggered Board: Everything You Need to Know
A staggered board is made up of different classes of directors, and each director class serves a different term length, and are elected at different times.5 min read
Staggered Board: What are They?
A staggered board is a board made up of different classes of directors that serve different term lengths and are elected at different times of the year. A staggered board is an effective defense against a hostile takeoverdue to the staggered style of the elections.
A staggered board, also known as a classified board, is comprised of directors placed into different classes. They play an important role in the modern corporate landscape by preventing takeover by a hostile bidder. It's been found that companies that have a staggered board remain independent of undue influence. They also help guide the company towards profitability and prevent activist shareholders from overreach. While it's inevitable the company is eventually sold to the hostile bidder or another party, the board can still operate independently even with outside influence exerting pressure.
Each class serves an overlapping term which means only part of the board is up for election at any given time. For example: a board is made up of five classes. Class 1 serves for one year, Class 2 serves for two years, Class 3 serves for 3 years, and Class 4 serves for four. Class 5 is made up of senior members who serve an eight year term. Those directors in Class 1 are elected every year while those in Class 2 are elected every other year. Anyone looking to make a hostile takeover of a staggered board has to wait years before they can gain control. The person seeking the takeover needs to have enough seats in each class in order to take control. In fact, a company with a staggered board is much more likely to overcome an unsolicited bid than a single-class board can.
Why is a Staggered Board Important?
A staggered board is important to stop a hostile bidder or takeover from gaining control of the business. A hostile bidder needs to wait at least one year, if not longer, to gain control of the board across the classes. The hostile bidder has to wait for elections to be held for the specific director class. Staggering the terms and dates of the elections means a hostile bidder has to work harder to gain control through the election process and may give up an attempt due to the length of the wait for an election. As a result, the staggered board allows the corporation to remain independent of outside influence.
Reasons to Consider Not Using a Staggered Board
A staggered board has the potential to lower shareholder returns. A single, hostile bidder can win one seat and give the rest of the board the opportunity to defend the company against a takeover. This all but guarantees the continuation of the current style of management. However, this can be seen as an anti-shareholder move and the directors are acting in their own interest to manage the corporation.
Activist investors are putting more pressure on businesses to get rid of their staggered boards. They feel that making board members stand for re-election on an annual basis creates better corporate governance. One such incident involved McDonald's Corp. Activist shareholders put together a non-binding resolution to force McDonald's to eliminate its staggered board. However, a majority of shareholders voted to retain the staggered board, signalling their confidence in the governance of McDonald's Corp.
Reasons to consider using a Staggered Board
This type of board allows for the leadership to continue in the same fashion it has operated in. If the company is being led in the right direction, the retention of the board is beneficial for all. A staggered board can also incorporate something known as a poison pill. Poison pills are a tactic used by a corporation to prevent a targeted company against a hostile takeover. There are two types of poison pills:
1. Flip-in. This allows all shareholders, except the acquiring party, to buy shares at a discounted rate. This dilutes the value of the shares and makes the takeover more expensive.
2. Flip-over. This lets the stockholders buy the shares of the acquiring company at a discounted rate to discourage the takeover bid.
Using a Staggered Board Versus a Normal Board
- With a Staggered Board: Directors who have a longer term offer greater stability through the retention of their knowledge and counsel. They also offer protection against a hostile takeover tactic from a single board member. It's also easier to keep away pressure from a short-term shareholder that is looking to maximize a return on investment.
- Without a Staggered Board: A non-staggered board can experience more pressure to perform than a staggered board. Knowledge and advice are at risk of loss along with guidance. Board members are more likely to make bad decisions due to pressure from a hostile takeover or an aggressive shareholder.
There's an argument that the staggered board is a powerful deterrent to a hostile takeover. But it also has the effect of entrenching the board and providing too much protection from shareholder influence. Directors aren't incentivized to look out for the company and are more likely to look out for themselves instead. It's found that staggered boards are associated with:
- Lower market values in comparison to book value
- Lower CEO turnover
- CEOs less sensitive to pay-based performance rewards
A single hostile board director is known as a poison pill. They can be installed or removed by authority of the board. However, it's difficult to make the change when a third of the board is up for election. While the staggered board does deter a hostile takeover, they don't greatly deter bidders in any way. A bidder that is determined to buy the company simply does so at a higher price.
Frequently Asked Questions
- How often do directors get elected?
It depends on the director class and corporate bylaws. The corporation sets the length of time each class serves which means one class serves for one year while another may serve for five years.
- Why should you stagger the board?
A staggered board has a valuable role when it comes to making major changes in the business. There may be a need to make changes to the direction of the business. Knowing that the board is in place for a certain amount of time adds a steadying influence to the decision making process.
If you need help with a staggered board, you can post your question or concern on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.