A staggered board of directors is a board that is made up of different classes of directors with different service terms; they may also be elected at different times of the year. Terms are structured by the company and commonly include three classes of directors. The staggering of classes can be done simply to assign staggering service terms, or it may involve more detailed provisions and responsibilities for each class. The staggering restricts the number of board members up for re-election at each annual meeting delaying the time needed to obtain majority board control. This type of operation is sometimes referred to as a classified board.
Each class serves an overlapping term which means only part of the board is up for election at any given time. If the board is made up of three classes, Class 1 may serve for one year, Class 2 for two years and Class 3, made up of senior members may serve a five year term. Class 1 are elected every year while those in Class 2 are elected every other year, with Class 3 serving the longest. Alternatively, all directors serve the same length of term and a different class is elected each year are shown in the following example.
For a real life example of why a firm employs such a strategy and how it functions, please refer to the “Anti-takeover Effects of Our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws and Delaware Law” section in Exhibit 4.3 of the 10-K filing made by WABCO (WBC) on February 21, 2020.
The Use of a Staggered Board
Actions such as staggered boards will restrict the number of directors up for re-election at any one time and management will be busy giving presentations and Q&A sessions to major shareholders in order to secure their support. At this time, the services and actions of the Proxy advisory firm can play a crucial role. Often used as shark repellents, anyone looking to attempt a hostile takeover of a staggered board has to wait years before they can gain board 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. Staggered boards are often seen as less accountable to shareholders than annually elected boards and aid entrenchment. They have also been shown to cause a reduction in shareholder returns. However, their use has been declining in the 21st century. A Harvard study showed that in 2015, over 60% of S&P 1500 companies and over 80% of S&P 500 companies held annual elections for all directors.
