What is a Staggered Board of Directors?
A staggered board of directors, also known as a classified board, refers to a board that consists of different classes of directors. In a staggered board of directors, only one class is open to elections each term. It is different from a normal board of directors, where all directors are elected at once.
What is a Board of Directors?
The board of directors (BoD) is a group of individuals who represent shareholders. The board of directors hold the ultimate decision-making authority and oversees the activities of the company. The BoD is not to be confused with the top officers of the company, who focus on the day-to-day running of the company. A board’s powers are determined by government regulations and the company’s constitution and bylaws.
The major responsibilities of the board of directors include:
- Appointing, evaluating, and compensating the top officers of the company
- Providing strategic direction for the company
- Upholding a fiduciary responsibility to represent and protect shareholders interest
- Developing a policy-based governance system
- Monitoring company performance and evaluating the outcome of strategic decisions
- Assessing risks faced by the company and establishing a risk management plan
Understanding How a Staggered Board Works
A staggered board of directors consists of directors who are grouped into classes – Class 1, Class 2, Class 3, etc. Each class represents holds a certain percentage of the total number of positions. During elections, only one class is open, hence the name – “staggered” board. A staggered board is commonly practiced in U.S. corporate law and is a valuable takeover defense strategy against hostile takeovers.
Example of a Staggered Board
For example, Company A is using a staggered board of directors to govern the company. The board consists of 12 directors who each serves a 3-year term. 4 directors are placed into each class, resulting in Class 1, Class 2, and Class 3. In addition, elections are held every year. Therefore, the staggered board for Company A would look as follows:
Now, compare this to another company, Company B, which uses a normal board of directors consisting of 12 directors who each serves a 3-year term:
Staggered Board as a Takeover Defense
A staggered board is a very important takeover defense. Let us determine the implications of a potential hostile takeover of both Company A and Company B.
Hostile Takeover on Company A
Company C thinks that it can run Company A more efficiently and thus attempts a takeover. To gain control of Company A, Company C will need a board majority. In a staggered board, Company C will only be able to take over four seats per election. If Company C manages to take over all the seats in that election, the company will fail to achieve a board majority, only acquiring four out of the 12 total seats. Therefore, it will take Company C an additional year to acquire a board majority and take over the target company.
Hostile Takeover on Company B
Company C thinks that it can run Company B more efficiently and thus attempts a takeover. To gain control of Company B, Company C will need a board majority. In a normal board, Company C will potentially be able to take over 12 seats per election. Therefore, Company C will be able to secure a board majority and swiftly take over Company B.
The additional time required to control Company A serves as a takeover defense for rapid takeovers. It gives an opportunity for the rest of the board to fend off the hostile takeover.
Learn more about takeovers in CFI’s M&A Financial Modeling Course.
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