RESEARCH SPOTLIGHT
KEY CONCEPTS
Staggered (or classified) board
Directors elected to three-year terms, with one-third of board standing for
election each year.
Staggered boards are a formidable antitakeover protection.
The board cannot be replaced in a single year; two election cycles are
required to gain majority control.
Staggered boards are often adopted in combination with other
protections, such as a poison pill, limits on shareholder rights to call a
special meeting, and supermajority voting required to remove directors.
Combining a staggered board and poison pill is practically insurmountable.
KEY CONCEPTS
From a theoretical standpoint, it is unclear how staggered boards impact
shareholder value:
(-) Management entrenchment.
(+) Enhances bargaining power with potential acquirers.
(+) Strengthens long-term commitments to strategic partners.
(+) Encourages management to take risk / invest in long-term projects.
CONCLUSION
The evidence on staggered boards is highly mixed.
Staggered boards decrease merger activity by protecting a company from
an unsolicited takeover.
When combined with other defenses (in particular, a poison pill), the
defense is very formidable.
Whether staggered boards entrench management or empower a board to
adopt a long-term horizon is unclear.
Staggered boards appear to have a positive impact on companies with
unrecognized potential resulting from proprietary knowledge, innovation,
or business relationships.
BIBLIOGRAPHY
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John Pound. The Effects of Antitakeover Amendments on Takeover Activity: Some Direct Evidence. 1987. Journal of Law and
Economics.
Lucian A. Bebchuk, John C. Coates IV, and Guhan Subramanian. The Powerful Antitakeover Force of Staggered Boards: Theory,
Evidence, and Policy. 2002. Stanford Law Review.
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Olubunmi Faleye. Classified Boards, Firm Value, and Managerial Entrenchment. 2007. Journal of Financial Economics.
Re-Jin Guo, Timothy A. Kruse, and Tom Nohel. Undoing the Powerful Antitakeover Force of Staggered Boards. 2008. Journal of
Corporate Finance.
Martijn Cremers, Lubomir P. Litov, and Simone M. Sepe. Staggered Boards and Firm Value, Revisited. 2014. Social Science Research
Network.
BIBLIOGRAPHY
Weili Ge, Lloyd Tanlu, and Jenny Li Zhang. Board Destaggering: Corporate Governance Out of Focus? 2014. AAA 2014 Management
Accounting Section (MAS) Meeting Paper.
David F. Larcker, Gaizka Ormazabal, and Daniel J. Taylor. The Market Reaction to Corporate Governance Regulation. 2011. Journal of
Financial Economics.