Shareholder challenges to the staggered board: recent proposals pose new risks and require directors to consider appropriate responses.

AuthorRaymond, Doug
PositionLEGAL BRIEF

IN RECENT PROXY SEASONS, shareholders have successfully campaigned at many public companies to institute majority voting for the election of directors as a replacement for plurality voting. This concerted movement to eliminate plurality voting in uncontested elections has resulted in nearly 80% of S&P 500 companies adopting majority voting. (Plurality voting allows director nominees that receive the highest number of affirmative votes cast to be elected, in contrast to majority voting, which requires each director to be elected by a majority of the votes cast.) Having been largely successful in the effort to eliminate plurality voting among large cap companies, the same institutional forces are leading shareholder groups increasingly to oppose staggered boards.

A staggered board, also referred to as a classified board, is a corporate board of directors in which the directors are divided, generally into three classes. Each class of directors serves for a different, but overlapping, multiyear term. As a result, in any year, only some of the directors, generally fewer than a majority, are up for re-election. Proponents of staggered boards point to the continuity they engender. They can also be effective in a hostile takeover, as a proxy contest to replace a sitting board generally has to be successful in two different years to give the dissident (or the acquirer) majority control of the board. And two years is, for many, too long to have to wait to acquire control, which sometimes dissuades a proxy contest in the first place. Because of this aspect of staggered boards, critics argue that they support entrenchment and lessen directors' accountability to shareholders.

So far this year, at almost 50 companies, shareholders have submitted proxy proposals to declassify staggered boards and instead hold an annual election of all directors. The proposals that have gone to vote have been predominantly successful, often passing with significant shareholder support. In addition, most likely in response, at least to some extent, to shareholder pressure, another 65 companies, including 44 companies in the S&P 500, have submitted their own proposals to eliminate staggered boards. Most of the recent management proposals to declassify boards for which results are currently available have not only passed, but in many cases have done so with the overwhelming support of the votes cast.

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The elimination of a staggered board, in combination...

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