Staggered Boards Hurt Shareholders

April 1, 2002 ( - New research on the practice of staggering the terms of corporate boards finds that it slashed shareholder returns as much as 10% for takeover targets between 1996 and 2000.

Three Harvard University professors challenge traditional thinking that staggering directors’ terms makes it harder and more expensive for takeover artists to win board control and suggest changes to that practice. The Harvard study is scheduled to be published in an upcoming issue of the Stanford Law Review, according to a Wall Street Journal report.

The study contends that shareholders of companies with staggered terms achieved returns of 31.8% in the nine months after a hostile bid was announced, compared with 43.4% returns for investors of targets without staggered boards.

In a technique used at more than 70% of US public companies, the staggering of directors’ terms typically means that a takeover artist has to gain control of seats at two different board elections. However, according to the Journal, hostile bidders usually either work out a friendly deal or drop the takeover attempt altogether before the second meeting.

Drop Poison Pills

The Harvard professors content that courts should force takeover targets to drop “poison pill” provisions if a hostile bidder wins board seats. A poison pill, also known as a shareholder-rights plan, prevents an unwelcome buyer from accumulating more than a certain percentage of a target’s stock.

The adoption of their recommendation “might keep bidders in the game and may make incumbents less resistant because they would know they’re not going to be sheltered” by the staggered board, the professors said.

Not surprisingly, the study is already drawing criticism from veteran dealmakers, who consider the staggered board and poison pill as fundamental defensive devices to ward off cheapskate hostile bidders.

Critics also note that courts in Delaware, where most of the nation’s groundbreaking corporate takeover decisions are handed down, historically have allowed a board to retain a poison pill.

The Harvard proposal “is, in effect, telling a board to lay down its arms and allow the shareholders on their own to decide. I think there’s a question as to whether, by doing that, they would be acting in a manner consistent with their fiduciary duties,” John Madden, a partner in the mergers and acquisitions group at New York law firm Shearman & Sterling, told the Journal.