Senator Schumer’s proposed Shareholder Bill of Rights would impose one-year terms on public company directors, thereby eliminating staggered boards.
The trend has already been to move away from staggered boards: Shearman & Sterling’s 2008 corporate governance survey showed that only 27 of the 100 largest U.S. public companies had classified boards.
When a company eliminates its staggered board, one consequence is that it reduces the effectiveness of its poison pill. This is because pills give power to the board, but this power only lasts until the board is replaced. At a company with a classified board, replacing the board requires at least two annual meetings – an eternity in M&A land – but at a company without a classified board this can happen at the next annual meeting.
So, if a classified board gives a pill its teeth, a pill without a classified board is defanged.
Not surprisingly, with fewer classified boards, we’re also seeing fewer pills. Shearman & Sterling’s survey found that the trend away from poison pills is even more pronounced than the trend away from classified boards, with only 12 of the 100 largest public companies having pills in 2008.
Some of these companies may have pulled their pills thinking that if they ever got put in play, they could always adopt a new pill. But if that company also declassified its board, its “morning after pill” would be of limited use. The company would have to reclassify its board in order to give its pill teeth, something that would require shareholder approval or, if Schumer’s bill passes, be illegal.
Some have detected a recent resurgence in the popularity of poison pills, but this trend would presumably be squashed by a ban on classified boards.
So when thinking through the classified board ban, we also need to consider that it’s an antidote to poison pills. To some this is a feature, to others a bug.