Stagger System
A stagger system is a method of electing a company's board of directors that puts up only part of the board for re-election in any one year, in contrast to the system in which all board members go up for re-election annually. A stagger system is a method of electing a company's board of directors that puts up only part of the board for re-election in any one year, in contrast to the system in which all board members go up for re-election annually. Class 1 members serve a one-year term on the board, Class 2 members serve two years, Class 3 members hold their seats for three years, and so forth. A stagger system involves dividing a company's board of directors into classes and electing them in turns, instead of holding a single election. The advantage of staggered boards is that they promote stability and continuity in management, but critics say they can harm shareholders' rights by making it difficult to remove directors.
What Is a Stagger System?
A stagger system is a method of electing a company's board of directors that puts up only part of the board for re-election in any one year, in contrast to the system in which all board members go up for re-election annually.
Understanding Stagger System
Staggers systems are common practice in the United States. Each group of directors falls within a specified "class" — of which three to five classes is the norm — which is why staggered boards are also called classified boards. Class 1 members serve a one-year term on the board, Class 2 members serve two years, Class 3 members hold their seats for three years, and so forth.
Staggered boards make hostile takeovers extremely difficult. Hostile bidders have to win more than one proxy fight at successive shareholder meetings to take control of the target company, which takes years. This is why stagger systems are a particularly effective anti-takeover measure, particularly when combined with poison pills.
Defenders of staggered boards say they promote stability and continuity in management, and that they also foster a long-term strategic vision for corporate initiatives. But by making it more difficult to replace directors, and protecting companies from raiders, they can harm shareholders' ability to hold the board to account. Consequently, directors may not always act in the interests of shareholders, which damages shareholder value.
Example of Stagger System
Company XYZ has 12 directors divided into three classes, each consisting of four directors. Each director serves a five-year term. Class 1 is elected one year, followed by Class 2 and Class 3 in subsequent years. Company ABC attempts a hostile takeover of XYZ.
However, its attempt is stymied due to the class system of directorship adopted by XYZ. In one year, it is able to win the support of only one class (i.e., four directors). By the time the next election occurs a year later, the circumstances of XYZ's business have changed for the better and ABC is forced to call off its bid.
Related terms:
Board of Directors (B of D)
A board of directors (B of D) is a group of individuals elected to represent shareholders and establish and support the execution of management policies. read more
Classified Board
A classified board a way of organizing a firm's board of directors with staggered term lengths depending on one's classification. read more
Dead Hand Provision
A dead hand provision is an anti-takeover strategy that gives a company's board power to dilute a hostile bidder by issuing new shares to everyone but them. read more
"Just Say No" Defense
A "just say no" defense is a strategy used by boards of directors to discourage hostile takeovers by rejecting the takeover bid outright. read more
Macaroni Defense
The macaroni defense is an anti-takeover measure whereby a company issues a large number of bonds that must be redeemed at a high price if it is acquired. read more
Mergers and Acquisitions (M&A)
Mergers and acquisitions (M&A) refers to the consolidation of companies or assets through various types of financial transactions. read more
Poison Pill
A poison pill is a defense tactic utilized by a target company to prevent, or discourage, attempts of a hostile takeover by an acquirer. read more
Proxy Fight
A proxy fight occurs when a group of shareholders join forces and gather enough shareholder proxy votes in order to win a corporate vote. read more
Raider
A raider is an investor that targets undervalued companies, buying a big enough share in them to force existing management to increase shareholder value. read more
Scorched Earth Policy
A scorched earth policy is a strategy designed to deter a hostile takeover by making the target company unattractive to the potential acquirer. read more