NCPA - National Center for Policy Analysis

Staggered Boards and Hostile Takeovers

October 21, 2002

Staggered corporate boards -- in which board members stand for re-election at different times -- are currently used by most large U.S. public companies. A recent study finds that an "effective" staggered board (ESB) -- meaning one that cannot be circumvented by a hostile bidder -- provides a powerful anti-takeover defense.

An ESB impedes takeovers by forcing a hostile bidder to wait at least one year to gain control of the board by winning two elections far apart in time, rather than a single referendum on an offer.

Using new data on hostile bids in the five-year period from 1996-2000, the authors found that not a single bidder won a ballot box victory against an ESB.

  • An ESB nearly doubles the likelihood of remaining independent from 34 percent to 61 percent; halves the odds that a first bidder will be successful, from 34 percent to 14 percent; and reduces the odds of a sale to a white knight, from 32 percent to 25 percent.
  • Shareholders of targets that remained independent were made worse off, on average, than shareholders of targets that accepted either the hostile bid or a so-called white knight offer.
  • Overall ESBs reduced returns for shareholders of hostile bid targets on the order of 8-10 percent in the nine months after the hostile bid was launched.

A majority of staggered boards were adopted before the legal endorsement of poison pills in the early 1990s gave staggered boards their anti-takeover potency. In the absence of clear shareholder approval for the ESB-poison pill combination, recognition of its anti-takeover power may lead to greater scrutiny of the use of staggered boards to just say no to hostile bidders.

Source: Les Picker, "The Powerful Anti-takeover Force of Staggered Boards," NBER Digest, October 2002; based on Lucian Bebchuk, John Coates, and Guhan Subramanian, "The Powerful Anti-takeover Force of Staggered Boards: Theory, Evidence, and Policy," NBER Working Paper No. 8974, June 2002, National Bureau of Economic Research.

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