To Stagger Or Not To Stagger: Harvard’s Shareholder Rights Clinic v. Wachtell Lipton

Recent days have seen a flurry of activity around a student clinical program at Harvard Law School: The Harvard Shareholder Rights Clinic (SRC). The clinic “provides advice and representation, on a pro bono basis, to public pension funds and charitable foundations seeking to improve corporate governance.” Harvard Professor Lucian Bebchuk is a corporate governance activist and the clinic’s faculty advisor. This academic year, the clinic has advised six public institutional investors, including Illinois State Board of Investment, the Los Angeles County Employees Retirement Association, the Massachusetts Pension Reserves Investment Management Board, the North Carolina State Treasurer, and the Ohio Public Employees Retirement System.

One of the clinic’s major projects has been eliminating the use of so-called “staggered boards.” Under a staggered board structure, board members are divided into classes and a different class is eligible for election each year. Thus, it takes at least two years to replace a majority of the board. Mr. Bebchuk argues that the use of staggered boards serves to unduly protect existing board members and diminishes shareholders’ voting power.  Furthermore, other academics have found that companies that utilize staggered boards tend to be of lower value, make poorer choices in asset acquisition, and have compensation schemes that do not necessarily reflect board performance.

By all accounts, the SRC has been successful in achieving its goal. As reported by the New York Times, “the project managed to convince about a third of all Standard & Poor’s 500 companies with staggered boards to eliminate the provision.” Furthermore, the Times reports that the number of staggered boards among S&P 500 companies has fallen from 302 in 2002 to 126 today. In addition, a general trend shows staggered boards fall from favor: The number of staggered boards of 900 companies outside of large companies has fallen by 25% in the past 10 years.

However, research on the value of staggered boards is far from conclusive. One study found that shareholders of companies with staggered boards receive substantially more compensation in corporate takeovers than those who do not. In addition, on March 21, 2012, the firm of Wachtell, Lipton, Rosen & Katz (WLRK) released a memorandum entitled “Harvard’s Shareholder Rights Project Is Wrong.” In its memo, four of the firm’s partners – Martin Lipton, Theodore Mirvis, Daniel Neff, and David Katz – assert that there is “no persuasive evidence” that declassifying boards provide shareholders any more value than do staggered boards. The memorandum maintains that staggered boards have value in avoiding “inadequate, opportunistic, takeover bid[s].”

In WLRK’s favor, 86.4% of companies going public in 2012 have chosen staggered board structures. Notables such as Dunkin’ Brands, Tesla, LinkedIn and Angie’s List have all chosen the staggered boards structure for their IPOs. It will be interesting to see if any of these much-hyped IPOs move to de-stagger its board in the years to come.