Sunday, March 25, 2012

The Debate over Staggered Boards


Staggered boards are found to be a form of anti-takeover defence. This concept, which is prevalent in several U.S. companies, ensures that only a third of the board can change each year. Hence, it would not be possible for shareholders to replace the board, except through a gradual process of changing a third of the board each year.
There is an interesting battle brewing in the U.S. with increasing calls from investors and a section of the legal academia for dismantling staggered boards so that takeovers (including hostile ones) are facilitated with greater ease. On the other hand, corporate managers and their advisors warn that such a move will adversely affect the ability of managers to effectively carry on business (without the threat of coercive takeovers) and that this will also play into the hands of the more short-term investors such as hedge funds. This battle is not only being played out through legal discourse, but also in decision-making at shareholders’ meetings as the Harvard Law School Shareholder Rights program is spearheading shareholder initiatives as a clinical program.
In the Indian context, however, this discuss has more of an academic relevance. Sections 255 and 256 of the Companies Act, 1956 provide for an element of staggering of the board, in as much as they provide that at least two-thirds of the board should consist of directors who retire by rotation. The remaining one-third is appointed in the manner permitted by the articles of association. Despite some shades of similarity between the Indian and U.S. position, there is one stark difference. And that is that Indian directors (whether appointed by general meeting through rotation or in the manner permitted by the articles) are all liable to be removed by the shareholders through an ordinary resolution (simple majority) at a shareholders meeting (Section 284, Companies Act, 1956). This is a significant power in the hands of Indian shareholders that makes staggered boards an entirely ineffective defence, if at all, in the context of takeovers.

2 comments:

vswami said...

"This is a significant power in the hands of Indian shareholders that makes staggered boards an entirely ineffective defence, if at all, in the context of takeovers."

May be; but to discuss the Indian climate, in comparison,would prove to be a highly academic exercise. Serve no 'purpose', rather pale into insignificance, should there have been, going by one's gut feeling, there has thus far not been even a single significant instance of the kind, as implied, in the hoary past history of India Inc.: any clue?

Mangesh said...

As Bebchuk et al point out in their paper, there's a difference between a staggered board (SB) and an Effective SB (ESB). With the presence of director removal provisions in Indian law, Indian boards are properly speaking SBs. Also, the validity of the poison pill defense has not yet been tested in India (can a special resolution passed to opt out of Section 81(1A) go far enough to introduce a poison pill defense?). Thus, in my view, the SB structure in India cannot really work as an anti takeover defense.

The Delaware courts persist in their liberal attitude towards ESB-cum-pill combo, refusing to treat that as a `just say no’ defense. The recent `Airgas v Air Products (2011)’ is a case in point. The Chancery court refused to order redeeming the pill even after the Airgas shareholders got one full year to assess the (in)adequacy of the Air Products offer for themselves (substantive coercion). In deciding that the combo was not preclusive, the Court seems to have taken too literal an interpretation – a defense is preclusive only if as a result of the defense, it is impossible for the bidder ever to take control of the target.

However, this case also underlined a major benefit of the combo defense. Air Products managed to get a minority slate of independent directors (IDs) elected during the first general meeting. Once in office, these IDs, rather than towing the line of Air Products, hired outside law and finance experts and joined the majority directors in holding that the offer was truly inadequate. This factor seems to have weighed heavily on the Court. Presumably, if Air Products could have secured majority control at one go, the picture could have been different.