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.