Thursday, December 18, 2014

SEC and Stanford vs. Harvard - Staggered Boards and the Shareholder Rights Project

Our friends at Harvard run an excellent blog on corporate governance featuring agreements and disagreements on various issues.  Lucian Bebchuk of Harvard has been quite successful in launching the shareholder rights project, an effort to get boards of directors to "de-stagger" or unclassify.

A classified board (also known as a staggered board) typically elects just 1/3 of its directors each year.  Thus, it takes 3 years to remove a board by election.  In separate research, Bebchuk and co-authors has shown that the combination of a staggered board and a poison pill can entrench management making it very difficult to remove them.  Hence, he suggests forcing boards to become unclassified and have all directors elected each year.

Opponents are primarily lawyers and corporate boards who make a counter argument - classified boards enable stability, continuity of leadership in the board room.  Opponents also argue that rather than entrenching management, staggered boards slow down hostile raiders and enable a target firm to better bargain for their shareholders.

Much of the empirical evidence supports Bebchuk's view, but now a new paper by SEC commissioner Gallagher and Stanford Law Professor Joseph Grundfest  suggests that Harvard violated security law.  Rule 14a-8 used by Bebchuk's group requires " proposals not be materially false or misleading" and they argue his use of empirical evidence doesn't give opposing views adequate attention.  

The back and forth between Harvard and Stanford is reminiscent of the takeover field in general.  More on that in another blog.  For now, let's keep an eye on the evolution of this web fight.  You can find the latest blog post here.

All the best,


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