The Powerful Anti-takeover Force of Staggered Boards

"An effective staggered board nearly doubles the likelihood of remaining independent, from 34 percent to 61 percent."

Staggered boards are an important part of the modern U.S. corporate landscape and are currently used by most large U.S. public companies. In The Powerful Anti-takeover Force of Staggered Boards: Theory, Evidence, and Policy (NBER Working Paper No. 8974), authors Lucian Bebchuk, John Coates, and Guhan Subramanian study these arrangements.

The authors find that an "effective" staggered board (ESB), meaning one that cannot be circumvented by a hostile bidder, provides a powerful anti-takeover defense. While conventional wisdom holds that a company that becomes a takeover target is likely to be sold to either the hostile bidder or a white knight, the authors find that targets with ESBs can, and most of the time do, remain independent.

An ESB impedes bids by forcing a hostile bidder, no matter when it emerges, to wait at least one year to gain control of the board. Bidders are also substantially impeded, the authors argue, by the need to win two elections far apart in time, rather than a single referendum on its offer. Using new data on hostile bids in the five-year period from 1996-2000, the authors find that not a single bidder won a ballot box victory against an ESB. The authors find that 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.

The authors also find that shareholders of targets that remained independent were made worse off, on average, than shareholders of targets that accepted either the hostile bid or a white knight offer. Furthermore, ESBs did not seem to provide sufficient countervailing benefits, in terms of increased premiums, to offset the costs of remaining independent. Overall, the authors estimate that 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.

These findings are relevant for shareholder proposals to de-stagger boards, which have been increasing in recent years. These findings may also be relevant for the regulation of takeover defenses. The authors find that a majority of staggered boards were adopted before the legal endorsement of poison pills in the early 1990s gave staggered boards their antitakeover potency. In the absence of clear shareholder approval for the ESB-poison pill combination, recognition of its antitakeover power may lead to greater scrutiny of the use of staggered boards to just say no to hostile bidders.

-- Les Picker

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