Stagger System

What Is a Stagger System?

A stagger system is a method of choosing a company's board of directors that puts up just part of the board for re-appointment in any one year, rather than the system wherein all board individuals go on the ballot every year.

Figuring out Stagger System

Staggers systems are common practice in the United States. Each group of directors falls inside a predefined "class" — of which three to five classes is the standard — which is the reason staggered boards are likewise called classified boards. Class 1 individuals serve a one-year term on the board, Class 2 individuals serve two years, Class 3 individuals hold their seats for quite a long time, etc.

Staggered boards make hostile takeovers incredibly troublesome. Hostile bidders need to win more than one proxy fight at successive shareholder gatherings to assume command over the target company, which requires years. Therefore stagger systems are a particularly effective anti-takeover measure, particularly when combined with poison pills.

Safeguards of staggered boards say they advance stability and continuity in management, and that they likewise foster a long-term strategic vision for corporate drives. Be that as it may, by making it more challenging to supplant directors, and protecting companies from raiders, they can hurt shareholders' ability to hold the board to account. Thus, directors may not necessarily in all cases act in the interests of shareholders, which damages shareholder value.

Illustration of Stagger System

Company XYZ has 12 directors separated into three classes, each comprising of four directors. Every director serves a five-year term. Class 1 is chosen one year, trailed by Class 2 and Class 3 in subsequent years. Company ABC endeavors a hostile takeover of XYZ.

Notwithstanding, its endeavor is frustrated due to the class system of directorship adopted by XYZ. In one year, it can win the support of just a single class (i.e., four directors). When the next election happens a year after the fact, the conditions of XYZ's business have improved and ABC is forced to call off its bid.

Features

• Staggered board make hostile takeovers incredibly troublesome on the grounds that bidders need to win more than one proxy fight throughout some stretch of time to assume command.
• The advantage of staggered boards is that they advance stability and continuity in management, however pundits say they can hurt shareholders' rights by making it hard to eliminate directors.
• A stagger system includes partitioning a company's board of directors into classes and choosing them reciprocally, rather than holding a single election.