State Law, Staggered Boards, and Reducing the Role of Shareholders (Part 4: Where Is Delaware?)

As we have noted, staggered boards, when coupled with poison pills, have become show stoppers with respect to hostile takeovers.  The combination has been validated by Delaware courts in Airgas, Yucaipa and Selectica.

At the same time, however, shareholders continue to pressure boards to eliminate staggered board provisions.  It is altogether possible that boards will increasingly ignore this pressure.  Those with staggered board provisions will keep them.

But what about the companies that do not have them in place?  They can propose them and submit them to shareholders but, if the results on shareholder proposals are any indication, they will fail.  Oklahoma and Indiana have addressed this concern by mandating staggered boards, allowing companies to pay lip service to shareholder opposition but profess a lack of authority in the area to act. More states will likely follow.

Which begs the question, what will Delaware do? As the adoption of DGCL 112 (access bylaws) and the Supreme Court's decision in Airgas concerning the interpretation of staggered board provisions, the state will protect its management friendly franchise.  Delaware does not have to worry that every reform by other states will result in companies leaving Delaware (or not reincorporating in the state).  Instead, management is mostly concerned with changes to the law that increase its discretion, decrease its liability, and facilitate job retention.  A state that substantially improves one of these categories will be attractive to public companies, even those incorporated in Delaware.  These factors are discussed in greater detail in The Irrelevance of State Corporate Law in the Governance of Public Companies. 

The approach taken by Oklahoma and Indiana facilitates job retention.  It makes hostile takeovers much more difficult.  The approach sidesteps the messy process of shareholder approval and has the side benefit of eliminating shareholder proposals about staggered boards.  In other words, for companies that want staggered boards but know they won't be approved by shareholders, these sorts of provisions are very attractive. In the right set of circumstances, a company might decide not to reinicorporate in Delaware (or to reincorporate from Delaware) because of a mandatory staggered board provision.

As long as Oklahoma and Indiana remain the only states to adopt these types of provisions, Delaware will probably ignore the phenomena.  But if they are adopted by more states and it looks like companies are actually taking them into account when deciding where to incorporate, Delaware will act.  Certainly, adoption of waiver of liability provisions made the state very attractive to boards concerned about liability (see Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom).