DealLawyers.com Blog

Here is something interesting pulled from this Cooley memo, repeated below:

You might be interested in this recent Wall Street Journal article regarding the trend toward declassifying boards. The author contends that, this year, “an unusually high proportion of companies have accepted activists’ demands that all board members stand for annual elections by shareholders, replacing staggered terms for directors that typically last three years.” Classified boards are typically put in place to deter hostile takeovers because they make it more difficult to quickly change the board’s composition. Annual elections have been promoted by some activist shareholders on the basis that they will increase board accountability.

The article notes that the “Florida State Board of Administration and the Nathan Cummings Foundation, advised by Harvard law professor Lucian Bebchuk [through American Corporate Governance Institute LLC, a new research and advisory group headed by Prof. Bebchuk], recently dropped half of 28 resolutions seeking yearly elections after 14 of the big companies they targeted agreed–ahead of a vote–to support the change at 2011 or 2012 annual meetings….Investors rarely withdraw annual-election resolutions because the company decides to endorse their idea. Fewer than 25% of such proposals offered by stockholders between 2005 and 2010 failed to reach a vote for any reason, including negotiated settlements, according to ISS, a proxy-advisory firm.” According to ISS, nonbinding proposals to implement annual elections “garnered majority support, on average, every year since 2000…. The number of Standard & Poor’s 500 companies with classified boards has fallen to 139 from 303 in 1998, according to research firm FactSet SharkRepellent.”

The author suggests that “now, some companies are embracing annual elections without the impetus of a vote on a shareholder proposal, partly because board members already feel vulnerable: Many major corporations recently adopted rules requiring, for instance, that directors in uncontested elections win a majority of votes cast.” The article reports that, while some companies immediately signed on when presented with the shareholder proposal for annual elections (even after having previously rejected declassification), in other cases, there were lengthy negotiations before endorsing the proposal or ultimately rejection of the proposal.