Classified/Staggered Board Structure
(DE)

Summary

This template sets forth provisions to be included in a company's certificate of incorporation for the classification of a corporation's board of directors. A classified, or staggered, board of directors is one in which the directors are divided into multiple classes, with each class serving on the board for a different term. This template includes practical guidance, drafting notes and alternate and optional clauses. Section 141(d) of the Delaware General Corporation Law (8 Del. C. § 141(d)) provides that the directors of a corporation may be divided into 1, 2 or 3 classes. If a board has three classes of directors, the term of each class would expire in successive years, with the term of the initial class 1 directors expiring at the first annual meeting after their election, the term of the initial class 2 directors expiring at the second annual meeting after their election and the term of the initial class 3 directors expiring at the third annual meeting after their election. In addition, Section 141(d) also provides that a corporation may grant to holders of any class or series of stock the right to elect separately one or more directors. However, this type of classification can only be created by the corporation's certificate of incorporation or amendment thereto. Classified boards may be used to promote board stability by reducing annual turnover on the board by ensuring that a group of experienced directors will always remain in office. In addition, many corporations have opted to use a classified board as an anti-takeover mechanism. Although a classified board does not provide a complete defense against a takeover, it does increase the time required for a potential acquirer to gain control over the board as only a minority of the corporation's directors is elected in a given year. Note, however, that proxy advisory firms and institutional investors look unfavorably upon the adoption of a staggered or classified board and will generally vote against any such proposal. Typically, provisions establishing a classified board are found in a corporation's certificate of incorporation. However, under Delaware law, a corporation may also include classified board provisions in either its initial bylaws or in bylaws that have been adopted by the stockholders of the corporation. This template provides examples of classified board provisions for a corporation's charter or bylaws. Classified Structure via Certificate of Incorporation or Bylaw Provisions It is preferable that takeover defenses (e.g., classified board provisions) are contained within a corporation's certificate of incorporation instead of its bylaws because amendments to the certificate of incorporation require approval of both the board of directors and stockholders. Unless otherwise provided in a corporation's organizational documents, amendments to the bylaws only require the approval of stockholders. As a result, a potential acquirer would have to gain stockholder approval and either convince the incumbent directors to approve such an amendment or seek to remove and replace the incumbent directors with its designated directors. Moreover, under 8 Del. C. § 141(d), directors on a classified board generally may only be removed for cause. However, the certificate of incorporation may provide that such directors may be removed by the stockholders with or without cause, although allowing for the removal of directors without cause dilutes the anti-takeover benefit of having a classified board. For further discussion of takeover defenses, see Hostile Takeover Defense Strategies.