Instruction:
What is a classified board of directors, and why would a company want to implement this type of corporate structure?

Response:
For companies that are incorporated in Delaware, the Delaware General Corporation Law permits corporations to divide their boards of directors into up to 3 classes.  Other states in the United States have similar provisions regarding classified boards.

For boards that have only 1 class, each director serves a fixed term (generally 1 year), and each director is subject to re-election each year.  

Classified boards (also known as staggered boards) are divided into three separate classes (in equal proportion, to the extent possible), with members of each class serving three-year terms and only one class of directors up for election in any year.  

A classified board is one type of protection that companies consider as part of a wider range review of corporate defensive measures.  Generally, corporate defensive measures relate to measures for a company to consider to protect against (1) hostile takeovers that the board believes do not reflect the value of the company and (2) short-termism, where there is pressure from public investors – particularly activist investors – to take board actions (or face the risk of being voted off the board) that the board believes are not in the best interest of the company and its stockholders and maximizing value over the long term.  Corporate defensive measures generally aren’t relevant when a company is private given the corporate structure with significant long-term investor representation on the board and various agreements in place with stockholders.  However, these measures become relevant once a company has public stockholders, so many companies who are considering an initial public offering will assess what types of defensive measures would be appropriate for them.

A classified board is viewed as corporate defensive measure (i.e., it’s an anti-takeover and activist defense) as the entire board can’t be replaced in a single election cycle (with 3 classes, it would take up to the 3rd election cycle for the full board to be replaced, and generally 2 years to capture a majority).