Series 79 practice questionmediumAnti-Takeover Defenses
A company with a staggered (classified) board of directors typically divides its board into three classes with staggered three-year terms. How does this serve as a takeover defense?
- AIt prevents any shareholder from voting at annual meetings
- BIt prohibits the company from entering into any merger agreement
- CTwo annual elections to gain board control✓ Correct answer
- DIt allows the CEO to unilaterally reject any tender offer
Explanation
Why C — Two annual elections to gain board control
A staggered board prevents a hostile acquirer from gaining control of the board in a single proxy contest because only one-third of directors are elected each year. The acquirer would need to win at least two consecutive annual elections, taking a minimum of two years to gain majority control. This delay significantly increases the cost and difficulty of a hostile takeover, giving the incumbent board time to pursue alternatives or implement other defensive measures.
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