Classified, or staggered, boards have become less common in recent years. Under classified boards, directors are divided into multiple classes. Companies usually decide to divide directors into three classes. At a company’s annual meeting in a given year, only one class is up for election. Thus, only one-third of the board is replaceable each year and directors effectively have a three-year term. In the absence of a classified board structure, companies will vote on the election or reelection of the full slate of directors at each annual meeting.

Classified board structures carry a number of advantages and drawbacks. They promote board stability and help prevent hostile takeovers. A hostile acquiror would have to wait for two annual elections before it could replace the majority of the directors on the board. Such stability can be particularly valuable to a newly public company. A company can more easily focus on its longer-term objectives if it has structural defenses to protect it from an outsider seizing control of the company’s board.

Historically, nearly 50% of public companies had a classified board structure. Over the past 20 years, efforts by activist investors to encourage board declassification have resulted in a dramatic decline in classified board structures. Such activist investors perceived board declassification as an improvement to the company’s corporate governance practices. They viewed classified boards as an impediment to board responsiveness. Today, the percentage of S&P 500 companies with a classified board is around 10%.

Companies that recently completed an initial public offering (IPO) often have a classified board with a sunset provision. The sunset provision states that the board will become fully declassified after a specified number of years. This board declassification typically occurs after the third annual meeting following the IPO closing date. Details about the staggered board and any sunset provisions will be detailed in the company’s certificate of incorporation and may also be described in public filings with the Securities and Exchange Commission (SEC).

Similarly, classified board structures are common following the completion of a spin-off transaction. The newly created public company following the spin-off will typically have a classified board structure with a sunset provision to declassify the board after a certain number of years.

For instance, in Becton Dickinson’s 2022 spin-off of Embecta Corp., a diabetes care business, it disclosed details about the newly created public company’s classified board structure and eventual plans for declassification. In Embecta’s Form 10 filing with the SEC in connection with the spin-off, Embecta indicated that the directors were divided into three classes. The Class I directors had terms expiring at the first annual meeting of stockholders following the spin-off and would be up for reelection for a three-year term. The Class II directors had terms expiring at the second annual meeting and would be up for reelection for a two-year term. The Class III directors had terms expiring at the third annual meeting and would be up for reelection for a one-year term. Embecta’s Form 10 filing also summarized its sunset provision. Starting with Embecta’s third annual meeting following the completion of the spin-off, all the directors were to be elected at each annual meeting for a one-year term.

A company that is considering going public should carefully consider the benefits and drawbacks of implementing a staggered board structure with a sunset provision. It is also important for a company’s lawyers to stay aware of board declassification trends. The ultimate decision on board structure should take into account a company’s unique facts and circumstances.