Classified boards may be effected through provisions in a corporation’s certificate of incorporation or in a corporation’s bylaws. Effecting a classified board in the certificate of incorporation maximizes protection to the board because it is more difficult to remove the classified board provision and declassify the board effected in a charter than in a corporation’s bylaws . If a corporation’s certificate of incorporation contains a provision classifying the board of directors, declassification cannot be done by stockholder vote alone because declassification will require an amendment to the certificate of incorporation. Amendments to a certificate of incorporation require action by both the board of directors and the stockholders. See.
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See 8 Del. C §109(a) In such a context, a potential acquirer may generally declassify the board by amending the corporation’s bylaws. The moment that by-laws are amended, the board is declassified. At that point, the corporation’s directors may be removed without cause. Unlike a charter that must be filed with the Secretary of State or similar public official to become effective, a bylaw amendment is effective immediately. The declassification amendment can provide that the directors’ terms automatically expire upon declassification or it can phase out the classification over time. If it does not provide for an immediate declassification, then the activist or acquirer would typically remove all the directors or all the directors not elected by the activist or acquirer. Once the directors are removed, the activist or acquirer and its elected directors can either appoint new directors to fill the vacancies or (if possible) adjust the size of the board to their preference. Declassification through a corporation’s bylaw can be made more difficult if the bylaws contain a supermajority stockholder vote provision limiting amendments. As noted above, limitations on action by written consent also may prevent a potential acquirer from amending the bylaws at its chosen time. Another issue raised by declassification in general—but most relevant when the classified-board provisions are in the bylaws (because declassification is more possible)—is the existence of so-called “poison debt.” Poison debt typically refers to borrowing agreements that contains large balloon payments that become due upon the change of control in a board of directors. Therefore, declassifying the board may be made more difficult not only due to provisions in charter and bylaws, but also due to provisions in a corporation’s
See 8 Del. C §109(a) In such a context, a potential acquirer may generally declassify the board by amending the corporation’s bylaws. The moment that by-laws are amended, the board is declassified. At that point, the corporation’s directors may be removed without cause. Unlike a charter that must be filed with the Secretary of State or similar public official to become effective, a bylaw amendment is effective immediately. The declassification amendment can provide that the directors’ terms automatically expire upon declassification or it can phase out the classification over time. If it does not provide for an immediate declassification, then the activist or acquirer would typically remove all the directors or all the directors not elected by the activist or acquirer. Once the directors are removed, the activist or acquirer and its elected directors can either appoint new directors to fill the vacancies or (if possible) adjust the size of the board to their preference. Declassification through a corporation’s bylaw can be made more difficult if the bylaws contain a supermajority stockholder vote provision limiting amendments. As noted above, limitations on action by written consent also may prevent a potential acquirer from amending the bylaws at its chosen time. Another issue raised by declassification in general—but most relevant when the classified-board provisions are in the bylaws (because declassification is more possible)—is the existence of so-called “poison debt.” Poison debt typically refers to borrowing agreements that contains large balloon payments that become due upon the change of control in a board of directors. Therefore, declassifying the board may be made more difficult not only due to provisions in charter and bylaws, but also due to provisions in a corporation’s