Lennar Corp. has changed its board structure to elect its entire board of directors each year, rather than every three.
Unlike other large home building companies, Lennar's board of directors actually brought up the issue itself, saying that the three-year terms "discourage takeovers and thus detract from shareholder value." Other companies, including Standard Pacific and Pulte Homes, are opposing shareholder pushes to "declassify" their board elections from staggered three-year terms to voting on every seat every year on the grounds that one-year terms make it easier for their companies to be taken over.
On Tuesday, April 8, Lennar's shareholders agreed, and the change was made. Beginning with the 2009 annual stockholders' meeting, directors will now be elected annually.
In urging the vote in favor of declassification, Lennar cited opponents' arguments that longer and staggered terms give a board stability and allow companies more time to respond to take-over attempts, but Lennar's management decided the advantages of one-year terms outweigh that.
Pulte's and Standard Pacific's managements decided the opposite.
Pulte Homes' shareholders are scheduled to vote on a plan to declassify its board during its May 15 annual shareholder meeting. That proposal was made by the Trowel Trades S&P 500 Index Fund, which owns $2,000 worth of shares in the Michigan-based home builder.
"In our opinion, such a system serves to insulate the board of directors and management from shareholder input and the consequences of poor financial performance," the union said in its proposal. "We feel this will promote a culture of responsiveness and dynamism at the company, qualities necessary to meet the challenge of increasing shareholder value. "
Just last year, Pulte's shareholders voted in favor of declassifying the board, but the company's board decided not to make the change.
"The board of directors has carefully considered this matter on several occasions in the past two years, and each time has determined, based on a variety of factors, that it is in the best interests of Pulte and our shareholders to maintain a classified board, notwithstanding the voting results on recent shareholder proposals," Pulte wrote in a recent SEC filing on the matter.
Standard Pacific Corp.'s shareholders are also scheduled to vote on declassifying its board at its May 14 annual meeting. The California Public Employees' Retirement System (CalPERS) started pushing for the declassification, along with other moves targeting the board for change, after marking the stock as an "underperformer" in its portfolio.
Standard Pacific, like Pulte, is urging shareholders to vote against the proposal. Both say three-year terms give the company stability and its board members a chance to develop expertise and knowledge.
But there's one other advantage to keeping board member term's staggered, both Standard Pacific and Pulte's management stress: It's much easier to take over a company when all its board members are re-elected at the same time.
"A classified board also enhances our ability to negotiate the best results for Pulte's shareholders in the event of an unsolicited takeover proposal," the company said in urging its shareholders to vote against the proposal. "Our current board structure encourages a third party to negotiate with us instead of engaging in an unfriendly or unsolicited effort to take over or restructure Pulte in a manner that may not be in the best interests of our shareholders. It gives us the time and leverage necessary to evaluate the adequacy and fairness of any takeover proposal, consider alternative proposals, and to ultimately negotiate the best result for all shareholders.
"Absent a classified board, a potential acquirer could gain control of Pulte by replacing a majority of the board [if not the entire board] with its own slate of nominees at a single annual meeting, and without paying any premium to Pulte's shareholders.
"Having a classified board does not prevent unsolicited takeover attempts, but by reducing the threat of imminent removal, it positions the incumbent board to negotiate terms to maximize the value to all shareholders. The board of directors believes that its ability to respond adequately to opportunistic unsolicited takeover proposals is particularly important at a time of adverse market conditions in our industry."
Standard Pacific's management expressed similar concerns in its note urging stockholders to vote against the change: "By preventing an immediate change in control of our board, our classified board structure ensures that if anyone seeks to acquire control of the company, the board has time to evaluate alternatives that may provide superior value to the stockholders, and encourages the potential acquirer to negotiate with the board to reach terms that are fair and in the best interests of all stockholders. In fact...classification may improve the relative bargaining power of target managers on behalf of their constituent shareholders. This increased negotiating leverage possesses added significance because the stocks of home builders, including ours, have recently traded at historically low valuations."