On October 8, 2010, Chancellor William B. Chandler III issued an important decision in a case of first impression in Delaware in the takeover battle between Airgas Inc. and Air Products and Chemicals, Inc., on the issue of when the next annual Airgas shareholders meeting could be held. Chancellor Chandler decided that the bylaw: (i) was valid under Delaware law; (ii) was properly adopted; and (iii) did not conflict with Airgas’s charter. The ramification of the Chancellor’s decision is to move up the Airgas 2011 annual meeting to January 2011 (which is only four months after the Airgas September 2010 Annual meeting) and thus shorten the terms of one-third of the directors of the nine-member classified Airgas board. Read opinion here.
As an interesting but not surprising side note, like many expedited corporate disputes in Delaware, the parties asked the Court to issue a ruling by October 15, 2010 in order to allow them enough time to prepare for a January meeting if the Court allowed the amendment. Chancellor Chandler accommodated the parties’ request and issued a 40-page written decision on the same day it was submitted to the Court. Prior rulings in this hotly contested litigation have been highlighted here.
This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.
Background of the Bylaw Amendment
Since October 2009, Air Products, a stockholder of Airgas, has been attempting to acquire Airgas with no success. Each offer was rejected by the Airgas board as grossly undervaluing the company. Air Products’ most recent proposal is an all-cash tender offer to acquire 100% of Airgas’s shares for $65.50 per share. In connection with its proposal, Air Products launched a proxy contest to gain control of Airgas’s board.
At the time of the Airgas September 2010 shareholders’ meeting, Airgas had a nine-member staggered board of three equal classes with one class (three members) up for reelection each year. Air Products nominated three candidates for election at the 2010 annual meeting and proposed three amendments to Airgas’s bylaws. The one amendment at issue in this decision stated that: “The annual meeting of stockholders to be held in 2011 (the ‘2011 Annual Meeting’) shall be held on January 18, 2011 at 10:00 a.m., and each subsequent annual meeting of stockholders shall be held in January.” With respect to the three board seats up for election, Air Products successfully obtained all three board seats.
Standard of Review
The issue before the Court with respect to the amendment to the bylaw regarding the annual meeting was whether the term “annual” means “separated by approximately twelve months” or “occurring once a year.” Since this was a matter of first impression in Delaware, there was no precedent for the Court to analyze, so the Court turned to the language of Airgas’s charter and bylaw provisions. The Court noted that in interpreting charter provisions:
[c]ourts must give effect to the intent of the parties as revealed by the language of the certificate and the circumstances surrounding its creation and adoption, and the ‘common or ordinary meaning’ of that language is what controls…. [w]hen presented with any ambiguity in interpreting bylaws, ‘doubt is resolved in favor of the stockholders’ electoral rights. Similarly, when the issue before the Court involves the interpretation of a statute, under the well-settled rules of statutory construction, ‘the court must determine whether the provision in question is ambiguous….[and in] the case of any ambiguity, [u]ndefined words in a statute must be given their ordinary, common meaning,’ and ‘[t]he established preference of our law is of course to give to  statutory language a literal reading, if that is possible’.
Majority or Supermajority Vote Requirement?
Under Article 5, Section 6 of Airgas’s charter, “[a]ny Bylaws made by the Directors . . . may be altered, amended or repealed by the Directors or by the stockholders.” Under the bylaws, “any such alteration, amendment, or repeal may be effected ‘at any regular meeting of the stockholders …by a majority vote….’” However, if the bylaw “alter[s], amend[s], or repeal[s]” Article III of the bylaws, or is “inconsistent therewith,” it would have required a supermajority vote. Article III states that, among other things, “[a]t each annual meeting of stockholders, the successors or the class of Directors whose term expires at the meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election.”
Airgas argued that a supermajority vote was required because the bylaw was inconsistent with Article III in that it allowed a director election to take place at an “annual meeting” which “impermissibly shorten[s] the terms” of those directors. Air Products argued that the proposed bylaw replaced Article II, Section 1 of Airgas’ bylaws which dealt with annual meeting of stockholders and thus only required a majority vote.
Court Construes Ambiguous Terms
The Court noted that on its face, the Air Products’ bylaw proposal regarding the annual meeting was an amendment to and restatement of Article II of Airgas’s bylaws. It moves the annual meeting date to January of each year. Moreover, it did not conflict with that class of directors’ “full term” as defined by Article III of the bylaws because directors are elected “for a term expiring at the annual meeting of stockholders held in the third year following the year of their election.” Airgas argued that the annual meeting date bylaw conflicts with the terms of Airgas’s charter, namely, Article 5, Section 1, which is the charter provision establishing Airgas’s staggered board. Airgas’s charter contains nearly identical language to Article III of Airgas’s bylaws establishing the terms of Airgas’s staggered board. Airgas argued that the class of directors elected at the August 2008 annual meeting was elected to serve a “full term on the Airgas Board of Directors” which, under Airgas’s charter and bylaws, means that their terms will expire at Airgas’s 2011 “annual meeting.” Moreover, according to Airgas, each annual meeting must be separated by “approximately one year” (or 365 days) and the next annual meeting must take place “around” August or September 2011. A “full term” of a class of directors is, according to Airgas, approximately three years.
The Court noted, however, that the words “annual” and “year” were not defined in Airgas’s charter. In addition, the phrase “full term” did specify a 36-month term, an approximately three-year term, or any other more or less precise length of time for which a director must hold office. A “full term” on the Airgas board is only defined in the charter as expiring “at the annual meeting of stockholders held in the third year following the year of their election.” The Court noted that had Airgas “wished to prescribe a more specific time period for its directors’ terms, it could have done so.” Because Airgas did not specify a particular term length, Air Products argued that moving the annual meeting to January did not conflict with any provision of Airgas’s charter.
What Does “Annual” Mean?
The lack of a clear definition of terms in the charter led the Court to look at the ambiguous terms in the light most favorable to the stockholder franchise. What is meant by the “annual” meeting? Plaintiffs contend that “annual” must mean separated by approximately twelve months, while defendant argues that “annual” means once a year.
On the question of how to define a “year”, since Airgas’s charter and bylaws did not define a “year,” the Court looked to the dictionary definition, which is a period of about 365 days. But then the Court asked when does that period start to run? Is it fiscal or calendar? Since the Court found that the Charter and bylaws were ambiguous as to whether a director’s term runs in accordance with a calendar year or fiscal year, it noted that:
[U]nder the “rule of construction in favor of franchise rights,” I cannot read the word “fiscal” into the charter, and must instead construe the ambiguous terms against the board, which leads to my conclusion that Airgas’s annual meeting cycle can validly run on a calendar year basis and still be consistent with the charter. Similarly, Airgas could have defined those terms but it didn’t.
The Airgas charter and bylaws state that “the successor shall take the place of any director whose term has expired ‘in the third year’ following the year of election.” As such, a January 18, 2011 annual meeting would be the “2011 annual meeting.” 2011 is the third “year” after 2008. Successors to the 2008 class can be elected in the “third year following the year of their election” which is 2011. As a result, the Court found that the bylaw did not violate Airgas’s charter as written.
Bylaw is Valid Under Delaware Law
Airgas argued that the Air Products bylaw violates Sections 141(d), 141(k)(1) and 211 of the DGCL because it would require Airgas to hold an annual meeting that is not really “annual” (i.e. it would take place only four months after the previous “annual” meeting as opposed to a year later), and therefore it would defeat the purpose of classified boards by shortening the Airgas directors’ terms of office by seven months without properly removing them for cause. Thus, Airgas argued, the class of directors up for re-election at the 2011 annual meeting will not have served their “full term” on the board.
Ironically, in support of their respective arguments, both parties pointed to the identical language in Section 211(b) (which provides that “an annual meeting of stockholders shall be held for the election of directors on a date and at a time designated by or in the manner provided by the bylaws”) and Section 211(c) (which provides that annual meetings cannot be separated by greater than thirteen months”). Airgas argued that the “policy thrust” of Section 211 is “that corporations should hold annual meetings of stockholders.” Air Products argued that there is “[n]othing in the statutes or in Airgas’s charter establish[ing] a minimum interval between a company’s annual meetings.
Improper Removal of Director
Airgas also argued that by “cutting short the ‘full term’ of the directors’ up for election at the 2011 annual meeting, the bylaw constituted an improper removal under Section 141(k)(1), as it is both without cause and without 67% of the vote of Airgas’s stockholders as required for removal under Airgas’s charter.” Air Products argued that there was no removal problem “because the Airgas directors are not being ‘removed.’” The Court agreed with Air Products finding that there was no removal problem in that the “’full term’ of these directors expires at the ‘annual meeting’ to be held in 2011”. The Court noted that while Section 211(c) explicitly prohibits holding the annual meeting later than thirteen months after the last annual meeting, the statute does not explicitly prohibit the annual meeting interval from being shortened by any amount of time. Having found that the bylaw did not conflict with the plain meaning of “annual meeting” under Section 211, the Court concluded that the bylaw did not conflict with Section 141(d), as it does not change the meaning of a “full term” on a classified board. As the Court noted, “[t]he “full term” visualized by the statute based on Airgas’s charter is until “the annual meeting of stockholders held in the third year following the year of their election.”
Is This an End to Staggered Boards? Stay Tuned
The Court answered this question in the negative stating:
[P]laintiffs suggest that the common practice and understanding of staggered boards is that a “full term” is three years, and a conclusion that two “annual meetings” can be held in a four-month period would “destabilize the staggered boards of Delaware companies.” This is not the case – it will not diminish the effectiveness of staggered boards. The common sense, ordinary language reading that an “annual meeting” must happen once every year comports with the clear terms of our statute, its policy rationale and our common law decisions. If corporate charters and bylaws have been written in a non-specific, open-ended fashion, it is not for this Court to twist their plain words to achieve a purported intent of the drafters. The solution is for drafters to employ clear and simple language to provide clarity and avoid ambiguity. This could easily be accomplished by corporate planners and draftsmen through such simple language as: “The annual shareholder meeting shall be held as closely as practicable in the same month of each year so as to ensure that the terms of office of directors shall approximate a complete year in length.” In short, this is not the end of the world for staggered boards; it is an easy fix if it needs fixing.
We may not have heard the last word on this issue. On October 11, 2010, Airgas announced its intention to appeal the Chancellor’s ruling and on October 12, 2010, the Delaware Supreme Court granted Airgas’s motion for expedited scheduling of the appeal. Oral argument before the Delaware Supreme Court is scheduled for Wednesday November 3, 2010 at 10:00 a.m.