Airgas, Inc. v. Air Products and Chemicals, Inc., Del. Supr., No. 649, 2010 (Nov. 23, 2010), read opinion here. This Delaware Supreme Court opinion determined that the bylaw amendment by which Air Products attempted to shorten the number of months before the next "regularly scheduled" annual meeting, as a means of circumventing the otherwise lengthier process of removing staggered board members, was inconsistent with the charter of Airgas and the applicable statute. The relatively short 23-page decision is full of memorable quotes, but one snippet follows:
No party to this case has argued that DGCL Section 141(d) or the Airgas Charter requires that the three year terms be measured with mathematical precision. Nor is it necessary for us to define with exactitude the parameters of what deviation from 365 days (multiplied by 3) satisfies the Airgas Charter three year durational requirement. In this specific case, we may safely conclude that under any construction of "annual" within the intended meaning of the Airgas Charter or title 8, section 141(d) of the Delaware Code, four months does not
qualify. In substance, the January Bylaw so extremely truncates the directors’ terms as to constitute a de facto removal that is inconsistent with the Airgas Charter. (citations omitted).
Delaware’s High Court also regarded the net result of removing a staggered board member in this manner, prior to the end of his term, as failing to satisfy another provision in the charter that only allowed such removal based on a two-thirds’ vote of shareholders entitled to vote.
Due to the great importance of this decision, and the benefit in publicizing it promptly, we now provide this short overview and then will provide supplemental commentary at a later date. This short highlight presumes familiarity with the background facts and prior procedural history of this important case. Prior decisions and developments in this case (including the Court of Chancery’s decision that was reversed), have been highlighted on this blog here. An example of the many articles that will be written about this case in the mainstream press, trade publications, academic journals and blogs, is the article by Reuters here, which includes a quote from your friendly author by reporter Jonathan Stempel of Reuters. Professor Gordon Smith provides scholarly insights on the case here, and Professor Steven Davidoff provides analysis about the opinion here. Additionally, Prof. Davidoff comments here about a Dec. 2 letter ruling from the Chancellor that requires the parties to submit supplemental briefing on issues that need to be addressed as a result of the Supreme Court’s decision.
SUPPLEMENTAL FULLER SUMMARY:
DELAWARE SUPREME COURT REVERSES COURT OF CHANCERY’S DECISION VALIDATING AIRGAS’S BYLAW ACCELERATING ANNUAL SHAREHOLDER MEETING.
This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP
On November 23, 2010, the Delaware Supreme Court, in an en banc decision in Airgas, Inc., et al. v. Air Products and Chemicals, Inc., No. 649, 2010, reversed the Court of Chancery’s decision validating the language of a bylaw that accelerated the next annual meeting of Airgas’ stockholders in order to replace three Airgas directors on its classified board who were supposed to serve three year terms. The Supreme Court found that the bylaw was invalid because it “impermissibly shortens” the directors’ three year staggered terms as provided by the Airgas charter and it amounted to a de facto removal without cause of those directors without a supermajority vote also required by the Airgas charter.
Airgas and Air Products are competitors in the industrial gas business. Because Air Products launched several tender offers to acquire 100% of Airgas which were rejected, Air Products engaged in a proxy contest and nominated three directors who were elected. Air Products also proposed a bylaw (“Bylaw”) that scheduled Airgas’s next annual shareholder meeting for January 2011, only four months after the 2010 shareholder meeting. The Bylaw was approved by approximately 46% of the shares entitled to vote.
Airgas then brought an action in the Court of Chancery claiming that the Bylaw was invalid because it was inconsistent with Section 141 of the DGCL and the Airgas corporate charter provision that creates a staggered board. Airgas’s charter requires an affirmative vote of the holders of at least 67% of the voting power of all shares to alter, amend, or repeal the staggered board provision, or to adopt any bylaw inconsistent with that provision. While the Court of Chancery concluded that the Airgas charter language defining the duration of directors’ terms was ambiguous, it approved the adoption of the Bylaw on the basis that the charter provided that directors serve terms that expire at "the annual meeting of stockholders held in the third year following the year of their election." Because the January 2011 meeting would occur "in the third year after the directors’ election," that was all that was required.
Language in Charter Ambiguous – Court Turns to Extrinsic Evidence
Section 141(d) of the DGCL permits corporations to implement staggered boards if the charter or the bylaws provide for them. Article 5, Section 1 of the Airgas charter and Article III, Section 1 of its bylaws each state that each class of directors serves until the "third succeeding annual meeting following the year of their election." So the issue on appeal was whether the Airgas Charter requires that each class of directors serves three year terms or whether it provides for a term that can expire at whatever time the annual meeting is scheduled in the third year following election. The Court of Chancery and the Supreme Court both found that the language in the Airgas charter defining the duration of the directors’ terms was ambiguous so they both turned to extrinsic evidence for guidance on the meaning.
To determine whether the Bylaw was inconsistent with the charter, the Supreme Court turned to Article 5, Section 1 of the charter. While the Supreme Court had never been asked to interpret the exact language before, the Court noted that “the Delaware cases (including the recent Supreme Court case Versata Enters. v. Selectica) that involved similar charter language regard that language as creating a staggered board with classes of directors who serve three year terms.” The Court next stated that there is support for this interpretation of the charter in the “real world” practice and understanding of similar charter language of corporations with staggered boards as well as corporations who have de-staggered their boards. The Supreme Court viewed this evidence as “persuasive but not controlling.” Then the Court also examined the ABA’s Public Company Organizational Documents: Model Forms and Commentary which contained model language similar to the language from the Airgas charter. The accompanying commentary, referencing Section 141(d) of the DGCL, also confirmed the Airgas’ view that “directors elected to succeed those whose terms expire shall be elected for a three-year term.”
Essential Enterprises v. Automatic Steel Products, Inc.,
The Supreme Court then turned its analysis to the 1960 Court of Chancery decision in Essential Enterprises v. Automatic Steel Products, Inc. (159 A. 2d 288 (Del. Ch. 1960)), where Chancellor Seitz in addressing the validity of a bylaw that authorized the removal of directors by a majority stockholder vote, the Court found that bylaw was inconsistent with a charter provision that provided for staggered, three-year terms for the corporation’s directors. The Court concluded: "the ‘full term’ visualized by the statute is a period of three years — not up to three years;’ and the bylaw would ‘frustrate the plan and purpose behind the provision for staggered terms . . ."
The Supreme Court concluded that the Court of Chancery “failed to give proper effect to the overwhelming and uncontroverted extrinsic evidence that establishes, and persuades us, that the [“annual meeting of stockholders to beheld in the third year following the year of election” language] and the [“three-year term” language] mean the same thing: that each class of directors serves three year terms. The Supreme Court concluded:
No party to this case has argued that DGCL Section 141(d) or the Airgas Charter requires that the three year terms be measured with mathematical precision. Nor is it necessary for us to define with exactitude the parameters of what deviation from 365 days (multiplied by 3) satisfies the Airgas Charter three year durational requirement. In this specific case, we may safely conclude that under any construction of "annual" within the intended meaning of the Airgas Charter or title 8, section 141(d) of the Delaware Code, four months does not qualify. In substance, the  Bylaw so extremely truncates the directors’ term as to constitute a de facto removal that is inconsistent with the Airgas Charter. The consequence of the  Bylaw is similar to the bylaw at issue in Essential Enterprises. It serves to "frustrate the plan and purpose behind the provision for [Airgas’s] staggered terms and  it is incompatible with the pertinent language of the statute and the [Charter]”